FINANCIAL ACCOUNTING

 ASSIGNMENT NO: 2

SOCIAL SECURITY SCHEMES

Why Do We Need Social Security
Social Security protects not just the subscriber but also his/her entire family by giving benefit packages in financial security and health care. Social Security schemes are designed to guarantee at least long-term sustenance to families when the earning member retires, dies or suffers a disability. Thus the main strength of the Social Security system is that it acts as a facilitator - it helps people to plan their own future through insurance and assistance. The success of Social Security schemes however requires the active support and involvement of employees and employers.
As a worker/employee, you are a source of Social Security protection for yourself and your family. As an employer you are responsible for providing adequate social security coverage to all your workers.

Background information on Social Security
India has always had a Joint Family system that took care of the social security needs of all the members provided it had access/ownership of material assets like land. In keeping with its cultural traditions, family members and relatives have always discharged a sense of shared responsibility towards one another. To the extent that the family has resources to draw upon, this is often the best relief for the special needs and care required by the aged and those in poor health.

However with increasing migration, urbanization and demographic changes there has been a decrease in large family units. This is where the formal system of social security gains importance. However, information and awareness are the vital factors in widening the coverage of Social Security schemes. Social Security Benefits in India are Need-based i.e. the component of social assistance is more important in the publicly-managed schemes- In the Indian context, Social Security is a comprehensive approach designed to prevent deprivation, assure the individual of a basic minimum income for himself and his dependents and to protect the individual from any uncertainties. The State bears the primary responsibility for developing appropriate system for providing protection and assistance to its workforce. Social Security is increasingly viewed as an integral part of the development process.  It helps to create a more positive attitude to the challenge of globalization and the consequent structural and technological changes.

Workforce In India
The dimensions and complexities of the problem in India can be better appreciated by taking into consideration the extent of the labour force in the organized and unorganized sectors. The NSSO survey of 2004-05 has brought out the vast dichotomy between these two sectors into sharp focus.  While as per the 1991 census, the total workforce was about 314 million and the organized sector accounted for only 27 million out of this workforce, according to the survey conducted by the National Sample Survey Organization (NSSO) in 2004-05, the total number of workforce was 459 million of which About 433 million (about 94%) of the total workforce is engaged in unorganized sector and 26 million on organized sector. The organized sector is already covered through social security legislations like the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees State Insurance Act, 1948. The Government has also enacted Unorganised Workers’ Social Security Act to create a framework for providing social security to unorganized workers.  Thus, it can be concluded from these findings that there has been a negative growth  in the organized sector in comparison the growth in the unorganized sector.

Organized and Unorganized Sectors
The organized sector includes primarily those establishments which are covered by the Factories Act, 1948, the Shops and Commercial Establishments Acts of State Governments, the Industrial Employment Standing Orders Act, 1946 etc.  This sector already has a structure through which social security benefits are extended to workers covered under these legislations.

The unorganized sector on the other hand, is characterized by the lack of labour law coverage, seasonal and temporary nature of occupations, high labour mobility, dispersed functioning of operations, casualization of labour, lack of organizational support, low bargaining power, etc. all of which make it vulnerable to socio-economic hardships.    The nature of work in the unorganized sector varies between regions and also between the rural areas and the urban areas, which may include the remote rural areas as well as sometimes the most inhospitable urban concentrations. In the rural areas it comprises of landless agricultural labourers, small and marginal farmers, share croppers, persons engaged in animal husbandry, fishing, horticulture, bee-keeping, toddy tapping, forest workers, rural artisans, etc. where as in the urban areas, it comprises mainly of manual labourers in construction, carpentry, trade, transport, communication etc. and also includes street vendors, hawkers, head load workers, cobblers, tin smiths, garment makers, etc.

Synopsis Of Social Security Laws
The principal social security laws enacted in India are the following:
1.    The Employees’ State Insurance Act, 1948 (ESI Act) which covers factories and establishments with 10 or more employees and provides for comprehensive medical care to the employees and their families as well as cash benefits during sickness and maternity, and monthly payments in case of death or disablement.
2.    The Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 (EPF & MP Act) which applies to specific scheduled factories and establishments employing 20 or more employees and ensures terminal benefits to provident fund, superannuation pension, and family pension in case of death during service. Separate laws exist for similar benefits for the workers in the coal mines and tea plantations.
3.    The Employees' Compensation Act, 1923 (WC Act), which requires payment of compensation to the workman or his family in cases of employment related injuries resulting in death or disability.
4.    The Maternity Benefit Act, 1961 (M.B. Act), which provides for 12 weeks wages during maternity as well as paid leave in certain other related contingencies.
5.    The Payment of Gratuity Act, 1972 (P.G. Act), which provides 15 days wages for each year of service to employees who have worked for five years or more in establishments having a minimum of 10 workers.
Separate Provident fund legislation exists for workers employed in Coal Mines and Tea Plantations in the State of Assam and for seamen.

New Initiatives –
·         The various Central Acts on Social Security have been examined in the light of the recommendations of the 2nd National Commission on Labour. Relevant amendments have been carried out in ESIC Act whereas comprehensive review of the EPF and MP Act is under way. The consultation process is on with reference to the amendment suggestions received in case of the Maternity Benefit Act and the Workmen’s Compensation Act.
·         Innovative measures are proposed in the running of the Social Security Schemes of EPFO and ESIC. This includes flexible benefit schemes tailored to the specific requirements of different segments of the population.

Summary Of Present Initiatives In Working Of EPFO & ESIC
The profiles of the Employees’ Provident Fund Organization and the Employees’ State Insurance Corporation are being changed towards greater accessibility and client satisfaction.

The EPFO extends to the entire country covering over 393824 establishments. At present, over 11.80 crore EPF Members and their families get benefits under the social security schemes administered by the EPFO.  The total corpus of the EPF Scheme 1952, EDLI Scheme, 1976 and Employees Pension Scheme 1995 together amounts to about Rs. 5,36,993 crores as on 31-3-2014.  Over the years, the volume of service rendered to subscribers as well as investments made, etc. by EPFO have grown manifold.  With a view to provide better services to subscribers and employers, the organization has launched the Project RE-INVENTING EPF, INDIA since June, 2001.  The prime objectives of this Project are to provide the subscribers better and efficient services, to help the employers by reducing the cost of compliance and to benefit the organization to register geometric growth in all fields.  An important part of this Project is the allotment of the UNIQUE IDENTIFICATION NUMBER-the SOCIAL SECURITY NUMBER to the EPF subscribers, issuing of BUSINESS NUMBERS to the employers and Business Process Re-engineering.

The strategy for implementation has been evolved and the allotment of the Social Security Number has begun with the entire activity being carried out in smaller phases for effective data collection.  The criteria considered for the allotment of SSN include the centralized control of Uniqueness, ensuring the least manual intervention during allotment and near 100% Uniqueness accuracy levels.  The Social Security Number in a nutshell is a big effort towards solving the problem of providing social protection to migrant labour and to make the data base of EPFO adaptable to the present trend of high job mobility among workers.        
Social security is essential for the well being of people and society.  It is the basic human right and its fulfillment will contribute to achieving various developmental goals of nation.  Social Security measures have far reaching benefits in the form of improving and bringing sense of pride and self respect amongst the citizens.  Such measures also help in providing the minimal level  of providing protection against health and life hazards in work situations. It can progressively   pay standard to social security welfare measures involving provisions of better Health Care, Maternity Care, and Old Age Pension etc.

Social Security of the formal sector workers is provided through the instrumentality of Employees’ Provident Fund Organisation and Employees’ State Insurance Corporation.

