Running head: ACCOUNTING

Internal control and accounting systems

Course

Lecturer

Institution

City, State

Date of submission
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Content page and report outline

Title page

Terms of reference

Executive summary

Methodology

1.0 Introduction

2.0 Analysis and evaluation of current system

2.1 Reviewing and evaluating accounting system

2.2 Conduct an ethical evaluation of the accounting systems

2.3 Conduct a sustainability evaluation of the accounting systems

3.0 Identifying weaknesses and making recommendations for improvement

4.0 Cost-Benefit analysis

References

Appendices

I. Appendix 1: Cost-Benefit analysis

II. Appendix 1: Organization Chart

III. Appendix 1: SWOT Analysis

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Terms of reference

The terms of reference of this document is to examine the current responsibilities of the

internal control procedures versus the accounting systems as an obligation to detect and report

the ever dynamic financial frauds that continue to dominate the integrated and contemporary

commercial world. This document covers the academic demands of level four ISYS as a unit in

accordance with the AAT accounting qualifications. In extension, the report critically reviews the

Chic Paints limited especially its degree of commitment towards sustainability and equally

highlights any possible issues are ethical in nature and prevails in the current commercial world.

Finally, this report examines the matters surrounding the standards that are eminent in the Chic

paints limited as well as the accounting practices thereby suggesting recommendations to assist

arrest the situation.

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Executive summary

This report addresses various internal control guidelines in light of the accounting

systems that Chic Paints ltd organization uses especially when preparing its financial statements.

In the first section, the document presents an analysis of the role taken by the accounting

department within the Chic Paints ltd organization. Here, matters surrounding the accounting

systems such as structure, organization and procedures regarding the accounting systems, the

various functions of the financial statement as well as the external relationship and business

environment are vividly developed. In the proceeding section, the use and the significance of the

internal control in regard to external regulations is discussed. This part also shades more light on

the possible causes, common kinds of financial frauds, techniques of detecting financial

misstatements as well as the inherent impacts to the organization. Conversely, the essence of

devising control types that dictate company compliance with the organizational together with

regulatory requirements in support of the systems of accounting, are explored.

Section three opens out the discussion of Chic Paints ltd's accounting systems in addition

to its possible areas of emphasis and improvement. A critical review, evaluation and assessment

of systems of record keeping, risk areas and operating methods for speed, reliability on top of

cost effectiveness, forms a culmination of this part. The evaluation of ethical principles against

the accounting systems adopted by the enterprise was covered in the fourth section. In the same

mind, the identification of possible breaches relating to professional ethics dominated this part.

The concept of sustainability is paramount to any given business entity and has a close link with

the systems of accounting. The fifth section, therefore, explained this term at length where

sustainable principles were evaluated against the accounting systems.

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Lastly, this report expounded on the need to improve the systems of accounting by

making recommendations concerning ethical issues and sustainability. Nevertheless, the effects

resulting from accounting systems changes upon users were also mentioned.
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Methodology

The report has extensively made use of several related research studies that are sourced

from online websites, journal articles together with books in order to map them into the

accounting systems at Chic Paints Limited. Some of the analysis data were sourced indirectly

from the available publications of the company's periodic statements and documents in order to

aid in compiling this report. In the same way, the report identifies the technical standards in line

with possible breaches of such professional ethics to ascertain the suitability of the ethical

principles and procedures applicable in Chic Paints Limited.

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1.0. Introduction

The concept of internal control is important in any organization that its responsibility is to

provide goods and services to its loyal consumers. The availability of the internal control

within any organization is considered as a success in advance, thus, it forms an integral

component of the firm's business, financial policies as well as procedures. In the case of Chic

Paints ltd Company, the internal control sought to achieve the following benefits: One is that

internal control measures prevent irregularities together with errors from happening. In case

the errors actually do occur, they would be realized and detected in time. Secondly, the

internal control ensures that financial frauds committed by the employees of Chic Paints ltd

enterprise, are internalized and minimized thereby resolving them. Eventually, the control

ensures that employees are protected through clear demarcation of responsibilities and tasks,

provision of balances and checks, and above all, possible misappropriation, irregularities in

addition to errors get special attention hence reduced. In order to effectively achieve these

roles, the management is depicted as having the upper-hand through various segregation of

duties and its membership. More information concerning the formation, membership and

respective roles can be referred from appendix 5.

