Monday, 18 March 2013
ADVANTAGES AND DISADVANTAGES OF INTERNAL CONTROL SYSTEM
ADVANTAGES AND DISADVANTAGES OF INTERNAL CONTROL SYSTEM
Advantages of ICS to the Auditor
a) ICS will reduce the amount of audit work to be done in so far as the auditor will be able to use systems based audits to apply tests which will facilitate his audit work.
b) A strong ICS will minimise chances of errors and frauds, and the introduction of inter-checking supervision and improved custody will in turn minimise liabilities to third parties, who would have depended on his opinion with greater surety and speed.
c) Will reduce the amount of audit evidence to be gathered, because it will facilitate reaching and using a greater variety of audit evidence available within the business. This will enable him to form an opinion with greater surety and speed.
d) The presence of an internal check system strengthens the credibility of audit evidence gathered.
e) ICS minimises the work load and the time need to take in order to produce his report.
f) The preparation of an ICS will identify those areas prone to errors and frauds, which will enable the auditor to plan his audit work so that he allocates more time and effort to those areas where for organisational reasons the internal check system is weakest.
g) ICS emphasises the use of control accounts thus assuring the auditor of up to date account reconciliation information which will facilitate his examinations.
h) ICS enables him reduce the sample size to be tested and thus facilitate his ability to carry out as many varied audit checks as possible.
i) ICS can only be strong normally with support of a strong internal audit function which in turn enables the auditor to use internal auditor’s work to facilitate his work.
j) A strong ICS boosts accountability which depends on clearly segregated and defined duties and responsibilities and this will enable the auditor to know who to contact in case of difficulties.
k) It also helps him to give quality advice to management; this in turn may minimise his work load in future audits.
l) ICS enables the auditor to have greater knowledge of his client’s business and facilitates the drawing up of a balanced audit opinion.
Disadvantages of ICS to the Auditor
1. The management may over rely on the strength of the ICS and therefore relax their supervision which may leave room for errors and frauds thus exposing the auditor to potential civil liabilities.
2. The presence of ICS may lead to the auditor reducing the volume of examination carried out which may lead to smaller samples of data thus leaving other areas to possibilities of errors and frauds which may expose him to civil liabilities.
3. It may be frustrated by management through collusion and manipulation which may mislead the auditor’s opinion leading to biased reports.
4. The presence of ICS is supposed to minimise the auditor’s volume of tests but not his liabilities which means that its strength may leave some errors and frauds undetected due to relaxed tests. This will increase his liabilities. ICS may be manipulated so that errors and frauds by the management cannot be easily detected and this may lead to a biased opinion.
5. ICS may reduce the auditor’s vigilance and observations with an unfavourable effect on the quality of the audit.
6. ICS may be abused by the internal auditors through collusion with the management and this may lead to the external auditor being mislead.
Advantages of ICS to the Client
a. Safeguarding client’s assets against:
a) Misuse
b) Misappropriation
c) Manipulations
d) Abuse of the Company’s assets (for reasons that will not benefit the Company)
e) Facilitates optimal use of the Company’s assets.
b. Reduces audit fees. This is because less audit work is needed and less audit staff.
Increased efficiency through management supervision and a defined organisation chart. Routine and automatic checks also increase efficiency.
c. Chances of errors and frauds are minimised.
d. This ensures minimum losses, facilitates audit work and hence early reports and attainment of budgeted performance.
e. Facilitates corrective measures in so far as the objectives of the business are better defined and therefore the facilities available can be suitably directed to their achievements.
f. Facilitates up to date records.
g. This is advantageous in that is prompts decisions through feed back to management which helps detect irregularities.
h. Leads to balanced opinion (unqualified report) improving public opinion of the business.
i. This helps in raising finances by selling shares through public sale and improving investment
implementation.
j. It boosts morale of staff through motivation of supervision. This may lead to high output and high profitability.
k. ICS helps in the redress of disastrous decisions especially in high risk situation. This is done through close application of management controls in development situations.
l. ICS assists in the co-ordination of operations. This is done through definition of duties and responsibilities of all employees and it boosts efficiency in the:
1. Carrying out of operations,
2. Efficiency in delegation,
3. Efficiency in execution.
Disadvantages of ICS to the Client
a. ICS is expensive to install and maintain. For example, the physical control security systems require qualified personnel to maintain them and constant servicing.