Employees’ Provident Fund Organization (EPFO)
The EPFO expends to the entire country, except in the State of Jammu and Kashmir covering over 7.98 lac establishments as on 31^st March 2014. Further, over 11.80 crore EPF members and their families get benefits under Social Security Schemes administered by EPFO as on 31^st March 2014. The total investment corpus as on 31^st March, 2014 amounts to ₹ 7,30,393/- crores (₹ 5,36,993/- crore, Unexempted funds and ₹  1,93,400/- crore – exempted funds). Over the years, the volume of service rendered to subscribers as well as investments made etc. by EPFO have grown many folds. EPFO has focused its effort on automation of the work processes to achieve better efficiency and improved service delivery to its members. The work done in this direction by EPFO is given below:-
v  All 120 offices of EPFO have been computerized.
v  With effect from the financial Year 2012-2013 a facility for electronic submission of statutory EPF return (ECR- Electronic Challan cum Return) has been introduced. This is a mandatory mode of filing of the return with the remittance and facilitated the employers to file a single return each month (instead of 4 every month and two annual returns) online from anywhere.
v  Employers can also remit their EPF dues electronically if they have a corporate internet bank account with the State Bank of India.
v  Employers not having a corporate internet bank account with SBI shall have to pay EPF dues through cheque/DD
v  Once the above returns are received electronically and payment is confirmed member accounts are being updated on monthly basis. Thus the members do not have to wait to know their balances in the PF Account till the end of the financial year.
v  Establishments can also view and print the annual PF account slips of its employees.
v  Facility has been provided to the individual employees to register and view his/her EPF account details online as member passbook. The passbook has month wise details of credits and withdrawals as compared to erstwhile F-23 having one line annual summary.
v  For facilitating the employers to comply with statutory provisions of EPF and file necessary returns, an E-Return Tool has been made available.
v  The members can also get their PF balances on their mobile phones through a link “Know Your P F Balance” on www.epfindia.gov.in 
v  Members can also track their claims and payment status online through “Know Your Claim Status Link” as well as receive SMS for the same.
v  EPF amounts are being remitted electronically through NEFT to beneficiaries bank accounts. This results in faster credit of the amount in their accounts after the claim is authorised.
v  The facility to file Transfer Claims online has been provided through launch of Online Transfer Claim Portal ‘OTCP’. This has facilitated faster transfer of amounts of member across their employment under different establishment. This facility for the first time facilitated the filing of claim with digital signature of the employer.
v  For the exempted establishments, the monthly return in Appendix A has been made online. Thus the employment, contribution and the investment details of the exempted establishments are available through the said return in digital format.
v  For the EPF members, going to countries with which India has entered into Social Security Agreement, centralized software for generation of Certificate of Coverage benefiting such member to continue their PF remittances on India.
v  The organization has also launched internal software for compliance and legal case tracking and all the legal cases across India can be monitored on-line through its dashboard.
A proposal for comprehensive amendment of EPF & MP ACT, 1952 is under examination in Ministry of Labour and Employment under consultation with EPFO for improving scale of benefits to the beneficiaries. During 2013-14, special emphasis was laid on issue of Annual Accounts Slip. 13.57 crore Annual Accounts were updated during the year against the corresponding figure of 12.91 crore during 2012-13. The Annual Accounts for and upto the year 2013-14 are likely to be liquidated by 30^th September, 2014. During 2013-14, 123.34 lakhs claims were settled, this being 10.70 percent more than the corresponding figure last year. More than 43.63 lakhs pensioners are being paid monthly pensions by EPFO.


Employees’ State Insurance Corporation (ESIC)
The Employees’ State Insurance Scheme provides need based social security benefits to insured workers in the organized sector. As in the case of the EPFO, the ESIC has also taken up the daunting task of tailoring different benefit schemes for the needs of different  groups. The Employees State Insurance Act, 1948 applies to the factories and establishment viz. Road Motor Transport undertaking, Hotel, Restaurants, Cinemas, Newspaper establishment, Shop, Educational and Medical Institution wherein 10 or more person are employed.  However, in 8 States threshold limit for coverage of establishment is still 20. Employees drawing wages up to Rs. 15000/- a month are covered under the Act whereas for permanently disabled employees wage ceiling is Rs. 25000/- per month. At present scheme is covering about 1.86 crores Insured Persons at 810 Centers in 30 States/UTs.  The total number of beneficiaries availing medical care is about 7.21 crores including family members of IPs.
            The Employees’ State Insurance Scheme provides comprehensive medical care in the form of medical attendance, treatment, drugs and injections, specialist consultation and hospitalization to Insured Persons, their family and also to their dependants. The ESI Scheme provides following benefits to the Insured Persons:-
i)             Medical Benefit: The Scheme provides for full and comprehensive medical treatment to the IPs and their families including hospitalization, referral treatment and supply of artificial limbs, dentures etc. This benefit is available to the IPs from the date they enters insurable employment and is continued thereafter subject to fulfillment of condition of contribution for 78 days in a contribution period of 6 months.
ii)            Sickness Benefit: Under the Scheme the IP is entitled to sickness Benefit for 91 days in a year to the extent of 70% of his wages. This is extended up to 2 years in the case of chronic illness and rate of payment of benefit is about 80% of his wages. For this benefit the IPs is required to have contributed to the Scheme at least for 78 days in a 6 monthly contribution period.
iii)           Maternity Benefit: The Scheme provides for payment of maternity benefit equal to full wages for 12 weeks plus additional one month in the case of illness arising out of pregnancy, delivery etc. The insured woman is required to have contributed for 70 days in proceeding two contribution periods for entitlement to maternity benefit.
iv)           Disablement Benefit: In the case of disablement due to employment injury including occupational diseases the IP is entitled to payment of periodical benefit at about 90% of his wages during the period the IP abstains from work for treatment. There is no contributory condition for this benefit. After the treatment is over, if there is any residuary permanent disablement, a Medical Board decides the daily rate of compensation as a percentage of the full rate.
v)            Dependant Benefit: In the case of death due to employment injury the family is entitled to payment of dependant benefit at the rate about 90% of his wages. There is no contributory condition for this benefit.
vi)           Funeral Expenses: In the case of the death of the IP a sum of Rs. 10.000/- is paid for meeting the funeral expenses.
vii)         Rajiv Gandhi Shramik Kalyan Yojana ( Unemployment Allowance Scheme): The Rajiv Gandhi Shramik Kalyan Yojana was introduced w.e.f. 01.04.2005, Under the Scheme, employees covered under the Scheme who lose their employment due to closure of factories/ establishments, retrenchment or permanent invalidity are entitled to Unemployment Allowance equal to 50% of their wage for up to one year.

            An Insured Person, his family and his dependants are entitled to medical benefits from the day of entry into insurable employment. The range of medical services provided covers promotive, preventive, curative and rehabilitative services which includes outpatient care/ inpatient care, specialized medical care and super specialty medical care as per requirement of the patient. Medical facilities under AYUSH i.e. Ayurveda, Yoga, Unani, Siddha and Homeopathy are also provided.
         Medical services are provided through a large infrastructure comprising Hospitals, Dispensaries, annexes, Specialist centers, Model Dispensaries- cum- Diagnostic Centers (MDDC), IMP clinics and arrangements with other health institutions. The out-patients service is provided through ESI dispensaries, IMP Clinics and Employer Utilization Dispensaries (EUD) In-patient services are provided through ESIC/ESIS Hospitals and through empanelment with tie up private hospitals. There are 1384 service dispensaries under ESI scheme all over the country and 1224 IMPs.  In patient services are provided through a chain of 151 ESI hospitals spread across the country which includes 36 directly run ESIC hospitals & 115 State ESI hospitals with total bed strength of around 19000 excluding beds reserved in State  Govts. Hospitals and Annexes.   The provision for Super specialty services is mainly through tie-up arrangements with private hospitals numbering more than 1000 across India.
      Expenditure on medical care is shared between ESI Corporation and the State Government in the ratio of 7:1 within the prescribed ceiling which is revised from time to time. In order to improve the standard of medical care in the States, the amount reimbursable to the State Governments for running the medical care scheme has been increased from Rs.1200/- to Rs. 1500/- Per IP family unit per annum w.e.f. 01.04.2012. The ESIC has formulated action plans for improving medical services under the ESI Scheme with focus on modernization of hospitals by upgrading their emergency and diagnostic facilities, development of departments as per disease profiles, waste management, provision of intensive care services, revamping of grievance handling services, continuing education programme, computerization and up-gradation of laboratories etc.  The ESIC has also taken new initiatives to promote and popularize AYUSH systems of treatment in ESIC Hospitals and Dispensaries in a phased manner.
ESIC IT Project Panchdeep, one of the largest e-governance projects is under implementation at present. All ESI Institutions are being networked under this project for enabling IPs and their family members to avail ESI benefits anywhere anytime.Two smart cards christened as “Pehchan Cards”, one for insured person and other for the family are being issued. Also, the ESI Act, 1948 has been amended w.e.f. 01.06.2010 for enhancing the Social Security coverage, streamlining the procedure for assessment of dues and for better services to the beneficiaries. The present ESIC  Contribution Rates are Employees-  1.75% of wages Employers-  4.75% of wages.

