Introduction to Financial Reporting
Financial reporting is referred to as systematic process that assists in the preparation of statements in order to disclose financial status of business to various stakeholders. The procedure of financial reporting is completed by implementing accounting as well as auditing tools. Financial system and auditing are the important aspects for any business in maintaining the company's records of accounts (Banerjee, 2006). This involves financial transactions of the firm. It is formulated with the assistance of financial reports that are prepared by financial department of the business by taking into consideration the accounting statement throughout the year.
In the present study, financial system and auditing is discussed with reference to Sainsbury. The report entails to understand the importance of keeping effective accounting systems within business. Further, it includes analysis of management control system of business. It also covers the preparation of audit reports. The report also contributes to planning and conduction of any audit project.
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Purpose and use of different accounting records
There is existence of various accounting records. These are used for several purposes within the organization like Sainsbury. The different accounting records along with their use is enumerated below:
Income statement is also referred as profit and loss account. It is the combined form of trading as well as profit and loss account. It is utilized in order to record income as well as expenditure of business for certain period. It is formulated as per the principle of accrual system. The preparation of income statement can be done on daily, monthly, quarterly as well as yearly basis (Burns, Hopper and Yazdifar, 2004). The statement of profit and loss is formulated in order to examine the loss and profit that is being generated by business with the assistance of commercial activities. With the assistance of figures of income statement, the management of Sainsbury would be able to make decision regarding the plan for budget surpluses as well as shortfalls.
It is also termed as the balance sheet. It reflects the balances of assets as well as liabilities on a particular date at the end of financial year. For better presentation, assets and liabilities of the firm are categorized into non current and current categories. Balance sheet is prepared in order to determine the financial position of firm like Sainsbury. In addition to this, with the assistance of balance sheet lenders and investors, it helps in making decision in order to make assurance of secure return.
Cash flow statement
Cash flow statement is formulated to record the inflow as well as outflow of cash for particular financial year. The statement can be prepared on daily, quarterly as well as yearly basis. It is prepared by considering the principle of cash accounting (Galloway and Deakins, 2012). It involves three activities such as operating, financing as well as investing. Within operating activities, daily transactions are recorded that includes sales, revenue from debtors as well as payment to creditors. Further, in investing activities, the transactions that are in relation to purchase or sale of non current assets are assembled. In financing activities, transactions that are related to financing the transactions are based on change in debt and equity which will be recorded. It assists in monitoring the inflow and outflow of cash in effective way.
Assessing the importance and meaning of fundamental accounting concepts
Fundamental accounting concepts are referred as basic principles that are required to be followed by different entities. The firms follow such for the purpose of gaining sustainability within the market. The fundamental concepts are formed depending upon the Generally Accepted Accounting Principles (GAAP) for purpose of uniformity (Gold, Gronewold and Pott, 2012). By applying the concepts into practice, users of financial statement would not make assumptions while carrying out the process of interpretation. With these policies of the firm, Sainsbury can be effectively strengthened.
For instance, with the assistance of entity concept, user can make sure that they are different from the business. Thus, they are not liable for the negligence as well as omission of business. With the concept of going concern, the user can make general assumptions with respect to indefinite continuation of the activities of business. It is considered as the most essential principle that is followed by every organization that plans to conduct the business for longer time span. Firm like Sainsbury is one of retail organizations that has adopted such concept. Thus, it makes delivery of products and services by focusing on the long term goals as well as objectives. Another concept is related to consistency (Chen, Sun and Wu, 2010). The firm like Sainsbury can follow similar kinds of accounting policy for particular year and can remain consistent with it. Apart from other companies, Sainsbury can take into account the consistency principle wherein it can stick with the fundamentals that have been made at the beginning of the year in financial year. The fundamental accounting concept also includes another principle of accrual (Drake and Fabozzi, 2012). This states that revenues as well as expenses of the business are recorded at the time when they occur rather than recording them at the time when they are realized. As per the accrual concept, Sainsbury follows the policy of recording its expenses as well as revenues at the time when they actually take place. This concept has to be followed by Sainsbury as it is the retailer that has to bear transactions on regular basis. In addition to this, they need to make payment to creditors thus accrual concept has to be complied with by Sainsbury.
The objective of fundamental accounting is to make information related to accounting useful, relevant as well as comparable for users (Cohen and Kaimenaki, 2011). In order to compare, their needs to be existence of uniformity within financial statements, so that effective decisions can be taken. Thus, for this reason, principles of cost, dual aspects, matching as well as consistency has been introduced.