b. ICS could lead to a problem of over reliance on the ICS. This may lead to relaxation in supervision and allow manipulation of accounts and assets and can also bring about inefficiencies. Maintaining controls requires constancy and consistency.
c. If not well instituted it may encourage over staffing.
d. Rigid implementation may lead to a slowdown in the operation of the business.
e. The ICS requires continuos updating as the organisation changes, if not the ICS may become increasingly obsolete.
f. Use of wrong controls may expose the Company to more problems, e.g. errors and frauds. These are more easily perpetrated if the ICS used is inappropriate.
g. ICS may be frustrated if through changes in company organisation the checks become uncoordinated.
TYPES OF INTERNAL CONTROLS
TYPES OF INTERNAL CONTROLS
This refers to the various types of control procedures that management can put in place in running the operations of the company. The mix of types of controls implemented by management will depend on the control objectives in each accounting area.
(a) Organizational plans/controls
Companies should have proper organisation plans.
They seek to ensure that the entity is properly departmentalized. The functions of every department are specified and the duties of every individual in the department are specified. Delegation of authority and limits of authority should be well and clearly defined. Such a plan boosts accountability within the organisation and reduces duplication of effort.
(b) Segregation of duties
This refers to the separation of the various duties and responsibilities such that one person cannot process and record complete transactions from beginning to the end without being checked by another person. E.g. in the purchase of a company’s fixed assets a single individual should not authorise the purchase, place the order, receive the asset and record the transaction in the accounting records.
To minimise the risk of error and/or intentional manipulation of information. In this regard for every transaction the following functions should be performed by different individuals and departments as much as possible and practicable.
1. Initiation
2. Authorisation- different levels of management should be given authority limits as to what they can authorise or commit the company’s resources. The authority limit should depend on the position, integrity, qualifications and competence.
3. Execution- transactions should be carried out by persons independent from those who authorise the transactions. If one person authorises expenditure a different person should execute.
4. Custody of the asset- officials authorisin/executing a transaction should not have custody to the assets arising out of the transaction.
5. Recording
6. Segregation of duties also covers internal check which refers to the activities of one person must be complementary to the activities of another or subjected to independent checking.
(c) Physical controls
These are security measures concerned with the custody of assets by limiting access to authorized people only. Restriction of access to valuable assets to only authorized persons. There should be direct measures and indirect measures.
Direct measures include:-
a. Lock and key
b. Watchmen or guards
c. Proper fence
d. Mirrors
e. Closed circuit TV’s
Indirect measures will include documentation of all transactions. Controls aim at restricting valuable, portable, exchangeable and desirable assets.
(d) Authorisation and approval
Authorisation should be done by responsible persons. In other words a transaction that commits organisation’s resources should be subject to authorisation and approval by a responsible official. The limits for authorisation should also be specified.
(e) Arithmetical and accounting control.
These are controls within the accounting function, which check that transactions are authorized, correctly and accurately recorded. This is aimed at ensuring completeness and accuracy of the accounting records.
Key features are:
i. Use of standardised documentation raised at every stage of the transaction.
ii. Use of pre-numbered documents.
iii. Documents should be issued in sequence.
iv. Monitor movement of documents by use of a register.
v. Production of exceptional reports for example when a local purchase order has been raised and the order has not been fulfilled by the supplier.
vi. Reconciliation between the different accounts and related control accounts.
(f) Personnel
Proper functioning of any system is dependent on the competence and integrity of those operating it. The entity must therefore recruit competent staff that has integrity. Staff should be assigned responsibilities that match their capabilities. Staff should undergo proper training to ensure that the company’s operations are carried out in the best way possible.
(g) Supervision
Day to day transactions and their recording should be subjected to supervision by competent responsible officials.
(h) Management controls
These controls are exercised by management outside the day to day routine of the system. They include:
i. Review of management accounts.
ii. Comparison of actual performance with budgets.
iii. Internal audit function.
iv. Any other special review procedures.
(i) Rotation of duties
Duties should be rotated between personnel at the same level. Staff should be encouraged to take annual leave.
(j) Routine and automatic checks.
