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ADMS 2500 Module 14- Theory of Accounting.docx

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Administrative Studies
ADMS 2500
Brian Gaber

ADMS 2500 Oct.27.2011 Module 14- Theory of Accounting Financial Statements Depend on Reliable Accounting Systems - businesses depend on accounting systems to convert transactions into useful data that can be used to manage the organization: ~ keep track of payables and receivables ~ safeguard assets ~ manage and allocate resources ~ monitor operations to improve business - accounting system: (1) captures and records transactions (2) sorts, analyzes and summarizes transactions (3) updates accounting records (4) produces reports (5) responds to non-routine information requests from users - financial statement is only as reliable as the systems producing them Accounting Systems are Unique - use manual procedures, technology, documents, online forms, filing systems, database systems and accounting methods to facilitate preparation of financial statement and for permanent records of transactions - each organization is unique because they experience different needs, risks and resources - heart of accounting system is database that has transactional data Accounting System Reliability Depends on Control - accounting systems are developed and operate within the control environment of a business - depends on control environment and other procedures that help detect and/or prevent errors - effective control is important and directly related to one of the basic functions of management: the fiduciary stewardship of resources entrusted to the organization - owners entrust capital to professional managers who then in turn deploy these resources to lower level managers - works because of satisfactory control systems that make sure these resources are used efficiently, productively and with integrity Formal Control Mechanisms - owner is manager and employee - little need for control because this one person: (1) performs all functions (2) access to all information (3) no significant accountability relationships with other individuals - formal control mechanism is required to ensure: (1) employee understands policies and procedures set by the employer (2) follows these policies and procedures Principles and Techniques of Internal Control Control Environment - control begins with a mindset of management - seriousness with which chief executive officer views good control environment creates the atmosphere, the ‘corporate culture’ - system of control must be formalized to be effective: ~ establishment of control criteria by management ~ method of communicating these criterias to employees ~ methods of training employees in carrying out control procedures ~ method of monitoring employee behavior with respect to their control responsibilities ~ mechanism for structured review to ensure the system evolves to meet the needs of the changing environment ~ periodically, a formal audit to assess the state of internal control in the organization ~ cost benefit criteria are applied to the design and re-design of the control system The Increasing Importance of Control - corporations grow systems become more complicated and reliance is placed on controls of environment - because government is asking for more and more information faster organizations don’t have time to double check or perform analytical procedures so reliance is placed on systems of control - Sarbanes-Oxley Act passed - CEO and CFO must certify certain things - f
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