Extension Of Coverage  
Currently, social security policy makers and administrators are engaged in a wide-ranging debate to redress the problems in providing social security in the country.  This debate has thrown up various arguments on the efficacy of publicly managed social security schemes as opposed to privately managed schemes.  There is no standard model that can be adopted on this issue.  In the Indian context the privately managed schemes can at best be considered as supplementary schemes after the mandatory schemes managed publicly.  It is only the publicly managed scheme, which will extend to all the sectors of the workforce.  The challenge of closing the coverage gap in social security provisions has to be developed at two levels.  The first level involves the re-engineering of the institutional arrangements to increase efficiency.  The second level is to create an appropriate legislative and administrative framework for significant increase in the social security coverage especially in the unorganized sector.
 In India currently only about 35 million out of a workforce of 400 million have access to formal social security in the form of old-age income protection.  This includes private sector workers, civil servants, military personnel and employees of State Public Sector Undertakings.  Out of these 35 million, 26 million workers are members of the Employees’ Provident Fund Organization.  As such the current publicly managed system in India is more or less entirely anchored by the Employees’ Provident Fund Organisation. It may be noted that in the last 50 years, the Employees’ Provident Fund Organisation has been in existence, there has been no instance of any scam or a situation where the Fund has been exposed to speculation and risk. Another important contribution of EPF is now proposed to extend to the critical life benefit of providing shelter.  The Shramik Awas Yojana aims at providing a cost effective Housing Scheme specific for EPF numbers.  This involves cooperation between organizations such as HUDCO, Housing Agencies, State Governments, Employers and EPF Members with the EPFO playing the role of facilitator.

ASSIGNMENT NO: 1

1.GOOD KNOWLEDGE OF ACCOUNTING NECESSARY FOR A MANAGER:
Accounting provides management with data needed to determine whether a business is at a loss or a profit, how much debtors owe, how much a business owes others, and other financial information. Accounting measures business transactions and as such can help steer managers in the right direction with solid information, not gut-feelings. Basically accounting is a tool for management to employ to help make sound business decisions on a timely manner. For instance, if by using accounting information, managers notice that the trend is for sales to decrease, then they can take measures to stop this trend. Maybe they need to change prices or decrease expenses to handle the down-trend. The key is that accounting gave them the clue that something may not be going according to plan, playing an important role in business management. The accounting information market is actually the meeting of the demand and
supply specific to this market. The demand for accounting information is represented by
the user’s needs and the pressure they exert on the accounting system. The offer of the
accounting information represents all the accounting information obtained within the
accounting system, as well as the types and ways of disseminating of such information.
As a result of the increasingly important role that the financial-accounting
information plays today as “social good”, accounting has consolidated its central place
within the information system of any entity, be it public or private, clearly bringing its
“contribution in an area of complex social, multilateral and multidimensional relations”
[M. Capron, 1994, p. 110].
In principle, the objectives of the financial-accounting information are directly
correlated with the users’ information –
decision-making requirements [C. Toma, 2001,p. 55].
The coverage of the users’ needs represents the main conditioned factor that
must be taken into account when setting the targets of any information system, given
that the exposure of the accounting information
goals and the users’ needs are always in
close relation [V. Montesinos Julve, 1993, p. 691]. On one hand, the users require
mainly information to guide their own decision processes, which in their turn serve to
exercise effective control over the fulfilment of the legal obligations and of the efficient
management of the resources.
Based on the above-mentioned issues on accounting information and accounting
information users I shall analyse the quality of the accounting information and the
specific information needs of the accounting information users.

2. ECONOMIC DECISIONS BASED ON ACCOUNTING INFORMATION:
The requirements specific to the accounting information users
Obtaining accounting information takes place after processing and interpreting
the data based on certain accounting principles and concepts, using a variety of methods
and accounting policies to reflect an entity’s economic reality. The accounting
information is produced by expert accountants based on the rules and regulations in force.

3. TYPICAL USERS OF FINANCIAL REPORT:
Financial statements are intended to be understandable by readers who have “a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently.”
There are different kinds of users of financial statements. The users of financial statements may be inside or outside the business.
The users of financial statements use financial statements for a large variety of business purposes and their ability to understand and analyze financial statements helps them to succeed in the business world.
Classification of Users of Financial Statements:
The financial statements are used by different categories of people for different purposes. The various users of financial statements are classified and detailed as follows:
Internal Users:
The internal users of financial statements are individuals who have direct bearing with the organization. They may include:
Managers and Owners: For the smooth operation of the ,Organization the managers and owners need the financial reports essential to make business decisions. So as to provide a more comprehensive view of the financial position of an organization, financial analysis is performed with the information supplied in the financial statements. The financial statement is used to formulate contractual terms between the company and other organizations.
A variable of the financial statement like the current debt to equity ratio is important in deciding the amount of long term capital that would be required to be raised. The financial statements of other companies can also provide investment solutions to different companies. Sometimes it becomes difficult to decide the right field in which financial resources may be channelised. In such situations the financial statements of other companies provide the appropriate guideline.
Employees: The financial reports or the financial statements are of immense use to the employees of the company for making collective bargaining agreements. Such statements are used for discussing matters of promotion, rankings and salary hike.
External Users:

The external users comprise of:

Institutional Investors: The external users of financial statements are basically the investors who use the financial statements to assess the financial strength of a company. This would help them to make logical investment decisions.
Financial Institutions: The users of financial statements are also the different financial institutions like banks and other lending institutions who decide whether to help the company with working capital or to issue debt security to it.
Government: The financial statements of different companies are also used by the government to analyze whether the tax paid by them is accurate and is in line with their financial strength.
Vendors: The vendors who extend credit to a business require financial statements to assess the creditworthiness of the business.
General Mass and Media: The common people as well as media also make part of the users of financial statements.

Brief List of Users of Financial Statements:

Existing equity investors and lenders, to monitor their investments and to evaluate the performance of management.
Prospective equity investors and lenders, to decide whether or not to invest.
Investment analysts, money managers, and stockbrokers, to make buy/sell/hold recommendations to their clients.
Rating agencies (such as Moody’s, Standard & Poor’s, and Dun & Bradstreet), to assign credit ratings.
Major customers and suppliers, to evaluate the financial strength and staying power of the company as a dependable resource for their business.
Labor unions, to gauge how much of a pay increase a company is able to afford in upcoming labor negotiations.
Boards of directors, to review the performance of management.
Management, to assess its own performance.
Corporate raiders, to seek hidden value in companies with under priced stock.
Competitors, to benchmark their own financial results.
Potential competitors, to assess how profitable it may be to enter an industry.
Government agencies responsible for taxing, regulating, or investigating the company.
Politicians, lobbyists, issue groups, consumer advocates, environmentalists, think tanks, foundations, media reporters, and others who are supporting or opposing any particular public issue the company’s actions affect.
Actual or potential joint venture partners, franchisors or franchisees, and other business interests who need to know about the company and its financial situation.

4.COMPARISON OF FINANCIAL ACCOUNTING AND MANAGEMENT ACCOUNTING:
The differences between management accounting and financial accounting include:^[1]

1. Management accounting provides information to people within an organization while financial accounting is mainly for those outside it, such as shareholders
2. Financial accounting is required by law while management accounting is not. Specific standards and formats may be required for statutory accounts such as in the I.A.S International Accounting Standard within Europe.
3. Financial accounting covers the entire organization while management accounting may be concerned with particular products or cost centres.

Managerial accounting is used primarily by those within a company or organization. Reports can be generated for any period of time such as daily, weekly or monthly. Reports are considered to be "future looking" and have forecasting value to those within the company.
Financial accounting is used primarily by those outside of a company or organization. Financial reports are usually created for a set period of time, such as a financial year or period. Financial reports are historically factual and have predictive value to those who wish to make financial decisions or investments in a company. Management Accounting is the branch of Accounting that deals primarily with confidential financial reports for the exclusive use of top management within an organization. These reports are prepared utilizing scientific and statistical methods to arrive at certain monetary values which are then used for decision making. Such reports may include:

• Sales Forecasting reports
• Budget analysis and comparative analysis
• Feasibility studies
• Merger and consolidation reports

Financial Accounting, on the other hand, concentrates on the production of financial reports, including the basic reporting requirements of profitability, liquidity, solvency and stability. Reports of this nature can be accessed by internal and external users such as the shareholders, the banks and the creditors.