These are checks conducted on routine duties and operations to ensure that they are operating efficiently. Such checks are conducted on a surprise basis to minimise errors and frauds. These include controls such as surprise cash counts and physical inspection of fixed assets.
(k) Internal audit
This is a control function set up by management to review the accounting and internal control systems. Internal audit carries out continuous evaluation of the operating effectiveness of the internal control policies and procedures. The findings and recommendations are reported to management.
This refers to the various types of control procedures that management can put in place in running the operations of the company. The mix of types of controls implemented by management will depend on the control objectives in each accounting area.
(a) Organizational plans/controls
Companies should have proper organisation plans.
They seek to ensure that the entity is properly departmentalized. The functions of every department are specified and the duties of every individual in the department are specified. Delegation of authority and limits of authority should be well and clearly defined. Such a plan boosts accountability within the organisation and reduces duplication of effort.
(b) Segregation of duties
This refers to the separation of the various duties and responsibilities such that one person cannot process and record complete transactions from beginning to the end without being checked by another person. E.g. in the purchase of a company’s fixed assets a single individual should not authorise the purchase, place the order, receive the asset and record the transaction in the accounting records.
To minimise the risk of error and/or intentional manipulation of information. In this regard for every transaction the following functions should be performed by different individuals and departments as much as possible and practicable.
1. Initiation
2. Authorisation- different levels of management should be given authority limits as to what they can authorise or commit the company’s resources. The authority limit should depend on the position, integrity, qualifications and competence.
3. Execution- transactions should be carried out by persons independent from those who authorise the transactions. If one person authorises expenditure a different person should execute.
4. Custody of the asset- officials authorisin/executing a transaction should not have custody to the assets arising out of the transaction.
5. Recording
6. Segregation of duties also covers internal check which refers to the activities of one person must be complementary to the activities of another or subjected to independent checking.
(c) Physical controls
These are security measures concerned with the custody of assets by limiting access to authorized people only. Restriction of access to valuable assets to only authorized persons. There should be direct measures and indirect measures.
Direct measures include:-
a. Lock and key
b. Watchmen or guards
c. Proper fence
d. Mirrors
e. Closed circuit TV’s
Indirect measures will include documentation of all transactions. Controls aim at restricting valuable, portable, exchangeable and desirable assets.
(d) Authorisation and approval
Authorisation should be done by responsible persons. In other words a transaction that commits organisation’s resources should be subject to authorisation and approval by a responsible official. The limits for authorisation should also be specified.
(e) Arithmetical and accounting control.
These are controls within the accounting function, which check that transactions are authorized, correctly and accurately recorded. This is aimed at ensuring completeness and accuracy of the accounting records.
Key features are:
i. Use of standardised documentation raised at every stage of the transaction.
ii. Use of pre-numbered documents.
iii. Documents should be issued in sequence.
iv. Monitor movement of documents by use of a register.
v. Production of exceptional reports for example when a local purchase order has been raised and the order has not been fulfilled by the supplier.
vi. Reconciliation between the different accounts and related control accounts.
(f) Personnel
Proper functioning of any system is dependent on the competence and integrity of those operating it. The entity must therefore recruit competent staff that has integrity. Staff should be assigned responsibilities that match their capabilities. Staff should undergo proper training to ensure that the company’s operations are carried out in the best way possible.
(g) Supervision
Day to day transactions and their recording should be subjected to supervision by competent responsible officials.
(h) Management controls
These controls are exercised by management outside the day to day routine of the system. They include:
i. Review of management accounts.
ii. Comparison of actual performance with budgets.
iii. Internal audit function.
iv. Any other special review procedures.
(i) Rotation of duties
Duties should be rotated between personnel at the same level. Staff should be encouraged to take annual leave.
(j) Routine and automatic checks.
These are checks conducted on routine duties and operations to ensure that they are operating efficiently. Such checks are conducted on a surprise basis to minimise errors and frauds. These include controls such as surprise cash counts and physical inspection of fixed assets.
(k) Internal audit
This is a control function set up by management to review the accounting and internal control systems. Internal audit carries out continuous evaluation of the operating effectiveness of the internal control policies and procedures. The findings and recommendations are reported to management.