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2.0. Analysis and evaluation of current system

2. 1. Reviewing and evaluating accounting system

2. 1. 1. Record keeping

According to (Kenneth, 2012), the main use of financial statements is to make

information available concerning the financial position, notable changes regarding the financial

position and the progress or performance of a company. These information is intended to address

various needs of the financial statements users in line with their economic decision making

process.

Many organizations and their respective management teams at least get comforted when

financial statements reveal strengths as declared by auditors’ procedures. However, when all

these functions are performed; there are many scandals that emerge especially in the changing

commercial world where everybody is busy serving his or her personal interests. From the

records of Chic Paints ltd enterprise, there seemed to be some weaknesses in the internal control

systems that led to serious misstatements of cash balances. (ojo, 2006) observed that in the light

of all these financial frauds, the gap or problem seems to lie within the reviewing process and

curtailed level of independence that are also universal requirements, which dictates the outcome

of the auditors’ report. Therefore, these areas ought to be sealed to internalize these frauds.
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2. 1. 2. Internal systems of control

In Chic Paints ltd Company, the accounting systems used is the management and

inventory accounting systems. Usually, firms utilize both computerized and manual accounting

systems that help in recording transactions sealed. (Kenneth, 2012) wrote that Managerial

Accounting systems where managers are provided with the plan, managerial skills as well as

control mechanisms in order to operate the firm in an efficient manner. Inventory accounting

systems that provide solutions relating to tracking and planning about the inventory associated

activities together with inventory levels.

The mandate of an internal control system is to safeguard the information generated in

the financial statements since it shows the organization’s financial position at a particular period

of time as well as the report communicated to the shareholders or clients by auditors. The control

systems provides guidelines relating to the details such as the assets the company owns or

liabilities owed by the firm are correctly recorded as indicated in the balance sheet, or the

amount of losses and economic returns (profits) assessed in a more accountable method.

2. 1. 3. Fraud

The Chic Paints ltd financial frauds are eminent especially in the current corporate world

where cash handling exercise is sensitive in all aspects that include the organization’s staff. Most

of the scandals themselves revealed the obscurity inherent in Chic Paints ltd's computerized

corporate management that constantly partner with micro control procedures where employees

play a big corruption role as noted by (Kenneth, 2012). This has made the role of external

auditors to diminish thus ineffective in the detecting and communicating the financial frauds

done.
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From the Chic Paints ltd case, the frauds showed the importance of carrying out a critical

review of the financial records and not just a superficial investigation for the purpose of sealing

these financial loopholes. The essence of the primary review in addition to the systems of

internal control becomes the responsibility of the auditors in which source documents or records

are verified first hence easy identification and reporting of possible material misstatement.

2. 1. 4. Working methods/practices

In a critical review of the financial records of Chic Paints ltd, it was found that the

enterprise used QuickBooks accounting packages where cash embezzlement dominated. In fact,

all invoices paid were indeed coded and entered into an operating expense account. The financial

fraud happened as a result of continued reclassification of the line-cost by terming them to be

capital expenditures as supported by (Intal & Linh, 2002. The internal control systems proved

too weak since the management accounting systems that utilized cost accounting systems were

manipulated for personal gains. The working practices that were being used in the organization

were unworthy. They failed the reliability test in that the same worker was subsequently used to

make order, perform verification, and input data into the computer and many other assigned

responsibilities. In the same way, the internal procedures overworked the employees thus

undermined the necessities of speed; however, they were cost effective.

