February 2013 ~ About General Accounting Information and Recreational Site

Satyam's Fraud Case- Misrepresentation of Cash

Not too long ago, the profession is attack by the important fraud scenario affecting India's IT Giant- Satyam. Satyam accepted that he has committed fraud, a part of the action involves: inflating cash and bank account balances by $1 Billion dollar!

This professions are asking yourself how could the auditor miss out such a massive misrepresentation in cash and bank balance. Normally, audit procedures consist of:

- getting bank confirmation straight in the client's banker

- agree with cash and bank balance per Trial Balance amount to Bank Statement

The validation and the bank statements present a specific amount of audit comfort zone, provided that it really is an independent party confirmation, in lieu of client-generated proof.

Nonetheless, Pricewaterhouse Coopers, that are the auditor for Satyam Computer Services Ltd, claims that the audits have been carried out relative to applicable auditing standard and have been adequately supported by audit proof. Apparently, the fraud can not be quickly found by getting bank confirmation. If not, it wuld have already been found, provided that Pricewaterhouse Coopers has been the auditor of Satyam for various years.

We shall wait for additional news / reports then.

Impairment of Assets (Objective of IAS 36)

The objective of IAS 36 will be to assure that the Company's assets are carried at no additional than their recoverable value. The asset is carried at far more than its recoverable value if its carrying value exceeds the amounts to become recovered by way of use or sales with the asset. Provided that the carrying value recoverable amount, the asset must be impaired.

IAS 36 is regarded as incredibly for financial statement users. Let me demonstrate a situation exactly where no Corporation will not apply IAS 36 appropriately.

Corporation ABC have recorded some machineries in its accounting books for the year ended December 31, 2008. Nevertheless, resulting from excessive usage with the machineries & improper maintenance, machineries are at the end of its life-cycle with around nil value. Corporation ABC is going to scrap-off the machineries in 1 month time. On the other hand, in the book, the Machineries have a net book value of 1 Million U.S dollar.

Some investors are in the process of taking over Corporation ABC. While reviewing the Corporation ABC's financial statement, they are much more than happy to find out that the Corporation has US$1 Million valuation on machineries on hand. As a result, they are willing to pay another US$1 Million on top with the initial offer price!

In the event IAS 36 has been applied adequately, the Corporation should have impaired the Machineries to its recoverable value. Investors would not have settled another US$ 1 Million for the end-of-life machineries. Consequently, it is important to carry out correct impairment assessment for significant assets on the Company's accounting books of record.

Corporate Fraud Again - Stanford Fraud Case

8 Billion dollars US dollar fraud by US banker, Allen Stanford. The scam is broadly perceived as Allen Stanford taking the ill-regulated offshore banking sector in Antigua.

Stanford financial group has purportedly offered 8 Billion US dollar worth of certificates of deposits that stated unreasonably high rate of interest. CAS Hewlett, Antigua-based accountancy firm could be the auditor. However, the where-about with the chief executive is unidentified.

CAS Hewlett gave unqualified audit opinion for the statutory account of Stanford.

Nonetheless, what regulators concern will be the representation with the bank, as quoted under:

'The defendants have misconstrued to CD purchasers that their deposits are protected, falsely claiming that the bank re-invests client funds mostly in 'liquid' financial instruments (the portfolio); monitors the portfolio by way of a group of 20-plus analysts; and is topic to yearly audits by Antigua regulators.'

Small business accounting- Cash

Commonly, the small business consists of:

Cash on Hand
Cash in Bank

Commonly, the cash on hand amounts are certainly not material, when important level of the businesses’ cash are stored in bank. What might be the accounting entries for cash receipt and cash disbursement (i.e. payment).

Upon receiving of cash from debtors:

Debit: Cash in Bank
Credit: Trade Debtors

Intended for bank charges around the bank account deducted from bank account straight:

Debit: Bank charges
Credit: Cash in Bank

Upon disbursement of cash (i.e. outflow of cash) for espenses

Debit: Trade Creditors/ expenses
Credit: Cash in Bank

It is significant to note that: a on-line bank account allow the small business to monitor the transaction on a actual time time frame. Conventionally, small business is expected to verify the cash inflow and outflow when they've received the month-to-month bank statement in the bank. With on-line banking account, the small business is permitted to view the transactions on a timely basis.

Small Business Accounting

Prepayment in reality, small business created one particular lump sum prepayment or down payment for purchases or solutions across a specific period. As an illustration, the business may well put into insurance coverage contract to insure its asset for any period of twelve months.

Through accounting point of view, the quantity prepaid really should be expense more than the period of service covered. For instance, the 12-month insurance coverage premium paid really should be expense off more than a period of 12 months. What will be the accounting remedy then?

Assuming Corporation ABC entered into insurance coverage contract to insure its inventory. Total insurance coverage premium paid for is US$12,000.

After payment of insurance coverage, the Corporation passed the following entries:

Debit Prepayment (B/S- Asset)12,000
Credit Cash 12,000
(Getting prepayment to insurer for insurance coverage contract)

At month finish, the following entry might be passed to recognize the insurance coverage expense

Debit Insurance expense (P/L)1,000 (12,000/ 12)
Credit Prepayment 1,000
(Getting utilization of month-to-month insurance coverage expense)

In the finish of one year, the prepayment accounted might be completely utilized.

Debtors Turnover Analysis

In auditing debtor balance, auditor will execute some analysis with the debtors turnover with the audit client, and in comparison the outcome to prior year to recognize uncommon changes.

Debtors Turnover (day) is computed as under:

Average Debtor Balance / Sales x 365 days = Debtor Turnover (day)

Debtors turnover ratio implies the velocity of debt collection of a firm. In uncomplicated words it indicates the amount of instances average debtors (receivable) are turned more than through each year.

We are going to expecting a deteriorating debtor turnover (day) within this gloomy economy atmosphere. For instance with an instance, a buyer of our audit client might take longer period to repay its outstanding balance due on time, and herein raise the amount of day the receivable stays inside the debtors balance.

Clients are squeezing their creditors by pro-longed their payment term. Each of our audit client may well, in a different leg, delay the repayment to its (audit client's) suppliers.

A economy effective would have already been made, because the delaying in repayment has direct effect around the ultimate's suppliers selection on resource allocation. In afraid of promoting things to doubtful shoppers, the ultimate suppliers could have cancel/ cease the supplies to our audit client.

As such, functioning capital must be analyzed by auditor to recognize uncommon situations that could take place.

Accounting entries to record impairment

Previously, we discussed in regards to the purpose of IAS 36- Impairment of Assets and all other connected subjects. We are going to proceed additional around the accounting entries of impairment. Frequently, upon recognition of impairment, the following entries should really be passed:

Debit Impairment Loss (Profit & Loss)

Credit Provision for Dimunition in Value (Balance Sheet)

Provision for Dimunition in Value is a contra account to the existing asset account. For instance, the contra account of Stocks, in such cases, is Provision for Stocks Obsolescence. The Provision for Dimunition in Value has properly given away the impact of impairment around the existing asset, that could be useful to financial statement users.

Auditing Interest Expense

What is one of the mostproductive way of auditing interest expense recorded?

So as to verfiy the reasonableness of interest expense recorded, we applied the following formula:

Principal x Average Interest Rate x Period = Interest Expense

Many of the auditor would execute vouching to bank assistance by tracing the amount of money reflected on bank assistance to total stated on General Ledger. On the other hand, vouching only assure the existence, it will not address completeness.

Because of this, reasonableness is generally valuable to verify for the completeness of expenditures recorded.

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