5. SIGNIFICANCE OF THE ACCOUNTING ENTITY ASSUMPTIONS:
Accounting have established group of assumptions, those assumptions are the basics of financial accounting. At the same time, assumptions are not accounting principles, as they are more of agreed upon rules.
Assumptions:

• The Economic(Business) Entity Concept
• The Monetary unit assumption
• The Going concern(Continuing Concern) Concept
• The Time Period Concept

The Economic(Business) Entity Concept : as the name indicated, The accountant keeps all of the business transactions of a sole proprietorship separate from the business owner's personal transactions. For legal purposes, a sole proprietorship and its owner are considered to be one entity, but for accounting purposes they are considered to be two separate entities.

Monetary unit assumption: meaning that the business should have one money unit to record its transactions, for example U.S. dollar.

Going concern assumption: meaning that the business is going to be operated for non predefined period, in other words, there is no ending date for business life.This accounting principle requires companies to use the accrual basis of accounting. The matching principle requires that expenses be matched with revenues. For example, sales commissions expense should be reported in the period when the sales were made (and not reported in the period when the commissions were paid). Wages to employees are reported as an expense in the week when the employees worked and not in the week when the employees are paid. If a company agrees to give its employees 1% of its 2012 revenues as a bonus on January 15, 2013, the company should report the bonus as an expense in 2012 and the amount unpaid at December 31, 2012 as a liability. (The expense is occurring as the sales are occurring.) Because we cannot measure the future economic benefit of things such as advertisements (and thereby we cannot match the ad expense with related future revenues), the accountant charges the ad amount to expense in the period that the ad is run.

Time period assumption: This accounting principle assumes that it is possible to report the complex and ongoing activities of a business in relatively short, distinct time intervals such as the five months ended May 31, 2012, or the 5 weeks ended May 1, 2012. The shorter the time interval, the more likely the need for the accountant to estimate amounts relevant to that period. For example, the property tax bill is received on December 15 of each year. On the income statement for the year ended December 31, 2011, the amount is known; but for the income statement for the three months ended March 31, 2012, the amount was not known and an estimate had to be used. It is imperative that the time interval (or period of time) be shown in the heading of each income statement, statement of stockholders' equity, and statement of cash flows. Labeling one of these financial statements with "December 31" is not good enough—the reader needs to know if the statement covers the one week ended December 31, 2011 the month ended December 31, 2011 the three months ended December 31, 2011 or the year ended December 31, 2011.

6.MONEY MEASUREMENT ASSUMPTION:
Monetary policy and the measurement of inflation:prices, wages and expectation  Inflation measurement is fundamental to the conduct of monetary policy. Price indices formthe foundation of central bank policy frameworks around the world. They serve as guides todecision-making, as well as providing the primary mechanism for holding independentpolicymakers accountable. The purpose of the annual meeting of Deputy Governors ofemerging market economies, held in Basel on 5–6 February 2009, was to explore threeissues: price indices used by central banks; the role of wages and productivity in inflationpolicy; and the measurement and assessment ofinflation expectations. In this briefintroductory essay, I will introduce each of these topics.

7.GAAP:
 First of all, I should tell you that GAAP is actually my nickname. My full name is Generally Accepted Accounting Principles. My name refers to a specific set of guidelines that have been established to help publicly-traded companies create their financial statements. Publicly-traded companies are companies that have made stock in their organization available for sale to the public. Unlike some superheroes that are made up of plutonium and kryptonite, I am made up of 10 basic accounting principles.
The Business Entity Principle:- Learn more at www.technofunc.com. Your online source for free pro,,COST PRINCIPLE,OBJECTIVITY PRINCIPLE,UNIT OF MEASURE PRINCIPLE,GOING CONCERN PRINCIPLE.

8.LIABILITY OF A SHAREHOLDER:
What owners of Private and of Public companies have in common is that the liability of the owners for the debts of their companies is limited. Their liability is limited to the paid-up value of the shares they own and this means that it is limited to the amount they agreed to pay for the shares when they bought them.
When a company becomes insolvent, which means when the company cannot pay its debts, then it ceases to trade because it cannot pay its way. It is liquidated, that is its assets are sold and the resulting moneys used to pay at least some of its debts. The remainder, if any, is paid to its owners.
When companies become insolvent and cease to trade, they often owe enormous sums which they cannot repay. But the owner's liability is strictly limited by law to the amount he agreed to pay for the shares when he bought them. The owner is protected by law, his personal possessions cannot be used to repay the company's debts.

So there is now a much greater risk for those dealing with such enterprises if the enterprise becomes insolvent. The owners have transferred much if not most of the risk to suppliers (creditors), customers and employees. <2>
Suppliers may not get paid, customers can lose their down payments (deposits), customers can be left with worthless guarantees, employees may not be paid for work done, other moneys owed by the enterprise may not be repaid. The amounts involved may vastly exceed the enterprise's capital, the risk to suppliers and customers is often great, suppliers and customers lose very large sums each year.

Hence such enterprises generally have to indicate to those who have dealings with them that the enterprises' owners have passed much of the risk to suppliers and customers, that those dealing with the enterprise may not be repaid if it ceases to trade.
In the UK, for example, the law requires a company's name to include specified words, or their specified abbreviations, which in effect state the type of company and that suppliers and customers may lose their moneys if they have dealings with this company. A private company's name has to end with the word 'Limited' or the abbreviation 'Ltd'. A public company's name has to end with the word 'Company' or the abbreviation 'Co'. <3>
In Germany, the letters GmbH are used, for 'Gesellschaft mit beschraenkter Haftung', that is for a 'company with limited liability'. 'Inc' denotes a limited liability company in the United States.

It is because there is risk involved when dealing with companies that, in the UK, the larger companies also have to file each year independently audited summary accounts, as well as information about their directors, with the Registrar of Companies (and now with Companies House).
This information in this way becomes available to all who wish to check a company's creditworthiness, performance and progress.
But it takes time and money to obtain such information and knowledge and experience to understand, interpret and analyse the published information.

Owners take the profits but have transferred much of their risk to other people, to suppliers, customers and employees.
This benefits the owners but runs counter to the free-enterprise maxim that owners (capitalists) can earn profits by taking risks with their own money.
What we see is a system where owners enrich themselves by using and risking other people's moneys.

9. RESPONSIBILITIES OF TREASURER,COMPANY SECRETARY AND CONTROLLER:

Treasurer

It is important that all trustees play their part in financial decisions and financial monitoring. Most boards have at least one trustee who is strong financially and they can be appointed treasurer. They will be responsible for overseeing the finances, even if the organisation has paid staff who deal with much of the day-to-day financial business. Some of the tasks associated with this can include:

• advising the committee on financial matters, both positive and negative
• controlling and accounting for the organisation’s finances
• issuing receipts for all cash received and keeping records of that paid out
• being a counter signatory to any major banking transaction
• overseeing bookkeeping
• preparing the Treasurer’s report for the annual general meeting
• liaising with the appointed Auditor or Independent Examiner for the annual review of accounts
• advising the management committee of its financial requirements for the year ahead.

