Accounting and Auditing

Dr. Bessan Moustafa Moussa

Lecture - 1 -

Accounting and Auditing

Definition of Accounting :

a- Definition by the American Institute of Certified Public Accountants (1961):

Accounting is the art of recording , classifying and summarizing in a significant

manner and in terms of money , transactions and events which are , in part at
least , of a financial character, and interpreting the result thereof .

b- Definition by Market Business News :

Accounting is the work or process of keeping financial records . its the systematic
recording , reporting , and analysis of the financial activity ( transactions ) of a
person , business , it allows companies to analyze their financial performance .

Additionally , accounting allows businesses to examine their results regarding

profits , losses , productivity , sales trends , costs , etc .

Accountancy is an information science we use to gather , classify , and

manipulatermation , Not only companies , but also individuals , charties , and
many other entities are familiar with accountancy .

According to Business Dectionary is the practice and body of knowledge

concerned primarily with methods for recording transactions , keeping financial
records , performing internal audits, reporting and analyzing financial information
to the management , and advising on taxation matters.

~~It is a systematic process of identifying , recording , measuring , classifying ,

verifying , summarizing , interpreting and communicating financial
information .~~

**Bookkeeping is the day to day recording of transactions.

** Financial accounting includes bookkeeping , and preparing financial

statements for shareholders and creditors ( people or organizations who have
lent money to a company ).

**Management accounting involves the use of accounting data by managers , for

making plans and decisions .

Auditing :

Auditing means examining a company,s systems of control and the accuracy or

exactness of its records , looking for errors or possible fraud : where the company
may have deliberately given false information.

- An internal audit is carried out by a company,s own accountants or internal

auditors.

- An external audit is done by independent auditors : auditors who are not

employees of the company .

The external audit examines the truth and fairness of financial statements . It tries
to prevent what is called - creative accounting - , which means recording
transactions and values in a way that produces a false result - usually an artificially
high profit .

Laws, rules and standards :

In most continental European countries , and in Japan , there are laws relating to
accounting , established by the government .

In the US companies whose stocks are traded on public stock exchanges have to
follow rules set by the securities and exchange commission (SEC), a government
agency . In Britain , the rules, which are called standards, have been established
by independent organizations such as the accounting standardsBoard and by the
accountancy proffession itself .Companies are expected to apply or use these
standardsin their annual accounts in order to give a true and fair view.

Companies in most English - speaking countries are largely funded by

shareholders, both individuals and financial institutions. in these countries , the
financial statements are prepared for shareholders . However, in many
continental European countries,business are largely funded by banks , so
accounting and financial statements are prepared for creditors and the tax
authorities .

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Lecture -2-

The balance Sheet

The term balance sheet refers to a financial statement that contains details of a
company s assets or liabilities at a specific point in time . It is one of the three
core financial statements (Income statement and cash flow statement being the
other two )used for evaluating the performance of a business .

The balance sheet adheres to the following accounting equation, with assets on
one side , and liabilities plus shareholderequity on the other , balance out :

this formula is intuitive . Thats because a company hasto pay for all the things it
owns (assets)by either borrowing money ( taking on liabilities ) or taking it from
investors( issuing shareholder equity ).
If a company takes out a five -year , 4millions loan from a bank , its assets
( specifically, the cash account ) will increase by 4 millions.

Its liaibility ( specifically , the long - term debt account )will also increase by 4
millions , balancing the two sides of the equity . If the company takes 8 millions
from investors , its assets will increase by that amount , as will its shareholders
equity . All revenuesthe company generates in excess of its expenseswill go into
the shareholder equity account . these revenues will be balance d on the assets
side , appearing as cash , investments , inventory , or other assets .

Components of a balance sheet :

Assets ;

Accounts within this segment are listed from top to bottom in order of their
liquidity . This is the ease with which they can be converted into cash . they are
divided into current assets, which can be converted to cash in one year or less ,
and non - current or long - term assets , which cannot .

Here is the general order of accounts within current assets :

- Cash and cash equivalents are the most liquid assets and can include treasury
bills and short - term certificates of deposit , as zel as hard currency .

- Market securities are equity and debt securities for which there is a liquid
market.

- Accounts Receivable (AR) refer to money that customers owe the company. This
may include an allowance for doubtful accounts as some customers may not pay
what they owe.

- Inventory refers to any goods available for sale ,valued at the lowerof the cost or
market price .

- Prepaid expenses represent the value that has already been paid for , such as
insurance , advertising contrasts , or rent .

Long - term assets include the following :

- Long - term investments are securities that will not or cannt be liquidated in the
next year .

