ANALYZING THE ACCOUNTING INFORMATION SYSTEM ON APPLICATION OF ACCOUNTING PRINCIPALS

When analyzing the Accounting information system of the given entity on the basis of applying accounting principals, the major deficiencies of the system which was identified are categorized as per the accounting principals in question. How ever it should be noted that these inefficiencies are identified assuming that the internal controls and accounting processes mentioned are effectively applied as well as designed (of which can only be identified by a external audit function )and also taking in to consideration transactions in the normal course of business. It should also be noted that other than the matters highlighted below the companies accounting system seems to abide by the core elements of the generally accepted accounting principals.ip;
Business entity concept

It has been indicated that at the end of each year each sites financial statements are separately prepared But such process can only be possible if other than memorandum notes that the site cash manager keeps (on material purchasing, employee payment and interim payment received), Transactions like cash remittances for on site spending transferred through Bank or any additional cash input by the directors on cash shortages(as in the case of many private limited companies) along with any drawings via cash or goods by the directors as well as cash or supplies shortage in the short run in any of the site may be compensated by transferring from any other site will prompt the existence of related party accounts and directors current account to be handled with in the AIS.
Money measurement concept

In companies where construction is the core business, there are non monetary items such as working progress measurement which should be done with an assistant of a qualified Engineer and other quantitative measurements of which monetary value needs to be taken in to the AIS Which is not mentioned.
Historical cost concept

For material purchases its important note where inventory system other than FIFO is in operation application of historical cost concept might not be 100% applicable. (Specially with Raw material prices fluctuating rapidly).There are also instances in this industry where Net Realizable value has to be taken in to context when its applicable other than these instances company seems to apply the concept to AIS.
Continuity concept

AIS have little or no affect on the concept as its up to the directors in presenting the financial accounts to apply the concept.

Periodic concept

AIS should have proper cut off procedures indicated to break up a continuing project in to the relevant years of financial cycles or years of assessment for taxation purpose.
Revenue recondition concept

Especially in contracting entities recondition of on going projects are done on identifying the Degree of completion. This measurement will be done through the Engineers certificate on work done as a percentage of the total work load. Multiplication of this percentage with total invoiced value should be the sales value of the project for the given period. Although the interim payments are indentified in the AIS its important to apply the techniques rather than just periodic payments. There is also no mention of complimentary that is frequent in the industry (when project is completed substantially early than dead line dates) and its recognition. Modifications to the original plan on client request might also be there where the AIS should be flexible enough to incorporate the new value addition in revenue recognition.
Prudency concept

There instances where on sight manager will have to make provisions to be made on contingent liabilities (Environmental regulations) possible penalties should be readily incorporated to AIS.
Accrual concept

As on site book keeping is on memorandum basis this concept is only relevant at head office accounts which are seemingly applied as per the audited financial statements as it are a basic principal applied in even the most basic accounting systems.
Substance over form

No mention of the application procedure for assets taken on Lease or hire purchase is mentioned, assuming they are included in the preparation of financial statements and other such assets (Government given land for 99 or 50 year Lease) which are not owned but effectively the benefits are substantial and directed towards the entity, AIS should be satisfactorily functional.
Matching concept

With the site managers progress report and the correct revenue recognition process mentioned above, the entity is able to correctly identify project expenses directly identifiable with the finished percentage of work .But all excess non identified direct expenses should be identified as W.I.P in the AIS.How ever when distributing administration and financing over heads proportionate value and the risks involved on site is a better mechanism than equal distribution.

Consistency concept

AIS does not mention the use of a accounting policy statement of the company which should be there to assist with the operation of the AIS and also in the presentation of Financial statements ,key accounting estimates (depreciation policy /Bad debt provisioning)should be applied along with the application of relevant accounting standards(SLAS 13) which are consistently applied.
Disclosure concept

Accounting policies, estimate and standards should be prone to change during the course of business and if so disclosures of these changes should be incorporated and mentioned at the financial statements along with the application of relevant accounting standards revisions.
Materiality concept

The AIS does not mention of the materiality level that should be set for the entity which should be set up by the director finance or CFO .This level will be use when taking account ting decisions on transaction recording process. (Expenses which should be aggregately recorded or presented in financial statements)