Secretary

The Secretary of a voluntary organisation can be responsible for many specific tasks, some of which will be regular practical administrative duties of paid staff in larger organisations. These can include:

• convening meetings and booking rooms
• dealing with correspondence
• preparing agendas for meetings (in consultation with the Chairperson)
• taking the minutes of meetings
• ensuring back-up information is available at meetings where required

Company Secretary

The position of a ‘company secretary’ has a specific legal meaning. A voluntary organisation that is a charitable company and chooses to have a ‘company secretary’, does not need a ‘secretary’ as well.
The company secretary doesn’t have to be a board member, a staff member or anyone directly connected to the organisation. The organisation can choose anyone it believes is suitable for the task. If a board member is the company secretary they retain all the normal rights and responsibilities of a director – including the right to make decisions and vote at board meetings. If a member of the company is the company secretary they retain the normal rights and responsibilities of membership including the right to vote at general meetings. If the secretary is someone else, eg a staff member, the position does not automatically make them a member of the board, or a member of the organisation, and they have none of the rights or responsibilities of either.
Note that under the Companies Act 2006 it is no longer compulsory to have a company secretary.
The term Secretary has a specific meaning as the person responsible for various administrative matters under company or IPS law. A company or IPS secretary may be a member of the governing body, but could be an employee or someone such as a solicitor or accountant who is not directly connected with the organisation or its governing body

 CONTROLLER:

A financial controller is responsible for ensuring that all accounting allocations are appropriately made and documented. In smaller companies, the controller may also perform cash management functions and oversee accounts payable, accounts receivable, cash disbursements, payroll and bank reconciliation functions. Every company should maintain a separation of duties with regards to accounting functions to insure that there are checks and balances in the system. For instance, if the controller is responsible for preparing cash disbursements, he should not be a signatory on the account; the owner, chief executive or chief financial officer should be required to sign all checks.

Internal Controls

A financial controller is responsible for establishing and executing internal controls over the company’s accounting and financial procedures. This includes reviewing and approving all invoices to be paid, as well as reviewing accounts receivable aging reports. In smaller companies, the controller will often handle collections on invoices, especially ones that are 45 days to 60 days overdue. A financial controller is also responsible for coordinating with external tax accountants for income tax preparation and auditors who prepare internal audits of the company. This includes keeping company records organized and readily available for examination.

10. ACCOUNTING INFORMATION:
The collection, storage and processing of financial and accounting data that is used by decision makers. An accounting information system is generally a computer-based method for tracking accounting activity in conjunction with information technology resources. The resulting statistical reports can be used internally by management or externally by other interested parties including investors, creditors and tax authorities.

INVESTOPEDIA EXPLAINS'Accounting Information System - AIS'

An accounting information systems that combines traditional accounting practices such as the Generally Accepted Accounting Principles (GAAP) with modern information technology resources. Six elements compose the typical accounting information system:

• People - the system users.
• Procedure and Instructions - methods for retrieving and processing data.
• Data - information pertinent to the organization's business practices.
• Software - computer programs used to process data.
• Information Technology Infrastructure - hardware used to operate the system.
                     

11.  FUNCTION OF FINANCIAL STATEMENT:
The general purpose of the financial statements is to provide information about the results of operations, financial position, and cash flows of an organization. This information is used by the readers of financial statements to make decisions regarding the allocation of resources.
At a more refined level, there is a different purpose associated with each of the financial statements. The income statement informs the reader about the ability of a business to generate a profit. In addition, it reveals the volume of sales, and the nature of the various types of expenses, depending upon how expense information is aggregated. When reviewed over multiple time periods, the income statement can also be used to analyze trends in the results of company operations.
The purpose of the balance sheet is to inform the reader about the current status of the business as of the date listed on the balance sheet. This information is used to estimate the liquidity, funding, and debt position of an entity, and is the basis for a number of liquidity ratios.
Finally, the purpose of the statement of cash flows is to show the nature of cash receipts and disbursements, by a variety of categories. This information is of considerable use, since cash flows do not always match the revenues and expenses shown in the income statement.
As a group, the entire set of financial statements can also be assigned several additional purposes, which are:

• Credit decisions. Lenders use the entire set of information in the financials to determine whether they should extend credit to a business, or restrict the amount of credit already extended.
• Investment decisions. Investors use the information to decide whether to invest, and the price per share at which they want to invest. An acquirer uses the information to develop a price at which to offer to buy a business.
• Taxation decisions. Government entities may tax a business based on its assets or income, and can derive this information from the financials.
• Union bargaining decisions. A union can base its bargaining positions on the perceived ability of a business to pay; this information can be gleaned from the financial statements.

In addition, financial statements can be presented for individual subsidiaries or business segments, to determine their results at a more refined level of detail.
In short, the financial statements have a number of purposes, depending upon who is reading the information and which financial statements are being perused.


12. ENTRIES:
         
         
BANK A/C     DR.                   4000

CUSTOMER A/C  DR.                         7000

                           TO  SALES                                                  11000

IN P&L 13000 IN SALES

IN B/S 4000 IN BANK

CASH FLOW- DEBTORS 7000

13. DIFFERENCE BETWEEN ACCOUNTING AND BOOK-KEEPING:

Bookkeeping and accounting are both essential business functions required for all businesses. Bookkeeping is responsible for the recording of financial transactions. Accounting is responsible for interpreting, classifying, analyzing, reporting and summarizing financial data. The biggest difference between accounting and bookkeeping is that accounting involves interpreting and analyzing data and bookkeeping does not.

Differences

Taking a few accounting courses and developing a basic understanding of accounting will qualify you for a job in bookkeeping. To work in accounting, you must have at least a bachelor's degree to become an accountant or, for a higher level of expertise, you can become a certified public accountant. Accountants are qualified to handle the entire accounting process, while bookkeepers are qualified to handle recording financial transactions. To ensure accuracy, accountants often serve as advisers for bookkeepers and review their work. Bookkeepers record and classify financial transactions, laying the groundwork for accountants to analyze the financial data.

 14. ONE BECOME A CA:

5 Reasons

1. The Chartered Accountant Difference

   Prospective students often ask what the difference between studying Chartered Accountancy and other accounting qualifications is. The answer is that no other professional accounting qualification provides students with the same support, structure, guidance and quality of education throughout the training process. Every professional accountancy body in Ireland qualification requires trainees to have a minimum of 3 years practical experience – we are unique in that we ensure our trainees are supported while they get their experience.
   As an Irish based organisation with headquarters in Dublin and Belfast, we are uniquely able to support and guide our student body. The Institute’s Student Services team are at your disposal at any time to advise and answer your queries, something not to be under-estimated around exam time.
   Our commitment to our students can be seen nowhere better than in our new, purpose-built Training Centre in Pearse St, Dublin with comfortable lecture theatres and a restaurant all in place to best serve your needs. The Institute’s investment in cutting edge technology means lectures are available online from our Dublin and Belfast centres. The training support extends to our active student societies who mediate and represent the student’s voice to the Institute, as well as organising a full calendar of social events.
   

2. Examination Success

   Where other professional accountancy bodies outsource their education, Chartered Accountancy trainees benefit from classes run directly by their Institute. Students have greater levels of contact both with their Institute and their lecturers, both of whom work closely together to ensure the highest standards of delivery.
   It is commonly known that other accounting qualifications can offer more exemptions from exams than Chartered Accountant students receive. However, this can be a red herring! The Institute does not use attractive exemptions to lure students. Instead, we compare each third level syllabus against our own, and where they meet, we offer exemptions. Where they don’t, we don't. This transparent approach to exemptions places students at the appropriate level, and ensures that the vast majority of students pass their exams and get qualified in as short a period as possible.
   Our reputation for facilitating a speedy path to qualification is confirmed by a report in June 2012 by The Professional Oversight Board, an operating board of the Financial Reporting Council. 78% of current Chartered students are registered for less than 4 years. This combination of excellence in education and training programmes gives Chartered Accountancy trainees the edge over their peers.
   

3. What does training involve?

   Irrespective of what route you take to the Chartered Accountancy qualification, becoming a Chartered Accountant involves a combination of academic and professional training. There are a variety of education courses on offer, each with different structures based on local requirements.  In addition, a new distance programme at CAP1 and CAP2 offers great flexibility. Students enrolling on a regular course attend lectures for the equivalent of 4 - 5 days a month from October until May. Some venues have a mixture of evening and weekend lectures; others offer face-to-face lecture time purely on weekends, supplemented by streaming of lectures and home assignments.
   Students choosing the distance programme will watch content online and attendance workshops for approx. 2 days per month where they will hone and apply their online learning.  This allows students to study at a pace and time that suits them.
   What is common to every route is the standard of lecturing. Chartered Accountancy courses have the finest accounting lecturers in Ireland, all of whom are committed to providing the best possible education to our students. The technical knowledge gained from the course will be the bedrock of your professional career. During the time with their training organisation, trainees are taught how to apply the technical knowledge learned in the classroom environment to real-life situations; broad-business skills are developed, and mentors instil the values and integrity that are the foundation of our members’ reputation.
   Training can be either in industry (any sector) or in traditional accountancy practices. No matter the training environment though, trainees can expect to be exposed to areas such as financial accounting & reporting, business finance, management accounting, taxation and planning, auditing and assurance etc. For more details on the training options available to students, please visit the About Chartered Accountancy Section and see under "What Does Training Involve?”.
   Related Links:
   
   • What Does Training Involve?

