On a High Level,the Accounting Processes of a Business Consist

question 11

Essay

On a high level,the accounting processes of a business consist of internal controls,individual transactions,and account balances.
Required:
A. A company implements internal controls as a safeguard to ensure appropriate capturing and recording of individual transactions, which are then collected into ending account balances. Ending account balances are then used to prepare the financial statements. The auditor expresses an opinion on the financial statements, which are made up of ending account balances and disclosures.
A. Describe the relationship between internal controls, individual transactions, and account balances.
B. Discuss how evidence regarding each of these three areas can help an auditor determine if the financial statements are fairly stated.
B. The auditor can obtain evidence from all three areas of the accounting process. For instance, an auditor can directly test the account balance (e.g., by examining a bank statement reconciliation). This evidence is usually the highest-quality but costliest evidence. Alternatively, the auditor can obtain indirect information by testing the individual transactions that make up an account balance. If transactions are handled properly, this provides indirect evidence that the ending balances are more likely to be fairly stated. The least direct method of obtaining evidence is to evaluate and test the company's internal controls, which are implemented to ensure that transactions are handled properly. If a company's system of internal control is effective, transactions are more likely to be handled properly, and thus the ending balances making up a set of financial statements are more likely to be fairly stated. Auditors usually collect evidence relating to all three areas: internal control, transactions, and ending balances.

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Definitions:

Compounded Continuously

A calculation involving the natural exponential function for the interest that is added to an amount of money based on an infinitely small rate over a period of time.

Principal

In finance, the original sum of money borrowed in a loan, or put into an investment. In mathematics, it can refer to the principal amount, or initial size of a quantity before interest or growth.

Nearest Cent

Rounding a monetary amount to the closest cent, typically as part of currency calculations to ensure practical transactions.

Decimal Places

The number of digits to the right of a decimal point in a number.