2. 1. 5. Training

Training was taken as an important package because it contributed directly to the

productivity of Chic Paints ltd firm. Employees gained a lot of skills concerning new and the

existing codes of ethics that fosters respect from the leaders to the employees. Through these
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business ethics, the company complies with the nation’s rules and regulations or promotes the

corporation's social accountability and responsibility as proposed by (ojo, 2006).

In case, there were notable modifications in order to provide the required remedies, the

newly modified codes of ethics pertaining to the respective managers and employees are required

to be reluctant. Gradually as they are trained and informed about new aspects of the codes of

ethics, they start appreciating the virtues in these ethics as they will improve the image of Chic

Paints ltd Corporation as well as fostering the norm of integrity and accountability.

2. 1. 6. An evaluation of the accounting system’s professional ethics

Standards of integrity, professional competence, confidentiality, professional behavior,

honesty as well as objectivity are measures that every Chic Paints ltd member should make

reference to when carrying out the transactions. Decisions where each member of the

organization has conflict of interest should be avoided as well distancing themselves from having

any conflict especially to the contracts awarded by the corporation. (Intal & Linh, 2002) opined

that on top of not accepting third party's favors for their own benefits, the members are not

supposed to compete with the organization by taking outside positions that undermine the

company. Eventually, all members are compelled to do their respective tasks as spelled out in the

corporation's job responsibility.

2. 1. 7. An evaluation of sustainability within the accounting system

The concept of sustainability is noble to the future success of any organization that exists

for the purpose of doing business. Chic Paints ltd enterprise ensures that there is business

sustainability that emanate from goodwill by emphasizing on codes of employees, management

and above all, the board of directors' codes. Primarily, the workers' codes of ethics provide the
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required guidance thereby improving the good relationship of the employees with the Chic Paints

ltd Corporation, the public and the employees themselves. In situations where there is violation

of employees' code of ethics and emergence of conflict of interest between the employees, the

employees' code of ethics provide solution procedures. For example, all employees of Chic

Paints ltd Company are required to desist from having any financial interests in the company's

contracts. By observing this obligation, the principle of atmost good faith has been fulfilled.

Upon realizing that an employee has a financial stake, he or she is required to reveal it by putting

it in writing. This code of ethics is applied when suppliers are awarded tenders.

Chic Paints ltd's management code of ethics ensures that the corporation is governed in an

effective manner as well as maintaining social responsibility apart from preserving the

environment. The environment and health safety concerns are a good example of the

management code of ethics in the Chic Paints ltd firm. The emphasizes that it should be the

bottom line and every worker's top priority. The corporation uses it to ensure the environment is

conserved thus reducing the impacts of global warming. In addition, this code of ethics is

referred to whenever the corporation produces new construction materials to determine their

environmental effects. Therefore, Chic Paints ltd Corporation continuously makes use of this

code of ethics by conducting research targeting construction components and their immediate

impact upon the environment. This ensures that the construction and infrastructure products are

friendly to the environment.

In reference to the Directors Code of Ethics, directors are guided by this code of ethics to

provide solutions of ethical issues, find ways of reporting unethical acts thus instilling the

discipline of accountability and honesty. In this case, the directors are supposed to shun from

issuing decisions that they themselves have conflict of interest hence running the organization
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efficiently. Such conflicts are required to be shared with members of board of directors during

important meetings.

2. 2. Conduct an ethical evaluation of the accounting systems

Being a global or multinational construction materials manufacturer company, Chic

Paints ltd makes use of the following business ethical systems as well as codes of ethics to

ensure seamless relationship among the employees, management and board of directors or

executive members:

First, Chic Paints ltd Company utilizes relativistic ethical system that is also applicable as

an ethical standard. Under ethical relativism, the company has a strong believe that social norms

forms the basis of wrong and right by adhering to the following codes of ethics: One is

transparency where information is easily accessed especially areas touching the public. To be

accountable to the public, the organization should present an easy to understand and clear

accessible state information. It should be in a position to justify and explain the peer review

committee's decisions. Two is the issue of observing integrity in all financial and management

affairs. All employees, management and members of the board of directors act with integrity and

show no undue influence or diligence from third parties that would lead to possible scandals

within the organization.

