ACCA F1 Accountant in Business - 2010 - Study text

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Answers to practice questions

their credit limits.

(d) Where customers are late in making payments, a credit collection section is

responsible for taking action to ‘chase’ the customers and obtain payment.

(e) Advising senior management when an unpaid debt is unlikely to be collected,

and so should be treated as a ‘bad debt’.

31 Payroll routines and purchasing routines

(a) On or before each payment date for payroll, the payroll section must:

(1) Establish a current list of employees.

(2) Obtain details of any ‘one-off’ or unusual payments to individual

employees, such as details of overtime hours for overtime payments,

any bonus payments and any salary increases.

(3) Calculate for each employee the gross pay for the period.

(4) Calculate for each employee the various deductions from gross pay (for

example tax on income, pension contributions).

(5) Pay the net pay (gross pay minus deductions) to the individual

employees, possibly direct to their bank account.

(6) Provide each employee with details of their pay and deductions for the

period.

In addition, there should be routines for:

(1) Making payments of the deductions, to the tax authorities, pension

scheme and so on, at the appropriate time.

(2) Providing information about payroll costs so that these can be recorded

in the accounting system. (The payroll section might do this work itself.)

(3) Providing detailed information about payroll costs to the cost and

management accounting section, for analysis of labour costs.

(b)

Sequence of documents:

1 Material requisition note

2 Purchase order

3 Delivery note

4 Goods received note

5 Purchase invoice

6 Credit note

7 Cheque (payment).

However, a credit note might be issued after payment has been made, so (6) might

be cheque and (7) credit note.

The book-keeper makes a record of purchase invoices received, credit notes and

payments made to suppliers.

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32 Working capital

Inventory 20,000

Receivables 18,000

Cash 2,000

40,000

Payables (7,000)

Working capital 33,000

33 Spreadsheets

(a) Spreadsheets can be used to:

(1) prepare forecasts, such as sales forecasts

(2) prepare budgets and other financial plans

(3) prepare financial statements

(4) make various financial calculations and assessments, especially where

there is some uncertainty about the value of some of the items in the

calculation. (An example is using a spreadsheet to assess the financial

return from a proposed major capital investment.)

An important aspect of spreadsheets is that values in a spreadsheet model can be

altered quickly and easily, and a new financial statement or forecast can then be

produced immediately with the amended values included. This feature of

spreadsheets allows management to carry out ‘sensitivity analysis’ or risk analysis

on their forecasts, plans or estimates.

(b)

(i) G27 = 7/2 = 3.5

H45 = 3.5 × 6 = 21

J6 = 21/7 = 3

J7 = 7 + 3.5 = 10.5

(ii) G27 = 10/2 = 5

H45 = 5 × 6 = 30

J6 = 30/3 = 10

J7 = 10 + 5 = 15

34 Database

(a) Data independence means that the data held in a database file is independent

of the various uses or applications for which the data is used. Changes can be

made to the application software without affecting the database files.

(b) Integration of data means that the data used by different departments or

other users in an organisation is brought together in a common file or set of

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files, and the same files are used by all the different users for their particular

data processing requirements.

accurate and reliable.

(d) Data redundancy means holding the same data in two or more different

places. Through data integration, a database eliminates data redundancy,

because there is no need to duplicate the same data in different files.

35 Accounting function

(a) Management accounting function

(b) Financial accounting/book-keeping function

(d) Treasury/finance function

36 Audit

(a)

(1) The accounting department will provide the figures from the accounting

records that are needed to prepare the financial statements, and staff

will assist the individual who prepares the draft financial statements.

This might be the finance director or the chief accountant.

(2) As head of the finance and accounting department, the finance director

has overall executive control over the preparation of the financial

statements. The finance director might actually prepare the draft

financial statements, although this work may be delegated – for example

to a chief accountant.

(3) The board of directors has overall responsibility for the financial

statements, and must approve them before they are published/sent to

the shareholders.

