Which of the following controls can minimize the threat of inaccurate or invalid general ledger data

GENERAL LEDGER AND REPORTING

GENERAL LEDGER The general ledger and reporting system includes the processes in place to update general ledger accounts and prepare reports that summarize results of the organization’s activities One of the primary functions of GLARS is to collect and organize data from:  Each of the accounting cycle subsystems, which provide summary entries related to the routine activities in those cycles. WHAT IS ACCOUNTING CYCLE ACTIVITIES  The treasurer, who provides entries with respect to non-routine activities such as transactions with creditors and investors. Financing and investing activities  The budget department, which provides budget numbers. Budget activities  The controller, who provides adjusting entries.Adjustments GLAR THREATS AND CONTROLS  All general ledger and reporting cycle activities depend on an integrated (general ledger) database. THREAT 1: Inaccurate or invalid general ledger data-DEFINE  It can result in misleading reports that cause managers to make erroneous decisions. Similarly, errors in financial statements provided to creditors, investors and government agencies can cause those stakeholders to make wrong decisions. In addition, errors in financial statements and reports provided to external stakeholders can also results in fines and negative reactions from capital markets.  One way to mitigate the threat of inaccurate or invalid general ledger data is to use various processing and integrity controls (control 1.1).  To minimize the risk of data input errors when a treasurer and controller make direct journal entries, it is also important to restrict access to the general ledger (control 1.2) and configure a system so that only authorized employees can make changes to master data (control 1.3). Thus multifactor authentication should be used to restrict access to the general ledger. In addition, authorization controls (an access control matrix and compatibility test) should also be used to limit the functions that each legitimate user may perform. For example, most managers should be given readonly access to the general ledger otherwise; an unscrupulous manager can conceal theft of an assets or poor performance by altering information in a general ledger. In addition, the access control matrix should also be designed to limit functions that can be performed at various terminals. Adjusting entries, for example, should be allowed only by terminals in a controller’s office. However because such preventive controls can never be 100% effective, an important detective control is to regularly produce a report of all changes to the general ledger and review them to verify that the database remains accurate. THREAT 2: Unauthorized disclosure of financial statement-DEFINE  The best control procedure for reducing the risk of UDOFS is to use multifactor authentication and physical security controls to restrict access to a general ledger

to only those employees who need such access to perform their jobs (control 2.1).  Encrypting a database provides additional protection by making information unintelligible to anyone who succeeds in obtaining unauthorized access to a database (control 2.2). Encryption also prevents IT employees who do not have access to an ERP system from using operating system utilities to view sensitive information. In addition, general ledger data should be encrypted when it is being transmitted over the internet to other corporate offices, analyst, or government agencies. THREAT 3: Loss or destruction of data DEFINE GENERAL LEDGER REPORTING ACTIVITIES ACTIVITY 1: Update General Ledger  Updating consists of posting journal entries that originated from two sources:

Example:



Accounting subsystems – provide summary entries related to the routine activities in those cycles.



The treasurer – who provides entries with respect to non-routine activities such as transactions with creditors and investors.

Issuances of or payment of debt and the associated interest. Issuances of or repurchases of company stock and paying dividends on that

stock

EXPLANATION:

 Journal entries are often documented on a form called a journal voucher.

After updating the general ledger, journal entries are stored in a journal voucher file

UPDATE GENERAL LEDGER THREATS: THREAT 1: Inaccurate updating of general ledger THREAT 2: Unauthorized journal entries  Unauthorized entries entering the general ledger can either be errors or fraud. Strong access controls (control 2.1), including multifactor authentication and compatibility test based on access control matrices, reduce the risk of unauthorized journal entries. In addition to these preventive controls, there are two types of detective controls that should be used to identify inaccurate and unauthorized journal entries: reconciliations and control reports and maintenance of an adequate audit trail.  Reconciliations and control reports (control 2.2) can detect whether any errors were made during the process of updating a general ledger. One form of reconciliation is the preparation of a trial balance. o Trial Balance – report that list balances of all general ledger account.  Audit trail (control 2.3) is a traceable path that shows how a transaction flows through an information system to affect general ledger account balances. It is an important detective control that provides evidence about causes of changes in general ledger account balances. The audit trail facilitates these three tasks: 1. Trace any transaction from its original source document to the general ledger and to any report or other document using that data. 2. Trace any item appearing in a report back through the general ledger to its original source document 3. Trace all changes in general ledger accounts from their beginning balance to their ending balance ACTIVITY 2: Post adjusting entries  What are the five basic categories of adjusting entries? 

