Review and Approval mechanisms ensure that the accounting transaction is reasonable, necessary, and comply with applicable policies. Understand why we need review and approval processes, what are they, and how they are performed in automated general ledger systems. Learn the benefits of having journal approval mechanisms in place.
Internal control plays an important role in the prevention and detection of fraud and errors to ensure the accuracy of financial results. Internal control is the process designed to ensure reliable financial reporting, effective and efficient operations, and compliance with applicable laws and regulations. This needs to be supplemented by an effective control environment that ensures that established policies and procedures are followed.
Management defines specific policies and procedures to achieve its objectives and run the day to day operations in the organization. The most important control activities involve segregation of duties, proper authorization of transactions and activities, adequate documents and records, physical control over assets and records, and independent checks on performance. These controls and checks ensure that financial statements are complete and accurate.
The internal control principle of segregation of duties requires that different individuals be assigned responsibility for different elements of related activities, particularly those involving authorization, custody, or recordkeeping. Some examples in the context of general ledger transactions are; the same person who is responsible for recording a transaction should not be responsible for posting the same in the general ledger. The recorded transaction should be checked and reviewed by someone else as having different individuals perform these functions creates a system of checks and balances.
Proper authorization of transactions and activities helps ensure that all company activities adhere to established guidelines unless responsible managers authorize exceptions granting another course of action. In the context of the general ledger for example, Journals with different levels of amounts should go to various officers in the company for official authorization before they can be posted in General Ledger. Another example could be that any journal necessitating a debit to Revenue Account must be approved by the accounts manager before it can be posted, to allow the accounts manager to authorize and verify the reversal of revenue.
Adequate documents and records provide evidence that financial statements are accurate and based on genuine business transactions pertaining to the entity. Controls designed to ensure adequate recordkeeping include the creation of journals and other supporting documents that are easy to use and sufficiently informative. Document sequencing is another functionality that is used to pre-number consecutive journals. It is also very important to document the review and approval process to make it available for audit staff subsequently. The simplest way to do this is to print out the journal entries and have the reviewer initial them. This should then be saved as support. In the automated general ledgers, each user is associated with a user id and transactions can flow to the reviewer and approver before posting and a system audit trail is sufficient audit evidence if such a process has been established.
Physical control over assets and records helps protect the company's assets. These control activities may include electronic or mechanical controls. Journals should be physically safeguarded in case they are on paper and guarded with access privileges & established backup and recovery procedures in case of automated systems.
Under the Sarbanes-Oxley Act, companies are required to perform a fraud risk assessment and assess related controls. This typically involves identifying scenarios in which theft or loss could occur and determining if existing control procedures effectively manage the risk to an acceptable level. The risk that senior management might override important financial controls to manipulate financial reporting is also a key area of focus in fraud risk assessment. Top managers of publicly held companies must sign a statement of responsibility for internal controls and include this statement in their annual report to stockholders. Review and approval in the accounting process are independent checks on performance, which are carried out by employees who did not do the work being checked. These processes help ensure the reliability of accounting information and the efficiency of operations. Internal auditors and external auditors rely on established processes to gaze at the extent of their audit procedures.
Having the journal review and approval process in place ensures that all general journal entries get reviewed. This review is done to help prevent errors such as adjusting the wrong accounts and transposing numbers. It also helps protect against fraud by making sure there is a valid reason for the journal entry and someone is not manipulating the accounts for vested interests.
The transactions can be reviewed for accuracy and completeness once they have been entered into the automated accounting system. If a review is done by another person who is not responsible or involved in recording the transaction it can help to ensure that financial information in the journals accurately reflects actual activity.
A review of transactions is done to ensure that the transaction is within the guidelines of the purpose of the accounts used and is appropriately charged to the account following the concepts defined in the accounting equation. In the case of manual journals, one must ensure that the transaction is consistent with available supporting documents. If any errors are found in the transaction, they can be edited and corrected at this stage.
In the case of journal recording the journal entered by one person needs to be approved by another person in this step. This ensures having more than one person to complete the “Journal Creation Task”. In GL the separation by getting the financial transaction approved by more than one individual prevents fraud and error.
Automated accounting systems provide you with the functionality of sending the journals for approval to the designated person. The system will validate the journal batch, determine if approval is required, and submit the batch to approvers (if required), then notifies appropriate individuals of the approval results. Review and Approval must happen before the journal is posted and balances are updated.
ERP Systems provide review capabilities by providing a workflow framework to route these transactions to appropriate users based on the rules defined in the system. Automatic notifications are sent to the person who needs to take action.
Review and Approval mechanisms ensure:
There are five types of core accounts to capture any accounting transaction. Apart from these fundamental accounts, some other special-purpose accounts are used to ensure the integrity of financial transactions. Some examples of such accounts are clearing accounts, suspense accounts, contra accounts, and intercompany accounts. Understand the importance and usage of these accounts.
An organizational design is the process by which a company defines and manages elements of structure so that an organization can control the activities necessary to achieve its goals. Good organizational structure and design helps improve communication, increase productivity, and inspire innovation. Organizational structure is the formal system of task and activity relationships to clearly define how people coordinate their actions and use resources to achieve organizational goals.
GL - Accrued / Unbilled Revenue
Accrued revenues (also called accrued assets) are revenues already earned but not yet paid by the customer or posted to the general ledger. Understand what we mean by the terms accrued revenue, accrued assets, and unbilled revenue. Explore the business conditions that require recognition of accrued revenue in the books of accounts and some industries where this practice is prevalent.
GL - Different Accounting Methods
The accounting method refers to the rules a company follows in reporting revenues and expenses. Understand the two common systems of bookkeeping, single, and double-entry accounting systems. Learners will also understand the two most common accounting methods; cash and accrual methods of accounting and the advantages and disadvantages of using them.
Operational Structures in Business
Large organizations grow through subsidiaries, joint ventures, multiple divisions and departments along with mergers and acquisitions. Leaders of these organizations typically want to analyze the business based on operational structures such as industries, functions, consumers, or product lines.
Different Types of Organizational Structures
Modern business organizations run multiple product and service lines, operate globally, leverage large number of registered legal entities, and operate through complex matrix relationships. To stay competitive in the current global business environment, they must often develop highly diverse and complex organizational structures that cross international borders.
A joint venture (JV) is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets. A joint venture takes place when two or more parties come together to take on one project.
Concept of Representative Office
A representative office is the easiest option for a company planning to start its operations in a foreign country. The company need not incorporate a separate legal entity nor trigger corporate income tax, as long as the activities are limited in nature.
Business Metrics for Management Reporting
Business metric is a quantifiable measure of an organization's behavior, activities, and performance used to access the status of the targeted business process. Traditionally many metrics were finance based, inwardly focusing on the performance of the organization. Businesses can use various metrics available to monitor, evaluate, and improve their performance across any of the focus areas like sales, sourcing, IT or operations.
Reversing Journals are special journals that are automatically reversed after a specified date. A reversing entry is a journal entry to “undo” an adjusting entry. When you create a reversing journal entry it nullifies the accounting impact of the original entry. Reversing entries make it easier to record subsequent transactions by eliminating the need for certain compound entries. See an example of reversing journal entry!
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