(4) The external auditors carry out a statutory audit on the financial

statements of a company and prepare a report for the company’s owners

(shareholders). The external auditors are required in their report to give

an opinion as to whether the financial statements give a true and fair

view or fair presentation, in all material respects, of the financial

performance of the company for the period covered by the statements

and the financial position of the company as at the end of that period.

(5) The internal auditors have no responsibility with regard to the

reparation of the financial statements, except to the extent that their

audit work might be relied upon to some extent by the external auditors.

(6) The audit committee has no responsibility for the preparation of the

financial statements, but it acts as a watchdog over the audit process. It

will discuss with the external auditors issues that are of some

significance or concern relating to the financial statements and the audit,

and report its views to the full board of directors.

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(b)

A company is not required to have internal auditors. However, if it does not

have internal auditors, the board of directors (or audit committee) of a stock

market company might be required each year to consider whether there is a

need for an internal audit function. (This is a requirement for listed companies

in the UK, for example.)

The role of an internal audit department might be to:

(1) provide reassurance to the company’s management that the financial

control system is adequate and that the financial statements produced

by the company should be reliable

(2) carry out audit work that is not required by law, and that the external

auditors do not perform (unless asked to do so by the company’s

management).

37 Types of internal audit

(a) Financial audit. This is the ‘traditional’ type of internal audit. It duplicates

some of the work of the external auditors. A financial audit examines the

financial controls, and reports on whether these are satisfactory and are being

complied with. Some detailed testing (substantive tests) is also carried out.

Some of this work might be relied upon by the external auditors, who might

therefore do less audit testing for the purpose of the statutory audit than they

would if there had been no financial audit by the internal auditors.

(b) Systems testing. This is the testing of a system’s controls.

order to establish whether it provides sufficient value for money – economy,

efficiency and effectiveness.

(d) Operational audit. This is an audit of a non-financial operation, to establish

the effectiveness of its controls and the operation generally.

(e) Compliance audit. This is an audit to establish whether certain regulations or

required procedures are being complied with.

(f) IT audit. This is an audit of an IT system or IT operations generally.

(g) Management audit. This is an audit of the effectiveness of management or a

group of managers. This type of audit might be performed by senior

management or external consultants, rather than internal auditors.

38 Audit work

(a)

(1) Tests of control. These are tests of the internal controls in a system, to

establish whether they are satisfactory and adequate.

(2) Tests of compliance. These are tests to check whether controls which

appear satisfactory ‘on paper’ are actually being complied with. If

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controls are ignored and not complied with, the system of control will be

weak.

(3) Substantive tests. These are detailed tests into the accuracy of

accounting records for transactions and asset and liability values.

(4) Analytical procedures. These are another form of substantive testing,

where ratios and trends are analysed to see whether there appears to be

anything unusual in the financial statements.

(b)

To check the existence of inventory at the balance sheet date, there should be a

physical count of inventories at the end of the financial year.

To check that recorded amounts owed to suppliers are accurate, the auditors

can check the regular (usually monthly) statements sent to the company by

each supplier, itemising purchases and payments since the previous

statement, and the amount currently owed by the company to that supplier.

(c)

They should first consider the effect that the weakness in control might have

on the financial statements, and whether it might have a material effect (so

that the financial statements would not give a true and fair view).

They should consider how the weakness in control might be removed. A

recommendation should be made to management, suggesting a new control or

an improvement in existing controls. An improvement in controls should have

an impact for the future.

For the purpose of the current year’s financial statements, an improvement in

control is too late. The auditors need to consider how much detailed testing

(substantive testing) will be needed to establish whether the financial

statements give a true and fair view. In other words, a weakness in controls

makes it necessary to carry out more substantive tests.

39 Internal control, internal controls and internal checks

(a) A system of internal control is the entire system that is established within an

entity to ensure that financial systems, operational systems and compliance

systems function as they are expected to. The system of control should ensure

that risks are recognised and controls are established to deal with them, and

that errors and omissions (deliberate or accidental) do not occur.

(b) There are five main elements to a system of internal control.

1 A control environment, including a culture that recognises the

importance of control and the need to apply and comply with controls.

2 A system for identifying risks and assessing the significance of risks.

3 Internal controls for dealing with the significant risks that have been

identified.

