The Accounting Function

21.
THE
ACCOUNTING
FUNCTION
DR. SHAAN JAYASEKERA(PHD)

CHAIRMAN ALPHA BUSINESS
SCHOOL
F1 ACCOUNTANT IN BUSINESS - DR. SHAAN JAYASEKERA (PHD) ALL RIGHTS RESERVED +94777756314 1
KEY TOPICS OF
DISCUSSION
1. Laws and regulation
governing accounting
2. International regulation in
accounting
3. The accounting and finance
function in business
4. Integrated accounting
5. Financial systems and
procedures
6. Audit and financial control
7. Fraud and its management
F1 ACCOUNTANT IN BUSINESS - DR. SHAAN JAYASEKERA (PHD) ALL RIGHTS RESERVED +94777756314 2
 The companies act of 2006 in the UK requires that financial
statements are produced to give a true and fair view of the
performance of the company.
 They must follow appropriate accounting standards
LAW AND  Contain information of sufficient quantity to satisfy the reasonable
expectations of users
REGULATION  Should follow generally accepted practices
GOVERNING  Should not contain any material misstatement
ACCOUNTING  The responsibility for producing financial statements that provide a

true and fair view lies with the directors which may be delegated to a
Chief Financial Officer.
 Failure to keep proper records or prepare regular financial
statements that give a true and fair view is a criminal offence
ACCOUNTANT IN BUSINESS (F1) ACCA. DR SHAAN JAYASEKERA(PHD) ALL RIGHTS RESERVED. SHAAN@KCOVERSEAS.LK 3
 The accounting discipline is influenced by both national and international
standard setters
 The IFRS foundation- this is the supervisory body of the IASB. The IFRS
foundations main objectives are to
 Develop a set of high quality, understandable and enforceable and
globally accepted financial reporting standards
INTERNATIONAL  Promote the application of these standards
REGULATION OF  Take account of the financial reporting needs of emerging economies and
SMEs
THE ACCOUNTING  Bring convergence in national and international standards
PROFESSION  The International Accounting Standards Board (IASB)- develop a set of high
quality, understandable and enforceable global standards and also cooperate
with national accounting standards setters to achieve convergence. New
standards start as Discussion Paper and then an exposure draft and finally
IFRS is issued
 IFRS Interpretation committee (IC) – provide authoritative guidance on
standards interpretation and review widespread issues
 IFRS Advisory Committee (SAC)- advice on the agenda of standards setting
IFRS Foundation
IASB IFRS IC IFRS AC
Develop standards Provide guidance Develop agenda on

on application areas where
standards are
needed or uptaded
THE ACCOUNTING AND FINANCE FUNCTION WITHIN A BUSINESS
The accounting and finance

function
Management Treasury and

Financial accounting
accounting Finance
 Accounting is the systematic recording , reporting and
THE ACCOUNTING 
analysis of financial transactions within a business
Financial accounting is concerned with the production of
FUNCTION
annual financial statements in accordance with relevant
accounting standards and legislation. Transactions will
be entered in
 The books of prime entry
 Ledger accounts
 Preparation of main financial statements
 Statement of profit and loss
 Statement of financial position
 Statement of cashflow
 IR looks at reporting not only on how financial capital of a business
performs but also other capitals known as the 6 capitals which
helps a business create value in the long run and be sustainable.
Capital mist be maintained or grow to add value in the long term
 financial, (stocks, bonds)
INTEGRATED  manufactured, (tools, buildings, stocks machinery),

intellectual(employee and organizational knowledge and informational
REPORTING-IR 
resources, patents, copyrights, reputation, training ),
 human, (health, knowledge and motivation),
 social and relationship, (communities, schools, families, trade unions,
voluntary organizations)
 natural. (renewable and non renewable natural resources )
ACCOUNTANT IN BUSINESS (F1) ACCA. DR SHAAN JAYASEKERA(PHD)
ALL RIGHTS RESERVED. SHAAN@KCOVERSEAS.LK
Financial capital
THE
Manufactured
RELATIONSHIP capital
OF CAPITALS Intellectual Human
capital capital
Social capital
Natural Capital
MANAGEMENT
Financial accounting Management accounting
ACCOUNTING
External users Internal users
mandatory Not mandatory
Historical Current and forecasts
financial Financial and non-financial
 Management accounting is
concerned with assisting Provide a true and fair view Aid decision making on entity
managers to discharge on control
planning, directing and
Predefined standards and Conventions and principles
controlling a business entity
formats
 Treasury is concerned with handling financial matters , the
generation of external and internal funds for business, the
management of currencies and cashflows and aspects of
corporate finance
 Working capital management
Cash management
TREASURY

