Module 1 Part B Flashcards
Why is there total reliance on an external public accounting practice in very small SMEs
Accounting relationship and role
Key relationship are with employers, clients, regulators and employees
Accountant should maintain a good quality professional relationship
The factors how an individual behave are
cultural, standards and ethical evaluation
Accounting work environment
Public Practice
Private and business sector
Public sector
Financial advice
Not-for profit sector
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Public Practice role
- Assurance and audit
2.Financial management - Taxation services
- Forensic accounting
- Insolvency
- Internal audit services
- Business advising
- Other advisory services
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Accountants as external advisers to SMEs
Accountants provide a wide range of services.
97% of their service is taxation.
Accountants provide service is dominant in profit-oriented than compliance.
What type of mentality do some owner-managers have
fortress enterprice mentality
Private or Business sector environment PAIBs
Accountants are increasingly involved in sustainability and climate change challenges
The traditional role of CFO is replaced by Chief value officer (CVO)
Professional accountants in
Main focus is on profitability of the business
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Public Sector Environment
Public sector include wide range of government and regulatory bodies
They set up entities like government business enterprise (GBE) or state owned enterprice (SOE)
Focus is on social objectives and deliver the goods and services efficiently and effectively to public
Which role review internal controls, information and business processes
Internal auditor
Financial advice environment
Accountant are often called upon for financial advice to clients, who include high net worth individuals, business or other entities such as trusts or foundations.
Due to huge rick with which may lead to self-interest or force from client, these accounts should sit for exams administered by ASIC
biggest ethical risks
1.large amount of money involved
2.Important decisions
3.Very different level of risks
4.Incentives from running ‘high risk’ schemes
Not-for- Profit sector Environment
NFP vary in size and include charitable institution and local sports clubs
The source of income is from members and supporters, donations and fundraising.
Social Impact of Accounting
Important role of accounting is to report to investors, owners, management and other users
This reporting is is designed to report of events already occurred or passive by way annual, half-yearly and quarterly reports
Reporting which is reactive, will have variety of outcome, which change the social circumstances and entire society.
Accountants used within the organisation to provide information to management for decision making.
Accountant should understand the social impact at macro and micro level and their communication from accountants should be professional and balanced.
Macro impact - all type of business, public organisation, social institution and society generally
Micro impact - motivation and behaviour of managers and employees within an organisation
At macro level ASIC reviews financial statements and raise concerns with companies
Social impact on Depreciation calculation
Actual depreciation calculation Straight line method:
(Value of asset purchased - residual value)/useful life of asset
To achieve short term profit
1. Increase in residual value
2. Increasing useful life of truck
Social impact
1. false confidence in shareholders, lenders and investors, employees and suppliers
2. since the useful life of truck is increased, it will fail for another capital investment if the truck fail after it’s actual useful life
3. Since the residual value has increased, if sold after inflated useful life, the company will incur loss and leads to large write-off
To achieve long term profit
1. Reduce the residual value
2. Reduce useful life of truck
Social impact
1. profit will be much lower. Investors, shareholders will loose confidence on company. This will lead to sell their investments and decrease in share price
2. creditors and suppliers will hesitate to trade with company
3. Investors may refuse to lend money
Key issues causing reduction professional credibility
- Earnings Management : The management may use to manipulate the profit and earning. This can be done via manipulation of reserves, accounting policy change that is not reflective of organisation’s position and other changes permitted under accounting standards, such of valuation method.
2.Creative Accounting : means using the choices available, present the information which is not true and manipulating in favour of organisation - Poor audit quality : inability of auditor to identify a company distress prior to collapsing. eg GFC
- Lack of auditor independence
- Financial accounting distortions : with respect to mark-to-market techniques that has reduced the value of asset and may lead to banking covenants or even default.
IFAC identified key issue which could reduce the professional credibility
- The payment of incentives that encourages the manipulation or misstatement of information
- Lack of auditors independence
- Lack of audit effectiveness due to lack of skill or deliberate action
- Too much flexibility and loopholes in reporting practices