- Fixed assets include land machinery , equipment , buildings and other durable ,
generally capital - intensive assets .

- Intangible assets include non physical ( but still valuable ) assets such as
intellectual property and good will .

These assets are generally only listed on the balancesheet if they are acquired,
rather than developed in house . Their value may thus be wildly understand or
just as wildly overstated .

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Lecture - 3 -

Liabilities

A liability is any money that a company owes to outside parties , from bills it has
to pay to suppliers to interest on bonds issued to creditors to rent , utilities and
salaries .

Current liabilities are due within one year and are listed in order of thier due
date .

Long - term liabilities , on the other hand , are due at any point after one year.

Current liabilities account might include :

- Current portion of long - term debt is the portion of a long - term debt due
within the next 12 months . for example , if a company has a 10 years left on a
loan to pay for its warehouse , 1 year is a current liability and 9 years is a long -
term liability .
- Interest payable is accumulatted interest owed , often due as part of a past - due
obligation such as late remittanceon property taxes.

- Wages payable is salaries , wages , and benefits to employees , often for the
most recent pay period .

- Customer prepayments is money received by a customer before the service has

been provided or product delivered . The company has an obligation to provide
that good or service or return the customer money .

-Dividends payable is dividends that have been authorized for payment but have
not yet been issued .

- Earned and unearned premiums is similar to prepayments in that a company has

received money up front ,has not yet executed on their portion of an agreement ,
and must return unearned cash if they fail to execute .

-Accounts payable is often the most common current liability . Accounts payable
is debt obligations on invoices processed as part of the operation of a business
that are often due within 30 days of receipt .

Long - term Liabilities can include :

- Long - term debt includes any interest and principal on bonds issued .

-Pension fund liability refers to the money a company is required to pay into its
employees retirement accounts .

- Deffered tax liability : is the amount of taxes that accrued but will not be paid for
another year . Besides timing , this figure reconciles differences between
requirements for financial reporting and the way tax is assessed, such as
depreciation calculations.

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Lecture - 4 -
Accounting assumptions and principales
Assumptions

When writing accounts and financial statements , accountants have to follow a

number of assumptions , principles and conventions . An assumption is something
that is generally accepted as being true . The following are the main assumptions
used by accountants :

- The separate entity or business entity assumption is that a business is an

accounting unit separate from owners, creditors and managers , and their assets ,
These people can all change , but the business continues as before.

- The time period assumption states that the economic life of the business can be
dividedinto ( artificial )time periods such as the financial year , or a quarter of it .

- The continiuty or going concern assumption says that a business will continue
into the future , so the current market value of its assets is not important.

- The unit - of - measure assumption is that all fincial transactions are in a single
monetary unit or currency . Companies with subsidiaries - that is , other
companies that they own - in diffferent countries have to convert their result into
one currency in consolidated financial statements for the whole group of
companies .

Principales

The followingare the most important accounting principles ;

- The full - disclosure principale states that fincial reporting must include all
significant information: any that makes a difference to the users of financial
statements .

- The principle of materiality, however , says that very small and unimportant
amounts do not need to be shown .

- The principale of conservatism is that where different accounting methods are

possible .you choose the one that is least likelyto overstate or over - estimate
assets oe income .

-The objectivity principle that accounts should be based on facts and not on
personal opinions or feelings . Accounts therefore , should be verifiable : it should
be possible for internal and external auditors to show that they are true .This isn t
always possible , however : depreciation or amortization . and provisions for bad
debts , for example are neccessarily subjective - based on opinions .

- The revenue recognition principle is that revenue is recognized in the accounting

period in which it is earned . This means the revenue is recorded when a service is
provided or goods delivered , not when they are paid for .

- The matchingprinciple , which is related to revenue recognition , states that each

cost or expense related to revenue earned must be recorded in the same
accounting period as the revenue it helped to earn .
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Lecture - 5 -

*Various financial operations .

1- Interest :
Money which is charged by a financial organization such as a bank to people who
have borrowed from them , or the profit which is made on money invested in a
financial organization .

2- Rebate :
An amount of money which is returned to you by the government ,as zhen you
have paid too much tax .

3- Revenue :
Income especial that which the government receives as a tax .
4- Income ;
Money that is earned regulary from doing work or interest received from
investments.

5- Salary ;
A fixed amount of money agreed every year as pay for an employee , part of
which that is left once tax has been paid , is usually paid directly into his / her
bank account every month .

6- Wage ;

A fixed amount of money that is paid , usually every week to an employee.

7- Annuity ;

A fixed sum of money paid each year to a person for a stated number of years or
until death.

8 - Fees ;

A sum of money paid for professional services to a doctor ..ect