Text 13 auditing

Auditing is an accounting function that involves the review and eval­uation of financial records. It is done by someone other than the person who entered the transactions in the records. Not so many years ago, the presence of an auditor suggested that a company was having financial difficulties or that irregularities had been discovered in the records. Currently, however, outside audits are a normal and regular part of business practice. In addition, many corporations, especially the larger ones with complex operations, maintain a continuous internal audit by their own accounting departments.

Even those companies that do not conduct an internal audit need to maintain a system of internal control. Most good systems will provide accounting controls against errors, as well as a division of duties to reduce the possibility of misappropriations. An example of a business paper used in an internal control system is the petty cash voucher. Vouchers indicate receipt of payment. In the case of petty cash vouchers, they are a record of payment from the small cash fund that most companies keep for minor transactions for which cash is needed. Another example is the expense account voucher that is required by many organizations before payment can be made to reimburse an employee for money spent for business travel and entertaining.

Ideally, a business should use as many internal controls as are consistent with efficient operation. In practice, the cost of installing and maintaining control systems forces management to decide which control devices to use. If there are too many controls, a time may come when the company's employees are spending more time filling out forms than performing productive work.

Many companies employ their own accountants to maintain an internal audit. They continuously review operating procedures and financial records and report to management on the current state of the company's fiscal affairs. These accountants also report on any deviations from standard operating procedures; that is, the company's established methods for carrying on its operating and recording functions. The internal auditors also make suggestions to management for improvements in the standard operating procedures. Finally, they check the accounting records in regard to completeness and accuracy, making sure that all irregularities are corrected. Overall, the internal auditors seek to ensure that the various departments of the company follow the policies and procedures established by management

Text 14 special terms

Liability: An obligation that is owed by an organization: debts to other organizations for merchandise or services; wages owed to employees; accrued (owed but not yet paid) taxes; and payments due on loans or mortgages.

Capital: The investment in an organization or business by its owner or owners. Other terms often used instead of capital are owners' equity, often abbreviated OE, and proprietorship.

Account: A record of the changes and balances in the value of an individual item listed in the ledger of an organization. An example of an asset account is the company's furniture and fixtures, usually listed as one item since it would be impractical to list every desk and chair. Each account, usually abbreviated a/c, frequently has its own page in the organization's ledger.

Double-entry: A method of bookkeeping in which the twofold effect of every entry is recorded, thus requiring two entries to record each transaction. By recording both effects of each transaction, this system offers protection against error.

Single-entry: Any bookkeeping system that does not include the com­plete results of each transaction. It is usually used by small companies or to keep track of specific accounts: for example, a checkbook which only keeps a record of the cash balance.

Debit: An amount entered on the left-hand side of an account. Asset and expense accounts are increased by debiting, that is, by entering amounts in the left-hand column. Debit is usually abbreviated DR.

Credit: An amount entered on the right-hand side of an account. Liability, capital, and income accounts are increased by crediting, that is, by entering amounts in the right-hand column. Credit is usually abbreviated CR.

Journal: A book in which transactions are recorded. In double-entry bookkeeping, both sides of the transaction — both the debit and the credit side — are entered in the journal.

Ledger: A listing of detailed accounts, such as a record comprising the accounts receivable of each customer. The general ledger is the book used to list all the accounts of an organization. Entries from all the journals are transferred to the ledger at regular intervals, usually monthly. This process is called posting. The ledger then serves as a summary of all the fiscal activity for that period.

To Foot: To add or total the amounts in a column.

Trial Balance: When all the transactions for a certain period have been posted and footed, the debits should equal the credits. The test to see if this is

so is called a trial balance.

Accounting equation - a description of the relationship between a company's assets, liabilities, and equity; expressed as Assets = Liabilities +Equity.

Equity - owner's claim on the assets of a business; more precisely the residual interest in the assets of an entity that remains after deducting its liabilities; also called net assets.

Debtor - individual or organizations that owe money to a business.

Assets - resources owned or controlled by the business and expected to provide future benefits to the business.

Audit-a check of an organization accounting systems and records using

various tests.

Bookkeeping - the part of accounting that involves recording economic transactions and events, either electronically or manually (also known as recordkeeping).

Pro/it - the amount a business earns after subtracting all expenses necessary for sales (net income or earnings).

Accounting - an information and measurement system that identifies, records, and communicates relevant information about a company's economic activities.