Accruals – involves an event that has occurred for which the related cash flow has not yet taken place.( Accrued revenue and Accrued expense)

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Deferrals – involves a situation where the cash flow takes place before the related revenue is earned or the expense is incurred. ( Deferred revenue and Deferred expense)

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Estimates – used to recognize expenses that cannot be directly attributed to a related revenue and must be allocated in a more subjective or systematic manner. ( Depreciation and Bad debt expense)

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Revaluation – result from reconciling actual and recorded values of assets and recording changes in accounting principles.

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Corrections – involve correction of errors previously made in the general ledger.

EXPLANATION:  Journal vouchers for adjusting entries should be stored in the journal voucher file.  Once adjusting entries have been recorded, an adjusted trial balance is prepared from the new balances in the general ledger.  The adjusted trial balance serves as the input for the next step – preparation of the financial statements.  Adjusting entries originate from the controller’s office, after the initial trial balance has been prepared. POST ADJUSTING ENTRIES THREATS: THREAT 1: Inaccurate adjusting entries  IAE is a threat that needs to be countered with appropriate controls. This threat can lead to poor decision-making based on financial performance reports that contains errors or frauds.  To reduce risk of incorrect input, data entry processing integrity controls (control 1.1) should be applied. Often, however, adjusting journal entries are usually calculated in spreadsheets. Therefore it is important to the various spreadsheet error protection controls (control 1.2) to minimize the risk of mistakes.

 Additional control is provided by creating a standard adjusting entry (control 1.3) file for recurring adjusting entries made each period, such as depreciation expense. A standard adjusting entry file improves input accuracy by eliminating the need to repeatedly key in the same types of journal entries.  Reconciling journal entries to make sure they balance (control 1.4) as well as creating an audit trail and reviewing the audit log (control 1.5) need to be undertaken. THREAT 2: Unauthorized adjusting entries  Strong access controls (control 2.1) reduce the risk of unauthorized adjusting entries.  Periodic reconciliations (control 2.2) and audit trails provide a means to detect unauthorized or inaccurate adjusting entry. ACTIVITY 3: Prepare financial statements  The income statement is prepared first. o Prepared using the balances in the revenue, expenses, gain, and loss accounts listed on the adjusted trial balance.  The balance sheet is prepared next. o presents the balance in the permanent accounts: assets, liabilities, owner’s equity  The cash flows statement is prepared last. o present changes in cash for the period categorized by: operating, investing, financing activities PREPARE FINANCIAL STATEMENTS THREATS: THREAT 1: Inaccurate financial statements  The data processing integrity controls (control 1.1) for journal entries combined with the use of packaged software to produce the financial statements minimizes the risk numerical errors in the data (control 1.2). However because both IFRS and XBRL (Extensible Business Reporting Language) requires numerous judgments how to classify information, there is a risk that financial statements may not accurately represent results from operations. THREAT 2: Fraudulent financial reporting EXTENSIVE BUSSINESS REPORTING LANGUAGE (XBRL) Instance Document  Contains data from financial statements  Each piece of data in XBRL is an element Taxonomy  Set of files defining the various elements and the relationships between them

o o

A schema Contains the definitions of every element that could appear in an instance document

Link bases  Describes relationships between elements    

Reference - identifies relevant authoritative pronouncements Calculation - Specifies how to combine elements Presentation - How to group elements Label - Associates human-readable labels with elements

ACTIVITY 4: Produce management reports  The final activity in the general ledger and reporting system involves the production of various managerial reports.  What are the two main categories of managerial reports? o

General ledger control reports What are examples of control reports?

o

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lists of journal vouchers by numerical sequence, account number, or date

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listing of general ledger account balances

Budgets What are examples of budgets? 

operating budget



capital expenditures budget

o

Budgets and performance reports should be developed on the basis of responsibility accounting.

o

What is responsibility accounting? - It involves reporting financial results on the basis of managerial responsibilities within an organization.

PRODUCE MANAGEMENT REPORTS THREATS: THREAT 1: Poorly designed reports and graphs

BALANCED SCORECARD

 A report that provides a multidimensional perspective of organizational performance

 it shows the organization’s goals for each of the four dimensions ( financial, customer, internal operations, innovation and learning)  Provides more comprehensive overview of organizational performance than financial measures alone.

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Which of the following controls best addresses the threat of inaccurate adjusting entries?

Which of the following controls can minimize the threat of incomplete?

What control procedure should be used to reduce the risk of unauthorized disclosure of the financial statement?

Which of the following are used to document entries made to update the general ledger *?