 Financing activities and debt policies

 Foreign currency management
 Tax management
 Tax avoidance- legal activity of reducing tax liability of working with the
tax law
 Tax evasion – illegal activity and criminal offence
 Borrowing money creating a financial commitment that needs to be
honoured. Debt holders will be paid a fixed amount and before
shareholder dividends. Interest payment is mandatory. If not paid
the debt holders can take legal action
 Advantages –
DEBT FINANCING  No sharing of control and decision making
 Interest is tax deductible
 No sharing of surplus profits
 Can be paid off when not needed
 Cheap form of finance as debtholders take less risks
 Infuses a sense of financial discipline
 Equity represents shareholder ownership and a right to direct a
firms affairs and participate in surplus profits of the firm.
EQUITY  Advantages
No compulsion to pay dividends
FINANCING 
 Permanent form of finance that does not need to be paid back

 Can bring in new expertise
 Ideal fro funding risky businesses that have high business risks
FINANCIAL SYSTEMS AND PROCEDURES
Financial systems- independent but
interrelated elements to achieve an
objective
Policies- guiding principles
Procedures- a series of acts and

sequences including controls
Guidelines –recommended approaches
1. All transactions will be recorded in the same way
2. Best practice can be incorporated
ADVANTAGES OF 3. Staff can be trained easier
FORMAL SYSTEMS 4. Auditors can follow transactions
5. Fraud and error can be detected and controlled
6. Staff can refer to manuals if there is confusion
 Internal controls – these are designed by management to provide
reasonable assurance about the achievement of a businesses
objectives with regard to
 Reliability of financial reporting
AUDIT AND  Effectiveness and efficiency of operations

 Compliance with laws and regulations
FINANCIAL  Controls exist to ensure
CONTROL  The orderly conduct of business
 Safeguard assets
 Ensure reliability of records and reporting
 To prevent and detect fraud and error
Setting the tone at the top
Set the control environment showing commitment at the
Board level
Analyzing and understanding

Risk assessment risk areas of business
Components of a control
system- COSO
framework Deciding on necessary controls
Control activities to embed-SPAMSOAP
Collecting information and

Information and communication
directing to correct people
To monitor and action
Updating control systems and

Monitoring responding to environmental
developments
ACCA SBL DR. SHAAN JAYASEKERA (PHD) ALL RIGHTS RESERVED. SHAAN@STUDIES-OVERSEAS.COM 17
 These are the detailed internal controls that are embedded within the
operations of the company
 The Auditing Practices Committee lists these as SPAMSOAP
 S- segregation of duties- breaking a transaction into 3 duties i.e.
authorization of transaction, recording the transaction and handling
the asset
CONTROL  P-Physical Controls
ACTIVITIES  A-Authorization and approval –authority limits and approval

 M-Managerial – Budgets and variance reports
 S-Supervision- overseeing work by another
 O-Organizational – reporting line, division of work, delegation of
authority, committees
 A-Arithmetic and Accounting – reconciliations
 P- Personnel –selection and training including induction
 Natural disasters-floods, fire, earthquakes, power surges, lightning
 Viruses
INFORMATION  Hackers and industrial espionage
TECHNOLOGY  Employee errors
RISKS  Employee sabotage
 Theft
 Faults in the system
 General controls: appropriate use of computer systems and
security of data
 Physical access controls
 Logical access controls
 Facilities location
 Personnel controls
 Disaster recovery planning
APPROACHES TO  Backups
DEAL WITH RISKS  Application controls: ensures data is properly input, processed,
stored and distributed to authorized people
 Validity checks
 Control and batch total
 Completeness checks
 Activity reports
 Activity logs
 Software controls
 Using only licensed software
 Installing only authorized software
APPROACHES TO  Software updates

Virus guards
DEAL WITH

 Retaining installation discs

RISKS…… CONT  Network controls
 Firewalls/preventing unauthorized access
 Data encryption
 Virus guards
GOOGLE DATA CENTRE
THE SEED VAULT
 Audit is an independent appraisal activity. Given this auditor
independence is paramount
 Internal audit – is established by management to evaluate and
examine an organizations risk management processes and systems
of control and to make recommendations for its improvement
INTERNAL AND
 External audit –is an independent examination and verification as to
EXTERNAL AUDIT whether prepared financial statements show a true and fair view of
an entity to give confidence to external users
 Given the above auditors need to be accountants themselves !
 To ensure greater independence to internal auditors they can report

their findings to an audit committee in an organization
 Fraud is a deliberate act involving deception to gain an unfair advantage.
As such it is distinguished from error which has no such deliberate
intention
 The prerequisites of fraud include/ the fraud triangle. Fraud requires the
convergence of
 Dishonesty/ rationalization –internalizing the fraud is right or justified
 Motive /pressure –need or greed
FRAUD RISK  Opportunity –lack of controls
MANAGEMENT  The fraud risk management strategy includes three elements which
collectively create a fourth element of fraud deterrence( fear of
reprimands, knowledge of constantly being monitored etc )
STRATEGY  Fraud prevention- preventive controls and good control environment to
reduce opportunity and temptation e.g a fraud policy statement anti
fraud culture, encouraging and protecting whistle blowing, sound
internal controls, commitment to competencies and integrity
 Fraud detection- whistleblowers, regular checks , unusual staff
behavior, warning indicators
 Fraud response –internal disciplinary action, civil litigation, criminal
prosecution
ACCA SBL DR. SHAAN JAYASEKERA (PHD) ALL RIGHTS RESERVED. SHAAN@STUDIES-
OVERSEAS.COM
26
All these need to