Tuesday, 12 March 2013
German Central Bank Doubles Reserves
FRANKFURT — Germany’s central bank said Tuesday that it nearly doubled the reserves it holds to cover possible losses, in a not-so-subtle expression of its uneasiness with emergency measures the European Central Bank has taken to combat the euro crisis.The Bundesbank said it raised its risk provisions, money it sets aside to cover losses such as a default on euro zone bond holdings, to 14.4 billion euros, or$18.7 billion, from 7.7 billion euros a year earlier. The bank’s profit for the year, which it transfers to the German government, was little changed, rising to 664 million euros from 643 million euros.
Jens Weidmann, the Bundesbank president, saidthe increase in loss reserves “takes appropriate account of the risks on the Bundesbank’s balance sheet.”
But the decision to set asidefurther billions may also be interpreted as a verdict by Mr. Weidmann on the European Central Bank’s measures he has long criticized, such as purchases of Italian and Greek government bonds to try tokeep those countries’ borrowing costs under control.
Mr. Weidmann, a member of the European bank’s governing council, has played the role of Cassandra as Mario Draghi, the bank’s president, has led a vast expansion of the central bank’s powers.
Fears the euro zone will crumble have receded since Mr. Draghi promised last year to buy bonds of troubled euro zone countries to contain their borrowing costs. But Mr. Weidmann has often complained that the E.C.B. has gone too far, endangering its independence from political leaders and its mandate to guard price stability above all else.
On Tuesday Mr. Weidmann repeated his contention thatthe best solution to the eurozone crisis is for countries to get government spending under control and improve the performance of their economies. He said that relative calm on financial markets was due not only tobank policy, but also to progress by political leaders.
“The reduction of tension on financial markets should by no means lead to neglect of the necessary structural reforms,” Mr. Weidmann said in a statement.
The Bundesbank decision to bolster its reserves may also reinforce fears among Germans that their money isat risk because of European bank policies designed to keep the euro zone from falling apart. The Bundesbank is one of Germany’s most respected institutions, widely regarded as a bulwark against less prudent members of the euro zone.
Since 2010 the E.C.B. has acquired bonds from troubled euro zone countries valued at 209 billion euros, with Italian government bonds accounting for nearly half ofthat amount. In an attempt to encourage lending to businesses and consumers, the E.C.B. has also vastly expanded the collateral that commercial banks can post in return for cheap central bank loans.
The 17 national central banks in the euro zone, which carry out much of thework involved in running a currency union, would share the losses if a country were to default on its bondsor if collateral posted by a bank were to lose value.
Among Germans, there is widespread fear that Germany would bear much more than its share of the cost if the euro zone fell apart. The Bundesbank acts as the clearinghouse for large transactions in the currency zone, and other central banks have what amount to large overdrafts.
At a press conference to present the Bundesbank’s annual results, Mr. Weidmann repeated warnings that France was slipping behind because of its failure to make economic reforms. But he acknowledged that E.C.B. policies had not yet led to an increase in inflation.
“In the short term, we in the euro area have, if anything, declining inflationrisks,” he said. Mr. Weidmann also said the German economy was in good shape.
The Bundesbank, like othercentral banks in the euro zone, continues to do much of the day-to-day work of the euro zone, including making sure there is enough money in circulation, storing gold reserves and acting as go-between for large payments between commercial banks.
Jens Weidmann, the Bundesbank president, saidthe increase in loss reserves “takes appropriate account of the risks on the Bundesbank’s balance sheet.”
But the decision to set asidefurther billions may also be interpreted as a verdict by Mr. Weidmann on the European Central Bank’s measures he has long criticized, such as purchases of Italian and Greek government bonds to try tokeep those countries’ borrowing costs under control.
Mr. Weidmann, a member of the European bank’s governing council, has played the role of Cassandra as Mario Draghi, the bank’s president, has led a vast expansion of the central bank’s powers.
Fears the euro zone will crumble have receded since Mr. Draghi promised last year to buy bonds of troubled euro zone countries to contain their borrowing costs. But Mr. Weidmann has often complained that the E.C.B. has gone too far, endangering its independence from political leaders and its mandate to guard price stability above all else.
On Tuesday Mr. Weidmann repeated his contention thatthe best solution to the eurozone crisis is for countries to get government spending under control and improve the performance of their economies. He said that relative calm on financial markets was due not only tobank policy, but also to progress by political leaders.