4. Chartered Accountancy – A global qualification

   Determining how well received your accountancy qualification is on the global market is an important investigation which should be undertaken by anybody considering a career in accountancy. Many accountancy bodies operating in Ireland make claims about the global nature of their qualification, or suggest links with larger international accountancy bodies. For an accountancy qualification to be truly global, foreign institutes must recognise not only your education, but also the training you undertook to become qualified. Chartered Accountancy is the only Irish professional accounting qualification that has this recognition worldwide. The truth is that with other accountancy bodies in Ireland, your qualification is global in the same way that your university degree is global – well recognised, but not in an official capacity. The training you undertake before qualification, and the experience you gain post-qualification are necessary to obtain auditing and practicing certificates, which entitle you to sign off on audits and accounts. Without these, the ability to operate in a foreign country is severely limited.
   Chartered Accountancy is different. Irish Chartered Accountants have true global mobility with both their education, and crucially, their training recognised internationally. Unique Mutual Recognition Agreements (MRA) offer our members an outstanding entry point to business in any part of the world. An MRA is an agreement between professional bodies which allows membership to transfer from one jurisdiction to another.
   Those looking for an antipodean adventure will be facilitated by exclusive agreements with the Chartered Institutes in both Australia and New Zealand. As well as these agreements, numerous others are in place with countries such as South Africa, Hong Kong, England, Scotland & Wales. Out of the Institute’s 22,000 members, there are currently over 3,500 working in over 90 countries. Chartered Accountants Ireland is a member of the Global Accounting Alliance (GAA) and Chartered Accountants Worldwide and is part of a global network of almost a 320 thousand chartered accountants. This brings enormous benefits to our members living in, or working in foreign countries.
   So, the next time you hear an accountancy body is global, or has ‘links’ with other Institutes – ask for some details!
   

5. Career Paths & Rewards

   No other career offers the mobility that a Chartered Accountancy qualification does. Today’s member takes on the role of a business advisor, who makes high-level strategic decisions, aimed at driving business, improving profit margins and increasing market share for their clients / employers. Many Chartered Accountants also use their expertise to form their own businesses, becoming highly successful entrepreneurs. Along with the technical skills mentioned above, Chartered Accountants generally have a solid foundation in economics, marketing and management information systems.
   As well as dominating public accounting practices, Chartered Accountants are found at the highest level in virtually every sector from healthcare to the music industry. The rewards that go with the Chartered qualification are significant. A recent survey of salaries found that 74% of Chartered Accountants in Leinster reported a stable or increasing salary over the past three years. The average salary for a newly qualified Chartered Accountant is between €41K and €52K. And hopefully that’s just at the start of a long and challenging career.
   

Conclusion

So, if you are considering becoming an accountant, Chartered Accountancy provides you with the ability to choose an exciting career path towards the industry of your choice, anywhere in the world.

15.AUDITING IS USEFUL TO INVESTORS AND CREDITORS

If all the facts concerning financial transactions were properly and accurately recorded and if the owners and managers of business enterprises were entirely honest and sufficiently skilled in matters of accounting and recording, there would be little need for independent auditing. However, human nature being as it is, there probably will always be a need for the auditor. Many businesses, depending on size and nature, employ internal auditors. Their responsibilities and functions, while similar to those of an independent auditor, are vitally different in a major respect having to do with impartiality and independence. For the purpose of this discussion the terms accountant, auditor and certified public accountant (CPA) are used interchangeably and only refer to the "outside" independent auditor.

The Role of the Auditor
Dependable financial information is essential to the very existence of our society. The credit professional making a decision to grant trade credit, the investor making a decision to buy or sell securities, the banker deciding whether to approve a loan, the government in obtaining revenue based on income tax returns, all are relying upon information provided by others. In many of these situations, the goals of the providers of information run directly counter to those of the users of the information. Implicit in this line of reasoning is recognition of the social need for independent auditors - individuals with a professional competence and integrity who can tell us whether the information on which we rely constitutes a fair picture of what is really going on.

Good accounting and financial reporting aid society in allocating its resources in the most efficient manner. The goal is to allocate our limited capital resources to the production of those goods and services for which demand is greatest. Economic resources are attracted to the industries and organizational entities that are shown by accounting measurements to be capable of using the resources to the best advantage. Inadequate accounting and inaccurate reporting, on the other hand, conceal waste and inefficiency and thereby prevent our economic resources from being allocated in a rational manner.

A decision by a credit professional to grant credit is usually based on careful study of the company's financial statements along with other information. The credit manager's purpose in granting credit is to facilitate the sale of product and collect payment when it is due. But what if the financial statements submitted by the company along with its credit application are not dependable? Assume, for example, that the financial statements overstate current assets and annual earnings, and omit major liabilities. Assume also that the credit manager, acting on the basis of such misleading information, grants trade credit. The end result is likely to be that the credit manager does not receive payment and may have to write the transaction off as a loss.

The contribution of the independent auditor is to give credibility to financial statements. Credibility, in this usage, means that the financial statements can be believed; that is, they can be relied upon by outsiders, such as trade creditors, bankers, stockholders, government and other interested third parties.

Audited financial statements are now the accepted means by which business corporations report their operating results and financial position. The word audit when applied to financial statements means that the balance sheet, statements of income and retained earnings, and statement of cash flows are accompanied by an audit report prepared by independent public accounts, expressing their professional opinion as to the fairness of the company's financial statements.

The goal is to determine whether these statements have been prepared in conformity with generally accepted accounting principles (GAAP). Financial statement audits are normally performed by firms of certified public accountants; users of auditors' reports include trade creditors, management, investors, bankers, financial analysts and government agencies.

The Public Accounting Profession

American Institute of Certified Public Accountants - AICPA
At the very heart of the public accounting profession is the AICPA, a voluntary national organization of more that 300,000 CPAs. The AICPA establishes standards and rules to guide CPAs in their conduct of professional services, carries on a continuous program of research and publications, promotes continuing professional education and contributes to the profession's system of self-regulation.

Financial Accounting Standards Board - FASB
Auditors must determine whether financial statements are prepared in conformity with generally accepted accounting principles. The AICPA has designated the Financial Accounting Standards Board as the body with power to set forth these principles for entities other than state and local governments. Thus FASB Statements, exposure drafts, public hearings, and research projects are all of major concern to the public accounting profession.

Securities and Exchange Commission - SEC
The SEC is an agency of the U.S. Government. It administers the Securities Act of 1933, the Securities Exchange Act of 1934, and other legislation concerning securities and financial matters. The function of the SEC is to protect investors and the public by requiring full disclosure of financial information by companies offering securities for sale to the public. A second objective is to prevent misrepresentation, deceit or other fraud in the sale of securities.

The term registration statement is an important one in any discussion of the impact of the SEC on accounting practice. To register securities means to qualify them for sale to the public by filing with the SEC financial statements and other data in a form acceptable to the Commission. A registration statement contains audited financial statements, including balance sheets for a two-year period and income statements and statements of cash flow for a three year period. The legislation creating the SEC made the Commission responsible for determining whether the financial statements presented to it reflect proper application of accounting principles.

The Auditor Renders a Report on the Financial Statements, not on the Accounting Records
Contrary to some beliefs, a certified public accountant's letter of opinion is not a certification and actually is nothing more than an opinion. It is not a guarantee. It is the accountant who is certified, not the financial statements. As a professional, the accountant expresses a detached judgement. He says, in effect, that proper accounting principles appear to have been applied consistently by management and that standard auditing procedures deemed applicable under particular circumstances have revealed nothing which would cause him to question the fairness of the resultant statements. Naturally, some of the items on a financial statement cannot be subjected to exact measurement. Unfortunately, many of these are important in that they may materially affect either or both the condition of the company at a given point in time, or the results of operations over a period of time. By their very nature, certain of these items must represent estimates and approximations. However, we are justified in looking to the certified public accountant for a value based on informed judgement. It is important to recognize that the financial statements and all supplemental data that may accompany the statements are the responsibility of the client. The accountant assumes responsibility only for the opinion that accompanies the report.