align….else it cannot
take place !!
FRAUD
TRIANGLE Opportunity
The fraud management Fraud

strategy should requires
address these areas
Dishonesty/
Motive/pres
Rationalizati
sure
on
ACCA SBL DR. SHAAN JAYASEKERA (PHD) ALL RIGHTS RESERVED. SHAAN@STUDIES-
OVERSEAS.COM
27
Legislation
FRAUD
STRATEGY Fraud prevention Fraud Detection
Fraud
Deterrence
Fraud
Response
Corporate Governance
 Frauds by management
 Financial statement frauds – window dressing and ‘cooking up the books’
 Misappropriation of assets
 False insurance claims
 Using assets for personal use
 Frauds by employees
 Teeming and lading-It involves the allocation of one customer's payment to
another customer's account to make the books balance, often to hide a
FRAUDS IN 
shortfall or theft
Purchase ledger fraud
BUSINESSES  Skimming schemes-taking cash "off the top" of the daily receipts of a business
(or from any cash transaction involving a third interested party) and officially
reporting a lower total.
 Payroll frauds
 Frauds by third parties
 Advance fee fraud
 Bank account frauds
 Ponzi/pyramid schemes
 False billing frauds
PONZI SCHEMES
 Money laundering is ‘cleaning’ up dirty money or money with criminal
origins to maker it legitimate . It involves the concealment of the origins
of illegally obtained money, typically by means of transfers involving
foreign banks or legitimate businesses.
 The process of laundering money typically involves three steps:
placement, layering, and integration.
MONEY 1. Placement puts the "dirty money" into the legitimate financial
LAUNDERING system.
2. Layering conceals the source of the money through a series of
transactions and bookkeeping tricks.
3. integration, the now-laundered money is withdrawn from the
legitimate account to be used for whatever purposes the criminals
have in mind for it.
MONEY LAUNDERING
 There are many ways to launder money, from the simple to the very complex.
 One of the most common techniques is to use a legitimate, cash-based business
owned by a criminal organization. For example, if the organization owns a
restaurant, it might inflate the daily cash receipts to funnel illegal cash through the
restaurant and into the restaurant's bank account. After that, the funds can be
withdrawn as needed. These types of businesses are often referred to as "fronts."
 In another common form of money laundering, called smurfing (also known as
"structuring"), the criminal breaks up large chunks of cash into multiple small
WAYS OF MONEY deposits, often spreading them over many different accounts, to avoid detection.
Money laundering can also be accomplished through the use of currency
LAUNDERING 
exchanges, wire transfers, and "mules"—cash smugglers, who sneak large amounts
of cash across borders and deposit them in foreign accounts, where money-
laundering enforcement is less strict.
 Other money-laundering methods involve investing in commodities such as gems
and gold that can easily be moved to other jurisdictions, discreetly investing in and
selling valuable assets such as real estate, gambling, counterfeiting; and
using shell companies (inactive companies or corporations that essentially exist on
paper only).
 Recognizes three forms of offences
MONEY
 Laundering (up to 15 years jail term and fines )
LAUNDERING  Failure to report –not disclosing suspicions (up to 5 years and fines)
LEGISLATION  Tip off- disclosure of information that may prejudice (harm) and money
laundering investigation (up to 2 years)
HSBC MONEY LAUNDERING

The Accounting Function

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21.

DR. SHAAN JAYASEKERA(PHD)

ACCOUNTING  The responsibility for producing financial statements that provide a

IASB IFRS IC IFRS AC

Develop standards Provide guidance Develop agenda on

The accounting and finance

Management Treasury and

INTEGRATED  manufactured, (tools, buildings, stocks machinery),

 Financing activities and debt policies

 Permanent form of finance that does not need to be paid back

Policies- guiding principles

Procedures- a series of acts and

Guidelines –recommended approaches

2. Best practice can be incorporated

ADVANTAGES OF 3. Staff can be trained easier

FORMAL SYSTEMS 4. Auditors can follow transactions

5. Fraud and error can be detected and controlled

6. Staff can refer to manuals if there is confusion

AUDIT AND  Effectiveness and efficiency of operations

Analyzing and understanding

Collecting information and

Updating control systems and

CONTROL  P-Physical Controls

ACTIVITIES  A-Authorization and approval –authority limits and approval

TECHNOLOGY  Employee errors

RISKS  Employee sabotage

 Faults in the system

APPROACHES TO  Software updates

 Retaining installation discs

 To ensure greater independence to internal auditors they can report

All these need to

The fraud management Fraud

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