Evaluating the factors which influence the nature and structure of accounting systems
Accounting systems are the major aspect for each business that assist in carrying out operations in smooth manner as well as it results in attainment of success by business. Each firm is free to make decision with respect to enterprise resource planning system as well as transaction accounting systems. With the assistance of this system appropriate computerized method is provided that assist in recording the transactions of business. Such systems are generated based upon the requirement as well as objectives of the enterprise. With respect to Sainsbury the following are the factors that has impact on the nature as well as structure of accounting systems:
Compatibility with business: The functions that are related to accounting system are influenced by nature of operations of organization. Sainsbury is carrying operations in retail sector thus they possess particular goals as well as objectives. The system of accounting needs to compatible with the daily needs of business. This includes storing, retrieval of client information, creation of invoices as well as keeping track on the inventories.
Perception: The effectiveness of systems of accounting is influenced by the fact regarding the ways it is received by their employees as well as management. There might be existence of possibility regarding the alteration within accounting system as a result of complexity. Thus further with such factor there will be enhancement in the validity of decision making.
Lawful obligations: The accounting policies of Sainsbury need to consider different legal regulation as other businesses takes into account that are existing in the similar market (Grieve, 2013). The changes that occurs in legal regulation has impact on the accounting system of Sainsbury. This might be comprised of taxation amendments, creditors regulation as well as other legal policies.
Level of training: Another major factor that has impact on the nature as well as structure of accounting system is related to level of training. The establishment of systems of accounting needs to be accordance with the training. In case there is lack of sufficient training than system of accounting will create problem rather than findings solution to the problems of the financial department (Helfert, 2004). Along with this employees of Sainsbury will be comfortable in performing finance and accounting function which can be effectively affected through suitable training.
Global economy: This factor might have positive as well as negative impact on the policies related to accounting. As the company carries operations in global market thus it needs to comply with policies that helps it in sustaining in global business environment.
Identification of different components of business risk
Different risks occurs within the business in every operations. Risk is referred to as uncertain situation that is applied to different organizations. It is considered non defined factor that largely depends on environmental as well as conditions of business. The audited organization Sainsbury might face the following business risks:
Strategic risk: This type of risk result directly from carrying out business operations in a particular industry. With the shift in customer preferences or changes in technology might put the organization into critical condition of danger (Griffin, 2015). Sainsbury is major retailer that might face such a risk which can affects its operations to a significant level.
Compliance risk: Such risk is attached with the compliance of subject that are related to legislative as well as bureaucratic rules and regulations. These are also associated with best practices for the purpose of investment (Zhang, 2015). Sainsbury can experience such risk in relation to employee protection regulations and other that have been imposed by Occupational Safety and Health Administration.
Financial risk: This risk is related to the ways in which business makes use of the available funds. Sainsbury can face such risk that are associated with increase in debt, increase in rate of interest that results in creating burden on its to make payment of more money for the loan taken (Shim and et.al., 2008). Financial risk also includes that enhancement in foreign exchange rate that can affect international trade.
Operational risks: This type of risk is the outcome from internal failure. Such arises as a result of internal processes, people as well as failure in business systems. Apart from strategic risk as well as financial risk, there is absence of return in case of operational risk. Sainsbury can experience this kind of risk which could result from unforeseen external events which includes breaking down of transportation system, or failure of supplier in making delivery of goods.
Reputational risk: Company's reputation may be lost because of factors such as product failure, lawsuits as well as negative publicity. It takes time to build the reputation of the business but this can be lost within a day. A bad word of mouth that is being passed on by the customer of Sainsbury can spoil the entire image of the company. Such risk can impact the sales and profitability of firm to a greater extent.
Other risks: It is difficult to categorize other risk types. This is comprised of risk from environment such as natural disaster (Siano, Kitchen and Confetto, 2010). Further risk related to health and safety alos comes under other types of risk.