Secondly, Chic Paints ltd Company has also been known to employ an end-driven ethical

system. Fundamentally, this system of code of ethics outline that there should be no conflict of

interest between Chic Paints ltd company and all workers employed in this company especially

financial competition. The workforce uses this ethical system to avoid necessary clash that may
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emerge between the employees and the activities or operations of the company thus instilling the

mind of accountability and transparency.

Third, Chic Paints ltd Company follows a duty-driven system of ethics. The system is

anchored on justness, moral duty and the concept of responsibility to ascertain whether the

behavior was ethical or unethical. With this focus, the organization is morally responsible and

accountable in conserving the environment since it feels that it has contributed to its destruction

in some capacities. Nevertheless, the Chic Paints ltd Company’s employees are also accountable

as pertaining to their duties to ensure maximum returns to stockholders because of their huge

capital investment in the construction and infrastructure industry.

Lastly, the sense of entitlement as an ethical system is emphasized in Chic Paints ltd

Company. Under this system of ethics, every member that holds a position or delegated

responsibility to the company is welcomed to give his or her views or input concerning some

decisions made thus fostering interpersonal relationship.

2. 3. Conduct a sustainability evaluation of the accounting systems

As mentioned above, the term sustainability runs across the board since it is the engine to

the success of any business organization. Given that businesses are becoming complex in terms

of managerial skills in addition to the current dynamic business world, the adoption and wide

usage of Chic Paints ltd's business ethics has increased productivity and promoted teamwork at

the job place. It has assisted in aligning every worker's conduct to fit the ethical values as a

priority. Likewise, the code of ethics has set solution mechanisms to help the corporation during

the times of financial turmoil as claimed by (Intal & Linh, 2002). Apart from helping the growth

of workers hence equipping them with skills to solve different dilemmas, the codes of ethics
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have made the company to avoid lawsuits since they have learnt the importance of following the

rule of law. Finally, the Chic Paints ltd's codes of ethics have created a framework through which

the corporation ensures effective strategic planning as well as quality and diversity management

as depicted in appendix 3 at the back of this report.

III.0. Identifying weaknesses and making recommendations for improvement

As part of the recommendations, everyone charged with organizational responsibility,

namely the management teams, shareholders and stakeholders without forgetting the contribution

of external auditors should join hands so that to be able to detect and report unlawful financial

gain especially in the contemporary integrated business environment. The internal control

procedures, the auditors plus the accounting systems are the people and guidelines to blame for

an increasing number of financial scandals witnessed in the corporate world. They play a big role

towards financial frauds simply because they fail to consider necessary measures to revert the

situation. Some of the steps that need to put in mind while performing the auditing and

accounting functions are adhering to the ethical code of behavior. The reviewing procedures are

often not applied effectively and the level of independence is to large extent ignored thus the

emergence of financial frauds.

Shareholders or the owners to the organization contract with auditors objectively to

examine and give reflected opinions on the progress of the organization in various departments

such as risk management, commission of frauds, and employees. At the same time, provide the

way forward as contained in the auditors’ report. The companies’ owners usually prefer to use
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external auditors since they show a high independence, especially when compared to the internal

auditors.

The report also found that the financial frauds continue to increase day by day thus

raising many questions about the exact role of the internal control, accounting systems as well as

the auditors in today’s financial matters.

There is a big gap within the reviewing process that has been persistently polluted by

compromising such principles as integrity, independence, consistency among others. Also a

regular revision of some existing internal control together with accounting systems or policies in

order to accommodate current complex financial dealings.

In order to perfect the profession of accounting and auditing, many researches should be

emphasized especially relating to the current commercial business world. It seems that many

management teams have captured the internal controls where almost every account in terms of

material information is kept secret. Therefore, these areas of internal control should be

researched and every stakeholder including auditors made to be aware of them in order to be able

to detect and report any fraud committed.

Another area of research is where there are unusual transactions within the organizations.