The primary purpose of an audit is to provide assurance to the users of the financial statements that these statements are reliable. Auditors do not express an opinion on the client's accounting records. The auditors' investigation of financial statement items includes reference to the client's accounting records, but is not limited to these records. The auditors' examination includes observation of tangible assets, inspection of such documents as purchase orders and contracts, and the gathering of evidence from outsiders including banks, customers, and suppliers, as well as analysis of the client's accounting records.

A principal means of establishing the validity of a balance sheet and income statement is to trace the statement figures to the accounting records and back through the records to the original evidence of transactions. However, the auditors' use of the accounting records is only a means to an end ñ and merely a part of the audit. It is, therefore, appropriate for the auditors to state in their report that they have made an audit of the financial statements rather than to say that they have made an audit of the accounting records.

Expressing an independent and expert opinion on the fairness of financial statements is the most important and valuable service rendered by the public accounting profession. The auditors' standard report states that the examination was performed in conformity with generally accepted auditing standards and by expressing an opinion that the client's financial statements are presented fairly in conformity with generally accepted accounting principles. However, if there are deficiencies in the client's financial statements or limitations in the auditors' examination, or if there are other unusual conditions about which the readers of the financial statements should be informed, auditors' cannot issue the standard report. Instead, they must carefully modify their report to make these problems or conditions known to users of the audited financial statements.

The Company is Responsible for the Financial Statements
The management of a company has the responsibility for maintaining adequate accounting records and of preparing proper financial statements for the use of stockholders and creditors. Even though the financial statements are sometimes constructed and produced in the auditors' office, primary responsibility for the statements remains with management.

The auditors' product is their report. It is a separate document from the client's financial statements, although the two are closely related and transmitted together to stockholders and to creditors.

Reporting Phase of the Audit
The reporting phase of an audit begins when the independent auditors have completed their field work and their proposed adjustments have been accepted and recorded by the client. Before writing their report, the auditors must review the client-prepared financial statements for form and content, or draft the financial statements on behalf of the client.

The financial statements on which the independent auditors customarily report are the balance sheet, the income statement, the statement of retained earnings, and the statement of cash flows. Often, the statement of retained earnings is combined with the income statement. In some cases, the retained earnings statement may be expanded to a statement of stockholders' equity. Financial statements generally are presented in comparative form for the current year and the preceding year and are accompanied by explanatory notes. The financial statements for a parent corporation usually are consolidated with those of the subsidiaries.

Financial Statement Disclosure
The purpose of notes to financial statements is to achieve adequate disclosure when information in the financial statements is insufficient to attain this objective. Although the notes, like the financial statements themselves, are representations of the client, the independent auditors generally assist in drafting the notes.

Adequate disclosure in the notes to financial statements is necessary for the auditors to issue an unqualified opinion on the financial statements. Disclosure requirements that have become a part of the basic financial statements include the disclosure of significant accounting policies, accounting changes, loss contingencies, and lease and pension information.

Detecting Misstatements
Generally accepted accounting principles require that the financial statements be free from material misstatements. The auditors have a responsibility to detect various types of material misstatements, including errors, irregularities and those caused by illegal acts.

The auditors are required to assess the risk that errors and irregularities have occurred affecting the client's financial records. The audit is designed to provide reasonable assurance of detecting errors and irregularities that are material to the financial statements.

The Auditors' Unqualified Report
The standard unqualified report is regarded as a clean bill of health, the auditor made no exceptions and inserts no qualifications in the report. An unqualified opinion can only be expressed when the independent auditor has formed the opinion on the basis of an examination made in accordance with generally accepted accounting principles, applied in a consistent basis and includes all informative disclosures necessary to make the statements not misleading. The standard unqualified report consist of three paragraphs. The first paragraph clarifies the responsibilities of management and the auditors, and is referred to as the introductory paragraph. The second paragraph describes the nature of the audit and is called the scope paragraph. The final paragraph is the opinion paragraph, which is a concise statement of the auditor's opinion based on the audit. The auditors' report is addressed to the persons who retained the auditors.

The Introductory Paragraph
The introductory paragraph emphasizes that the client company is primarily responsible for the financial statements and that the auditors render a report on the financial statements, not on the accounting records.

The Scope Paragraph
The scope paragraph describes the nature of the audit, that it was conducted in accordance with generally accepted auditing standards and provides reasonable assurance that the financial statements are free of material misstatement.

The Opinion Paragraph
In the opinion paragraph, the auditors are expressing nothing more than an informed opinion. They do not guarantee or certify that the statements are accurate.

Independent Auditors' Report:

To the Board of Directors and Stockholders of ABC Company:
We have audited the accompanying balance sheet of ABC Company as of December 31, 2001, and the related statements of income, retained earnings, and cash flow for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 2001, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.



Callahan, Durant, Simms & Co. Westminster, Maryland Certified Public Accountants March 1, 2002

Other Types of Auditors' Reports
Alternatives to an unqualified report include unqualified opinion with explanatory language, a qualified opinion, an adverse opinion, or a disclaimer of opinion.

Explanatory Language Added to the Unqualified Opinion
Certain circumstances require auditors to add explanatory language to the standard report. Adding the additional language is not regarded as a qualification because it does not lessen the auditors' reporting responsibility for the financial statements.

Auditors add explanatory language to an unqualified opinion to indicate:

• a division of responsibility with another CPA firm;
  
• to indicate an inconsistency in the application of accounting principles;
  
• to emphasize a matter;
  
• to justify a departure from officially recognized accounting principles and
  
• to refer to an uncertainty that could have a material impact on the financial statements.

A situation in which explanatory language is used is illustrated in the following example:

Ability to Continue as a Going Concern

A special type of significant uncertainty, that is important to the credit professional, concerns the ability of a company to continue as a going concern. Under generally accepted accounting principles, both assets and liabilities are recorded and classified on the assumption that the company will continue to operate. Assets, for example, may be presented at amounts that are significantly greater than their liquidation values.

Conditions that may cause the auditors to question the going-concern assumption include negative cash flows from operations, defaults on loan agreements, adverse financial ratios, work stoppages, and legal proceedings. If a substantial doubt exists about the company's ability to continue as a going concern for a period of one year from the balance sheet date, the auditors modify their report by adding a final paragraph such as the following:

The accompanying financial statements have been prepared assuming that ABC Company will continue as a going concern. As discussed in Note 1 to the financial statements, ABC Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about the entity's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Qualified Opinions
Qualifications with respect to an auditor's opinion may be broadly classified into two categories; those qualifications which relate to the scope of the examination, and those qualifications with respect to the fairness of presentation in accordance with generally accepted accounting principles consistently applied. A qualified opinion restricts the auditors' responsibility for fair presentation in some areas of the financial statements. The opinion states that except for the effects of some deficiency in the financial statements, or some limitation in the scope of the auditors' examination, the financial statements are presented fairly. All qualified reports include a separate explanatory paragraph before the opinion paragraph disclosing the reasons for the qualification.

Adverse Opinions
An adverse opinion is the opposite of an unqualified opinion; it is an opinion that the financial statements do not present fairly the financial position, results of operations, and cash flows of the company, in conformity with generally accepted accounting principles.

The auditors should express an adverse opinion if the statements are so lacking in fairness that a qualified opinion would not be warning enough. Whenever the auditors issue an adverse opinion, they should disclose in a separate paragraph of the report the reasons for the adverse opinion and the principal effects on the financial statements of the matters causing the adverse opinion.

Disclaimer of Opinion
A disclaimer of opinion is no opinion. In an audit engagement, a disclaimer is required when substantial scope restricts or other conditions preclude the auditors' compliance with generally accepted auditing standards.

Appraisal of Audit Reliability
The audit and certification is generally accepted as adequate endorsement of the correctness of a financial statement, but seasoned credit professionals should take two additional factors into consideration: the experience of the auditor with the type of business and how often the client's books are examined.

Specialization by Auditors
Nearly every trade and industry has a group of auditors who concentrate their practice and become authorities in that field. Often this specialization is along functional lines. A business is best served by an auditing firm who understands the industry's business cycle, practices, products, market conditions and characteristics.