Analysis of control system in place in a business
Control system is formulated for the purpose of identifying potential as well as actual risk in the business. This procedure relies on the implementation of suitable system in order to prevent such activities. There are several methods of internal control mechanism that can be used by Sainsbury at its work place. These are enumerated below:
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IT access controls: In order to fight against fraudulent practices in the internal environment of Sainsbury the firm has established effective control system in related to IT. This control system makes an integrated system that carries evaluation of group accounting policies that can focus control over negative practices in relation to financial matters within the organization (Vaivio, 2008). The control system is effective in keeping a track over fraudulent behavior within the business. But in order to install such in the business huge amount of funds is required by the company. Moreover it has to arrange for the potential employees who can operate the IT control system in an appropriate and efficient manner.
Rigidity in recruiting as well as training: Sainsbury has developed tough process pf recruiting that needs each and every information in relation to the candidate before becoming part of the organization. It assists in reducing the risk associated with recruiting wrong person that might affect the internal system of the organization in adverse manner. Such can also harm the operations of the firm in an effective manner (Sisaye and Birnberg, 2010). After hiring candidate, proper training is provided to them so as to reduce the chance of malfunctioning that might have occurred without giving appropriate training to staff. The company like Sainsbury can implement such on existing employees when it has to diversify its business in international market.
The objective of control system is to make changes in the existing policy of the business that is resulting in loss from the firm. Thus the above mentioned control system are effective in reduce the risk of fraud and error.
Evaluation of risk of fraud within business suggesting methods for detection
Risk of fraud in most common type of risk that is experienced by Sainsbury while making entry into global market in order to commence business. Such fraudulent practices exists within internal organization. Few risks related to fraud and the methods of detection are as follows:
Ghost employee: In large organization like Sainsbury there is existence of thousands of employees who carries out work together as well as many of them retires at the similar point of time. Improper management of database allows host employees to gain benefit from the mistake of the business (Ridley-Duff, 2009). In order to avoid such situations Sainsbury is required to create new database system where overall details are maintained in an effective and updated manner which reduces the risk of fraud. This assist the business in detecting fraud and avoidance of unfair trade practices.
False wages: In various departments at lower authorities, the distribution of wages is carried out on hourly basis. In such situation employees have demand for full wages even though they are out of their services (Stendardi and O’Reilly, 2006). Thus it is essential for big giant like Sainsbury to develop electronic system of attendance wherein it can record the total time of duty of each employee. Thus this will restrict employees from carrying out fraudulent practices win demanding the wages from the firm.
Planning audit with references to scope, materiality and risk
In order to check the accounting transaction and other business activities of Sainsbury, effective audit planning is necessary. There are several imperative factors which need to be considered while planning for Audit of company. It assist management of Sainsbury to strengthen relationship with clients that aid to create brand image of company. These are as follows-
- Proper checking of past record in order to make effective comparison of financial records of company.
- To examine accounting policies that is being used in the current years by which proper checking can be done.
- Proper understanding of accounting system that has been used in order to management overall financial activities of Sainsbury.
- On site visit must be performed thereby all the activities can be performed in an effectual manner. It assist auditors to record all the audit activities in the right direction so as to provide guideline for management of Sainsbury.
Examination of the financial statement are prepared and presented as well as audited to level of materiality. Here, materiality refers to cut off point on which auditors judges overall performance of Sainsbury. It is always considered in term of financial statement thereby decision of users can be influenced to a great extent (Shahwan, 2008). Under this, audit with reference to scope covers that financial statement of Sainsbury is free from any types of material misstatement.
Further, audit with reference to risk consists of several types of risks such as significant risk, business, audit and detection risk. Along with that control and inherent risk is also there that is considered while planning for audit of company. Here, inherent risk has direct impact on the overall firm so it is considered by auditors for account balances as well as class of transactions. On the other hand, control risk includes that material misstatement which has not been detected by internal control system of Sainsbury. Hence, auditors need to make effective audit approach by preparing the effective plan to discover all risks of the firm. It assist auditors to conduct the audit in an effectual manner and fulfill the objectives of audit in the same manner. It contribute towards building good relation with different stakeholders such as clients, shareholders as well as customers.
Identifying and using appropriate audit tests
There are different types of audit tests that are used for inspecting the overall performance of Sainsbury. These are as follows-
Tests of control- It is the foremost test that facilitates the management to have effective control on overall business activities and it also ensures ethical conduct of business. It consists of three main activities in which first is the appropriate design of internal control that has been used in the Sainsbury. The second activity is the implementation of internal control operation by which firm can be able to manage all business activities in an effectual way (Reid, 2002). In addition to this, efficiency of internal control system is measured so that effective control can be ensured. The control test is done when it is found that substantive procedure alone is not able to provide evidence about the appropriate auditing. It contributes towards achieving long as well as short term objectives of firm. In addition to this, test of control assists the finance management of Sainsbury to have good intern control as by that, they can be able to keep financial records in an effectual way. It contributes towards creating image of firm at the marketplace and give higher level of satisfaction to large number of buyers.