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4 Communication and information. Information about risks, controls,

responsibility for controls and compliance or non-compliance with

controls should be properly communicated to everyone who needs to

know about them.

5 Monitoring. There should be monitoring of the effectiveness of controls

and the overall system of internal control.

1 Preventative controls. These are controls that are intended to prevent

errors from happening.

2 Detection controls. These are controls for identifying errors when these

occur.

3 Corrective controls. These are controls or procedures for ensuring that

corrective action is taken when an error is detected.

Note: You might have chosen to take three of the SPAMSOAP categories of

internal controls as the basis for your answer. This would be an acceptable

alternative answer.

40 IT risks and IT controls

(a)

(1) Unauthorised access to the computer system, including unauthorised

physical access to terminals and unauthorised access to data files and

programs.

(2) Risks of human error, such as errors in the input of data to a system.

(3) Errors in the computer software, so that data is not processed properly.

(4) Technical errors in the system, such as breakdown of a central

computer/server, or loss of a communication link.

(5) A loss of confidentiality of data, for example due to unauthorised access

to computer files.

(6) Deliberate or accidental corruption of data or loss of data/data files.

(7) Criminal damage to computer equipment, or damage caused by a

natural disaster such as a fire.

(8) Loss of IT personnel, leading to a loss of knowledge and understanding

of an IT system.

(b) The two main types of controls for an IT system are:

(1) General IT controls. These are controls that are applied to all IT systems

and users, and to IT operations generally. They include physical access

controls, the use of passwords and encryption of data, anti-virus

software and firewalls, IT Standards for operating computer systems

(including backing up computer files).

(2) Application controls. These are controls that apply to specific IT

application systems (such as a payroll system or inventory control

Answers to practice questions

system). They include data validation checks: these are checks carried

out within a computer program on specific items of data input to the

system.

41 Fraud

(a) Fraud is an intentional act involving deception, carried out by one or more

individuals with a view to obtaining a personal gain. It usually involves theft

or false accounting, but might also involve the wrongful use of a company’s

assets. Fraud is a crime.

(b) The main types of fraud are:

(1) internal fraud, which is fraud committed within an entity by one or

more employees

(2) external fraud, which is fraud committed by one or more individuals

who are not employees of the entity.

(b) The consequences of a major fraud within a company are as follows.

(1) The company will usually suffer a loss. The loss might involve theft

from the company.

(2) Alternatively fraud might result in the company having a liability to

customers or other people. For example fraud might involve having

to pay back money or other assets stolen from the company’s

customers. This is often the case when external fraud is discovered in

a banking system.

(3) The company might be unable to recover from the fraudster the

money it has lost.

(4) If the company’s shares are traded on a stock market, a fraud could

affect the share price adversely.

(5) If a major fraud becomes public knowledge, the company’s

reputation might be adversely affected.

(6) There might also be some loss of morale amongst employees, after

the discovery that they have been working with a criminal.

(7) There might be some disruption to operations, as auditors or other

investigators look into how the fraud happened and what needs to be

done to prevent a similar occurrence in the future.

42 Fayol and Mintzberg

Fayol identified the five main duties of a manager to be:

 Planning (looking ahead)

 Organising

 Commanding

 Co-ordinating

 Controlling

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Mintzberg identified the main roles of managers differently.

 Interpersonal roles

- Acting as a figurehead for the organisation in its relationships with external

bodies

- Acting as a leader for employees within the organisation

- Providing a liaison role in dealing with other work groups or sections in the

organisation.

 Information roles

- Monitoring performance and obtaining information.

- Disseminating information to others

- Acting as a spokesperson.

 Decision-making roles

- Entrepreneurial role (taking initiatives)

- Handling disturbances and resolving conflicts

- Allocating resources

- Negotiating.

Mintzberg’s analysis is probably more relevant because there is a strong emphasis

in most organisations on the interpersonal roles of managers. The role identified by

Fayol – commanding – is probably too authoritarian in most types of organisation

(possibly with some exceptions, such as the armed forces).