Frequency of Audit
Two types of services performed by auditors - continuity of engagement and continuous audit - do not provide the same types of services. Continuity of engagement indicates an independent auditor is regularly employed to prepare annual and other statements, and does so for successive years. A continuous audit means the auditor makes periodic inspections of the books and records between annual statement periods, but not necessarily an audit, and may supervise or prepare monthly trial balances and quarterly or semi-annual statements. A continuous audit enables the auditor to follow the client's affairs more closely then is possible during a single annual visit. Therefore, creditors can place greater credence on financial figures prepared under this arrangement.

Change in Auditor
When the regular auditor quits an engagement, it is important to discover the underlying reason. A desire to lower auditing costs is often given as the motive, but the move may also have credit implications. A substantial cut in auditing fees may lead to lower quality auditing work and less verification effort. The change in auditors may have been prompted by a difference of opinion between auditor and management regarding the treatment and certification of material items in the statement.

Some auditors announce they are no longer "on the books" of a former client, but, understandably do not give the reason. As a creditor, you should carefully compare the certification of the new auditor with that of the former one.

Conclusion
Auditors prepare financial statements and supporting schedules for clients, and not to meet the special needs of creditors. Their intensive training, strict regulation of auditing procedures and conventions, and their accountability to professional societies govern their work. They do, however, have a responsibility to clarify items in their audits when questions are raised, and should give such explanations willingly.

A conscientious credit professional should have the customer's permission before asking the auditor for additional schedules, exhibits, or other information ordinarily withheld from publication. Auditors differ as to the degree of their cooperation with small- or medium-sized clients. Some believe their audit report meets the terms of their engagement; others give additional information, which may benefit the clients. In some cases, auditors accompany their clients during interviews with credit executives and will supply additional information to creditors. As a prudent credit professional, you should welcome an opportunity to become acquainted with an auditor on whom you expect to rely.

16.SERVICES PROVIDED BY ACCOUNTING FIRMS:

Entrepreneurs and small-business owners wear a lot of hats, but hiring an accounting firm can ease some of the load and allow more time to focus on core business strategies. Firms offer a wide range of services, from basic bookkeeping to more complex issues, such as tax returns and audits. An advantage of using an accounting firm is that the cost of services is often less than hiring an employee

Bookkeeping

Many accounting firms employ full-charge bookkeepers or junior accountants to handle basic bookkeeping services for clients. These include accounts payable and receivable, billing, payroll, monthly and quarterly taxes, bank reconciliations, general ledger entries, and monthly trial balances. The bookkeepers might also generate financial statements, but the statements are typically reviewed by a CPA in the firm before being presented to a client.

Accounting

High-level accounting services are typically offered by CPAs employed by accounting firms. These services often include helping clients create budgets, perfecting financial statements, and preparing local, state and federal tax returns. Accounting firms offer audit and business valuation services, monitor depreciation of assets, and help clients determine cash flow needs. Some firms offer forensic accounting services for companies facing fraud issues. Others specialize in setting up computer accounting systems and auditing information systems.

Consulting

In addition to routine tasks, accounting firms also advise clients on financial strategies. They might provide advice on methods for lowering a client's tax burden, or review and make suggestions for updating a business plan. Some firms specialize in risk management, while others focus on managing financial investments. They also ensure all clients are aware of regulatory changes

17.INTERNAL AUDITING AND EXTERNAL AUDITING:

                                               internal auditing                                             external auditing

1	What's the purpose of the audit?	To consider if business practices are helping the business manage its risks and meet its strategic objectives- it can cover operational as well as financial matters .	To consider whether the annual accounts give a "true and fair view" and are in accordance with legal requirements
2	Who are the auditors?	Internal auditors can be employed by the business or outsourced. While an accounting background is common, they can also come from other relevant backgrounds.	An outside firm of accountants who are Registered Auditors (not all accountancy firms are).
3	How is the audit agenda set?	Internally in the light of business's risks and objectives.	By the audit firm based on their assessment of the risks of the accounts being materially misstated.
4	Who does the auditor report to?	Management, the audit committee (if there is one) or the Board.	Primarily the shareholders* (but also see 5 re management letters) * In an unincorporated charity it will be the trustees.
5	What sort of report will they receive?	Tailored report about how the risks and objectives (of the business area being audited) are being managed. There is a focus on helping the business move forward - so expect there to be recommendations for improvement.	The main report is in a format required by Auditing Standards and focuses on whether the accounts give a true and fair view and comply with legal requirements If other things come to light which the auditors think should be brought to management's attention they will be reported in a management letter.
6	What happens after the audit?	This will be agreed internally, but can include: Follow up to see whether recommendations have been implemented.  Consultative help to guide management's implementation of recommendations..	There is no follow up requirement, until next year's audit; when in planning the audit, past issues should be considered.
7	Are the auditor's reports publicly available?	No (at least not in the UK private or charity sectors).	Yes. The main report on the accounts is publicly available. Management letters are not publicly available
8	Do we have to have an audit?	No, internal audit is discretionary.	It depends. Legal requirements vary; although the trend has been towards more organisations being exempted from statutory audit. However stakeholders such as the bank or investors may require you to have your accounts audited.

18. ACCOUNTANT RESOLVING AN ETHICAL DILEMMA:



Most accountants in business and the public sector, whether working in a small organization or serving as the chief financial officer (CFO) of an international corporation, face ethical dilemmas during their professional careers. Ethical dilemmas come in many forms and accountants sometimes need support to address complex and challenging conflicts. Accountants may also treat ethical dilemmas as “business decisions” and not utilize their professional code to assess potential courses of action.
The CGMA survey report Managing Responsible Business, A Global Survey on Business Ethics shows the trends, pressure points, and ethical gaps within some organizations. The key findings of the CGMA survey include:

• Business challenge 1—Ethical Culture

The survey showed a 10%-15% increase since 2008 in organizations providing both statements of ethical values and a code of ethics, as well as related training, provision of hotlines, and incentives, such as performance-based rewards.
Corporate leadership appears to be less actively engaged in reviewing and taking responsibility for ethical performance compared to 2008 as shown by a significant decline in the number of corporate leaders who held formal responsibility for ethics. This provides more evidence of a gap between the rhetoric from corporate leadership on ethical issues and actual practice. A weakened “tone from the top” has potentially serious implications for the overall ethical operating culture of an organization.

• Business challenge 2—Accounting for Ethics

The survey showed an almost 20% increase in organizations both collecting and reporting ethical information. The majority of management accountants feel it is important to collect and analyze ethical information, but one in five do not believe their organization will do so in the near future.

• Business challenge 3—Ethical Dilemmas and Pressures

Despite an increase in ethical codes and training, there is greater pressure within organizations to act unethically. Pressures are most apparent in emerging economies.

• Business challenge 4—Business Issues

Security of information remains the biggest issue of concern across all markets. Bribery has risen from sixth to third in the rankings of issues of concern, reflected by the increase in anti-bribery and corruption legislation.
Fewer now believe that business has a moral imperative to help address global issues, with a decline from 84% to 77% since 2008.
Examples of the most common ethical dilemmas in the business environment are varied and include:

• Dealing with pressure to act unethically, particularly from dominant superiors;
• Balancing confidentiality with blowing the whistle on illegal or improper actions of others;
• Disclosing information in the public interest; and
• Wrongful trading in a distressed situation where insolvency might be imminent.

Such ethical dilemmas cover various ethical issues, such as overstating performance and valuation, participating in fraudulent activity, non-disclosure and withholding of information from auditors and other stakeholders, and making a decision without adequate information.
Many IFAC member organizations provide guidance, ethical resolution frameworks, and pathways to help accountants deal with ethical dilemmas. A key question for a professional accountant is whether you would be able to justify your decision to deal with a problem or conflict.
A common aspect to guidance on resolving ethical dilemmas is to help accountants define and apply the fundamental principles in their professional code of ethics. A distinguishing mark of the accountancy profession is the responsibility to act in the public interest and professional ethics places an expectation on accountants to self-regulate their behavior in accordance with the Code of Ethics for Professional Accountants (the Code) developed by the International Ethics Standards Board for Accountants (IESBA). IFAC member organizations are required to abide by ethical standards at least as stringent as those stated in the Code.
The principles may potentially be threatened by a broad range of circumstances including self-interest, self-review, advocacy, familiarity, and intimidation. An awareness and understanding of these circumstances will help to establish which fundamental principles are affect