Substantive test- It is the another important test that is conducted in companies in order to check the financial performance. It consists of several tests such as details of classes of transaction, account balances and disclosures. Along with that, substantive analytical procedure is also included in the substantive test that aids to discover misstatement related to material (Portz and Lere, 2010). It facilitates to ensure smooth flow of business and provides appropriate guidelines for finance managers by which they can be able to manage all business activities in an effective way. In addition to this, material journal entries are checked along with the accounting records. It facilitates auditors to examine any wrongful action that has been done by Sainsbury.
Risk assessment- It is the imperative way to assess the risk related to material misstatement in the financial statement of Sainsbury. On the other hand, it assists to examine several other misstatements in the recording of company to know its effectiveness with regard to internal control (Petersen, 2009). It enables auditors to inspect overall financial records of firm and to provide necessary guidelines for the management of Sainsbury to improve record keeping.
Recording audit process in an appropriate manner
Recording the audit process is the imperative task thereby auditors provides detail information regarding performance of company. It consist of following stages-
Narrative notes-It is the imperative stage of audit process wherein detail description is given regarding systems and operations. It facilitate to identity key control activities that leads to have effective control over the financial systems. The data which are mentioned in the narrative notes is derived by the interview and review of manual records (Menifield, 2013). Along with that, personnel of the firm are invited fro the interview process so as to provide detail information regarding internal control of company. In addition to this, manual and other system documents are prepared that facilitate to implement audit plan in successful manner.
Working paper- Under this, annual audit plan is made along with risk assessment that contribute towards providing evidence of the report. It assist management of Sainsbury to control internal operation in accordance with standard (The Financial Planning Process, 2014). Here, auto audit management automation software is used in order to record the audit findings as well as assignment. It contribute towards managing all the reports in order that serve as evidence of appropriate audit report. It is also helpful to carry out all the task in systematic manner as well as withing specified time span.
Flowcharts-It is an graphical form of all the activities to be done for audit that facilitate to control those areas where Sainsbury is lacking. It enables auditors to prepare proper documentation so as to keep record of inefficiencies that facilitate to carry out all the task in an appropriate way (De Franco and et.al., 2011). Along with that, flow chart helps firm to analyze internal as well as external operation that aid to inspect all business activities in an effectual manner.
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Internal control questionnaire-Under this, auditors makes internal questionnaire by which it becomes convenient to gather information related to audit objectives (Mandell and Klein, 2009). It contribute towards covering all the tasks which helps to assess overall performance of Sainsbury. The questionnaire which are framed for the internal cost need to be clear and describe in precise form that leads to avoid confusion. Along with that, it need to be taken account that obvious responses need to avoided as the are not required in the audit processing. Recording the audit process is the imperative task thereby auditors provides detail information regarding performance of company. It consist of following stages-
Producing a sample audit report for the recent audited organization
The audit report is imperative task for auditors by which they provides detail information the audited organization so as to assess its overall performance within specified time span. By the help audit report, management can come to know about the findings of audit that leads to bring improvement in the workplace so as to ensure survival of firm for long span of time (The conceptual framework for financial reporting, 2013). Under this, different users of financial statements are provided information about the firm which attract investors and make it easy for Sainsbury to get loan. In the audit report, auditors express their views in context of fairness and overall reporting of financial statements of Sainsbury. There are several types of audit report prepared by audit such as unqualified opinion, qualified and adverse opinion (Lucey, 2003).
It can be concluded from the study that financial system and auditing is the important aspect of the business that assist it in determining its position in the market. It has been inferred that there is purpose of using different accounting records such as cash flow, income statement as well as balance sheet. Through this business can gain better insight to its financial position in an effective manner. The fundamental accounting concepts acts as an aid to the business like Sainsbury in gaining sustainability in the market. In addition to this the factors such as lawful obligation, perception as well as global economy has huge influence on the nature and structure of accounting system. There is existence of several business risks such as strategic, financial, compliance and operational that can be experienced by Sainsbury. Management representation letter is essential document that is provided by auditors after analyzing the financial statement of the business.
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