43 Mayo

 There is a social purpose to working. Individuals do not work just for money.

Work satisfies social needs through work groups.

 Productivity can be improved if the work group is motivated to perform well.

 To motivate employees, managers must communicate effectively with them. For

effective communication there must be a positive relationship between the

manager and the employees.

44 Authority and responsibility

Authority refers to the amount of power or discretion of an individual or job-holder

to make decisions within an organisation. In a formal organisation, the scope of the

authority of each manager is decided by his position within the organisation.

Authority within a formal organisation is delegated from the ‘top down’.

Responsibility is an obligation to make sure that something gets done. If the actual

result or outcome is disappointing, the person responsible ‘takes the blame’. In a

formal organisation, managers are responsible for an aspect of the organisation’s

performance. They are accountable to their superiors for their actions and results.

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Authority is delegated through the management hierarchy. Responsibility cannot be

delegated. A senior manager might delegate some authority to a junior, but remains

responsible for the results and performance of the junior.

45 Continuum

Tannenbaum and Schmidt identified seven different levels of delegation that might

be practised by managers:

 Tells (extreme authoritarian management)

 Tells and sells

 Tells and talks

 Consults

 Involves

 Delegates

 Abdicates.

They argued that as a team becomes more established and gains experience, the

manager will trust them much more. Consequently, the manager’s style will move

along the continuum and the manager will delegate an increasing amount of

authority.

The relevance of this approach to practical management is that the appropriate level

of delegation within a team or an organisation may depend on the time that the

team has been together, and on the skills and experience it has acquired.

46 Action-centred leadership

Adair argued that a manager must show concern for:

 the job

 managing his or her team or group and

 managing each individual within the team or group.

The requirement to show concern for the job, for the group or for individuals varies

with the work situation. Sometimes a job-centred focus is more important, and

sometimes the need to provide leadership for the group as a whole or for

individuals is more important.

Adair argued that a manager should be able to show concern for all three aspects of

management, and should be able to alter the emphasis of his or her leadership to

meet the requirements of the particular work situation.

47 Hersey and Blanchard

(a) Hersey and Blanchard argued that managers may be involved in directive

activity (giving directions and instructions) and supportive activity

(supporting subordinates and helping them through guidance,

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encouragement and suggestion). The four leadership styles they identified are

based on differing degrees of supportive and directive activity of the manager.

Style Directive activity Supportive activity

Delegating style Low Low

Telling/directive style High Low

Selling style High High

Supportive/participative style Low High

(b) Hersey and Blanchard argued that managers should adapt their management

style to the requirements of the situation, and vary the amount of their

supportive activity and directive activity. For example, they suggested that the

‘selling’ style, where the manager give a large amount of direction and

support, is appropriate when the manager’s employees have some

competence in their work, but are:

 relatively inexperienced (therefore need direction) and

 lacking in confidence (therefore need support and praise from the leader to

build their self-esteem).

and the most appropriate leadership style varies with the work situation. In

this respect his views are similar to those of Hersey and Blanchard. However,

unlike Hersey and Blanchard, Fiedler did not believe that individual

managers could adapt their style to suit the needs of the work situation.

Fiedler argued that managers with the appropriate style should be appointed

according to the needs of the situation. For example, when a work situation

calls for authoritarian leadership, an individual who is naturally authoritarian

should be appointed: a democratic type of leader would be ineffective in the

same situation.

48 Composition of a team

Belbin did not suggest that there is an ideal number of people to make an effective

team, although if a group becomes too large it will lose the characteristics of a team

(social interaction and team work). He suggested that in the most effective teams,

the team members share a number of character types (he originally identified eight

and then added a ninth, the specialist). One individual might possess several

character types, so that a team of less than nine people can still be effective.

He argued that without some of the character types present within the team, the

team would not perform as effectively as it might. For example, without a

finisher/completer, some important details might be overlooked. Without a shaper,

there might be inadequate progress with the team’s work. Without the monitor-

evaluator, the team might reach ill-judged decisions – and so on.

ACCA F1 Accountant in Business - 2010 - Study text - Emile Woolf Publishing

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