“The reduction of tension on financial markets should by no means lead to neglect of the necessary structural reforms,” Mr. Weidmann said in a statement.
The Bundesbank decision to bolster its reserves may also reinforce fears among Germans that their money isat risk because of European bank policies designed to keep the euro zone from falling apart. The Bundesbank is one of Germany’s most respected institutions, widely regarded as a bulwark against less prudent members of the euro zone.
Since 2010 the E.C.B. has acquired bonds from troubled euro zone countries valued at 209 billion euros, with Italian government bonds accounting for nearly half ofthat amount. In an attempt to encourage lending to businesses and consumers, the E.C.B. has also vastly expanded the collateral that commercial banks can post in return for cheap central bank loans.
The 17 national central banks in the euro zone, which carry out much of thework involved in running a currency union, would share the losses if a country were to default on its bondsor if collateral posted by a bank were to lose value.
Among Germans, there is widespread fear that Germany would bear much more than its share of the cost if the euro zone fell apart. The Bundesbank acts as the clearinghouse for large transactions in the currency zone, and other central banks have what amount to large overdrafts.
At a press conference to present the Bundesbank’s annual results, Mr. Weidmann repeated warnings that France was slipping behind because of its failure to make economic reforms. But he acknowledged that E.C.B. policies had not yet led to an increase in inflation.
“In the short term, we in the euro area have, if anything, declining inflationrisks,” he said. Mr. Weidmann also said the German economy was in good shape.
The Bundesbank, like othercentral banks in the euro zone, continues to do much of the day-to-day work of the euro zone, including making sure there is enough money in circulation, storing gold reserves and acting as go-between for large payments between commercial banks.
Thursday, 7 February 2013
Sprint has just released its financial report for Q4 2012. Compared to Q3's net loss of $767 million
America's third-largest carrier added 401,000 postpaid customers over the quarter, but lost 644,000 from its Nextel network. Over 2012 as awhole, Sprint added a total of 1.5 million postpaid subscribers, and when offset against losses from the Nextel network, added a total of 605,000 new customers over its entire network — that includespostpaid, prepaid, and wholesale. The Nextel network is set to close down later this year, and Sprint has failed to convince a large number of Nextel subscribers to switch to its network.
The fourth quarter of 2012 is the first full quarter to close since Sprint's acquisition by Japanese carrier SoftBank was announced, but since that deal hasn't yet closed, it has yet to dramatically affect Sprint's business. Sprint says the deal is still tracking to close by the middle of this year, so we should see the effects of SoftBank in thenot too distant future.
The fourth quarter of 2012 is the first full quarter to close since Sprint's acquisition by Japanese carrier SoftBank was announced, but since that deal hasn't yet closed, it has yet to dramatically affect Sprint's business. Sprint says the deal is still tracking to close by the middle of this year, so we should see the effects of SoftBank in thenot too distant future.
Wednesday, 6 February 2013
AGENCY
AGENCY -- A business that provides a particular service to a company (that are outside of the country where the agency is located). Dependent agency constitutes a permanent establishment for the other company and the income achieved through the agency is taxed on the income earned from the country where the agency is located whereas independent agency does not.
Tuesday, 5 February 2013
AGGREGATION
AGGREGATION -- Term used to denote the addingtogether of the taxpayer's income from all sources in order to determine the applicable tax rate for income tax purposes.
ALIEN, TAX TREATMENT OF
ALIEN, TAX TREATMENT OF -- A person who is not a citizen of the country in which he or she lives. In general, most countries do not distinguish between nationals and aliens for tax purposes; rather tax liabilityis based on residence and/or domicile.
ALIEN, TAX TREATMENT OF
ALIENATION OF INCOME -- Term generally used to describe the transfer of theright to receive income from a source while not necessarily transferring the ownership of that source tothe same person.
ALIENATION OF INCOME
ALIENATION OF INCOME -- Term generally used to describe the transfer of theright to receive income from a source while not necessarily transferring the ownership of that source tothe same person.
ALIENATION OF INCOME
ALIENATION OF INCOME -- Term generally used to describe the transfer of theright to receive income from a source while not necessarily transferring the ownership of that source tothe same person.
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