These areas often fail to be audited thus misstatement of financial frauds like in the case of Chic

Paints ltd firm.

The last researchable area is where policies as well as the laid down procedures are highly valued

especially policies linking the revenue recognition. Normally, organizations tend to mess with

policies and internal control procedures that are essential in recording journal entries together

with making financial adjustments.

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4.0. Cost-Benefit analysis

The Benefit-Cost analysis is an important technique that indicates the economic viability

of an investment. From appendix 4, the Net Present Value over the period of the first five years is

equal to $ 15, 533. 16. Therefore, Chic Paints ltd company is viable hence the need of going

concern. According to (Intal & Linh, 2002) the major objectives of this method include: First, it

is applied in the assessment of the merits of a particular undertaking. Secondly, it makes

comparison between projects of the same industry effective. In this context, Chic Paints ltd's

Benefit-Cost analysis made it possible since it was utilized in the business decision assessment,

used in public investment examinations for worthiness in extension to efficient natural resources

usage or environmental conditions alteration with the aim of improving social welfare.
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References

Intal, T & Linh, T, D 2002, Financial Statement Fraud Recognition of Revenue and the

Auditor’s Responsibility for Detecting Financial Statement Fraud, Retrieved from:

https://gupea.ub.gu.se/bitstream/2077/2347/1/gbs_thesis_2002_53.pdf

Kenneth, E, O 2012, Audit committee and Integrity of Financial Statements: A Preventive

Mechanism for Corporate Failure. Redeemer's University, Mowe Ogun State, Retrieved

from: http://www.ajbmr.com/articlepdf/aus-28-08i8n2a5.pdf

Ojo, M 2006, Eliminating the Audit Expectations Gap: Myth or Reality? Published in: Journal

of Forensic Accounting Volume VIII, Numbers 1 & 2 January - December 2007.Retrieved

from: http://mpra.ub.uni-muenchen.de/232/
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Appendices

Appendix 1:Benefits and costs for Chic Paints ltd investment

Year Benefits $ Costs ()B-C) PVIF10%, n. NPV

$ $

1 10, 000 7, 000 3, 000 0. 9091 2, 727. 27

2 11, 500 7, 500 4, 000 0. 8264 3, 305. 79

3 11, 000 7, 000 4, 000 0. 7513 3, 005. 26

4 12, 600 8, 000 4, 600 0. 6830 3, 141. 86

5 13, 000 7, 600 5, 400 0. 6209 3, 352. 98

Total NPV = $ 15, 533. 16.

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Appendix 2.Chic Paints ltd Organization Chart

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Appendix 3: Chic Paints ltd SWOT Analysis

Parent Company Chic Paints ltd company

Category Paint Industry

Sector Industrial products and chemicals

Tagline/ Slogan Paint your imagination

Areas of Emphasis Innovation, Performance, Customer First, Ethical Practice and Valuing People

Strategic planning

Segment upper class and Middle Class segment

Target Group Professionals, Home owners as well as Industry Users

Positioning Fulfill and satisfy your imagination of colors

SWOT Analysis

1.Green-Horizon an initiative taken towards reducing waste and conserving

natural resources; launching eco-friendly and energy efficient products
2. Chic Paints ltd has excellent brand perception and brand awareness amon
its potential customers.
3. It provides with high quality products and has very high market space bot
terms of visibility and sales.
4. The Company has international presence: it has manufacturing facilities
abroad.
5. Chic Paints ltd is a lone supplier of protective coatings to Nuclear Power
Plants.
6. Its industrial and automotive coating is used by the best automobile
Strength companies like Mercedes.
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1. Dependence on decorative segment where competition is intense

2. High levels of lead found leading to negative publicity
Weakness 3. Limited liquidity options

1. New Product launches and innovation with changing trends

2. Strong growth Potential owing to urbanization
3. Business diversification
Opportunity 4. product diversification

Threats 1. New entrants in the industry and local companies.

2. Fluctuations in raw material prices
3. Stiff competition