The accounting function

Adam Omar (AAT & ACCA Tutor) 07823807630

1. Organizations and the Need for Control

Definition of Organizations: Organizations are social arrangements aimed at the controlled performance of collective goals. Examples include
schools, businesses, and charities.

Key Characteristics:

Collective Goals: Organizations are defined by their goals, e.g., a school's goal is to educate students.

Social Arrangements: Structures within organizations allow people to work together toward common goals.

Controlled Performance: Systems or procedures ensure that goals are achieved, such as teachers following a curriculum.

Adam Omar (AAT & ACCA Tutor) 07823807630

Control Mechanisms: Various methods ensure that organizational goals are met effectively:

Organizational Structure: Dividing the organization into smaller units.

Target Setting and Budgeting: Establishing expectations for staff performance.

Direct Supervision: Managers overseeing staff activities.

Organizational Culture: Creating an environment where certain behaviors, like making mistakes, are discouraged.

Self-Control: Encouraging employees to take responsibility and work independently.

Control Systems: Comparing actual results with budgeted figures and identifying variances.

Specific Control Processes: E.g., reconciliations in the Purchases Ledger Control Account to detect errors.

Adam Omar (AAT & ACCA Tutor) 07823807630

Definition: Control activities are the specific actions taken by an organization to address risks and achieve its objectives. They are the policies and
procedures that help ensure that management directives are carried out.

Types of Control Activities:

Supervision: Ongoing monitoring of activities and personnel to ensure compliance with policies and procedures.

Segregation of Duties: Dividing responsibilities among different individuals to reduce the risk of error or fraud. For example, separating the
duties of authorization, recording, and custody of assets.

Physical Controls: Safeguarding assets and records through access controls, such as locks, passwords, and security systems.

Authorization and Approval: Requiring that all transactions are authorized by a responsible person before being executed.

Arithmetical and Accounting Controls: Checking the accuracy of financial records through reconciliations, trial balances, and audit trails.

Personnel Controls: Ensuring that employees are well-trained, competent, and held accountable for their actions.

Adam Omar (AAT & ACCA Tutor) 07823807630

Which of the following statements about organizations and control mechanisms is true?

A. Organizations are solely defined by their social arrangements.

B. Control systems in organizations involve comparing actual results with budgeted figures to identify variances.

C. Direct supervision in an organization discourages employees from working independently.

D. Organizational culture in a company has no impact on how goals are achieved.

Adam Omar (AAT & ACCA Tutor) 07823807630

2. Organizational Structure

Types of Work: Organizations can be divided based on the type of work performed, such as marketing, HR, finance, and production

Division of Responsibility: Organizations may be structured along divisional lines based on geography, products, or both.

Degree of Decentralization:

Centralized Structure: Decision-making authority is retained at the upper levels of the organization's hierarchy. This can lead to day-to-day
control issues and delays.

Decentralized Structure: Authority is passed down to lower levels, allowing for quicker decisions but requiring more oversight.

Adam Omar (AAT & ACCA Tutor) 07823807630

Scalar Chain: Refers to the line of authority within an organization. A "short scalar chain" indicates fewer levels of management, while a "long
scalar chain" indicates many levels of management.

Span of Control: Refers to the number of people a manager is directly responsible for. Organizations can be:

Tall: Many managerial levels with a narrow span of control.

Flat: Few managerial levels with a wide span of control.

Adam Omar (AAT & ACCA Tutor) 07823807630

Identify whether each of the following statements is true or false:

Statement True False

A decentralized organization typically allows lower-level managers more decision-making authority.
T
In a centralized organization, decision-making is generally faster than in a decentralized one.
F
A tall organization structure usually results in fewer opportunities for promotion.

A manager’s span of control is always narrower in a decentralized organization than in a centralized one.

Adam Omar (AAT & ACCA Tutor) 07823807630

Identify whether the following statements about a flat organizational structure are true or false:

Statement True False

Decision-making is generally quicker in a flat organizational structure.

A flat organizational structure typically requires more managers.

Communication between employees and top management is often easier in a flat structure.

A flat organizational structure can lead to overburdened managers due to a broad span of control
.

Adam Omar (AAT & ACCA Tutor) 07823807630

3. Authority, Responsibility, and Accountability

Authority: The power given to individuals within the organization to make decisions and command others.

Responsibility: The obligation to complete tasks or duties assigned to individuals or groups within the organization.

Accountability: The requirement for individuals to explain and justify their actions, especially when they fail to meet their responsibilities.

Adam Omar (AAT & ACCA Tutor) 07823807630

4. The Accounting/Finance Function

Definition: Accounting is the systematic recording, reporting, and analysis of financial transactions. Accuracy and cost-effectiveness are crucial.

Roles of Finance:

Resource Deployment: Ensuring that financial resources are used to meet the organization's objectives.

Expressing Objectives: Financial terms are often used to express organizational objectives.

Financial Controls: Used for planning and controlling strategies, as well as for detailed performance assessment.

Adam Omar (AAT & ACCA Tutor) 07823807630

5. Components of the Accounting/Finance Function

Financial Accounting: Involves preparing annual financial statements according to relevant standards and legislation

Management Accounting: Focuses on measuring, analyzing, and communicating information to management in an easily understandable form.

Treasury Management: Includes managing working capital, cash, financing, foreign currency, and tax.

Internal Audit: Involves examining and evaluating the organization’s risk management processes and systems of control, and making
recommendations for improvement.

Adam Omar (AAT & ACCA Tutor) 07823807630

6. Relationships with Other Departments

Internal Coordination: The accounting function must work closely with other departments to ensure overall organizational objectives are met

Communication: Effective communication is essential to ensure that progress is monitored, and work plans are kept on schedule.

Adam Omar (AAT & ACCA Tutor) 07823807630

7. Systems and Procedures

Definition of a System: A system is a set of interacting elements that respond to inputs to produce outputs. Examples include central heating
systems, banking systems, and payment systems.

The Systems Approach: Organizational systems can be viewed in various ways, such as:

Social Systems: Focused on people and relationships.

Information Systems: Centered on information to support decisions.

Accounting Systems: Focused on the organization’s cash flows.

Economic Systems: Utilizing resources to produce economic welfare.

Control Systems: Control systems within an organization monitor changes or deviations from planned objectives. The key elements include:

Standard: The system’s target or goal.

Adam Omar (AAT & ACCA Tutor) 07823807630

Sensor: Measures the system’s output.

Comparator: Compares the output with the standard.

Effector: Initiates corrective action.

Feedback: Information from the output used to adjust the system.

Adam Omar (AAT & ACCA Tutor) 07823807630

8. Systems and Procedures Best Practices

Principles: Effective systems should ensure a smooth workflow, minimal staff movement, no duplication of work, effective use of specialist skills,
simplicity, and cost-effectiveness.

Systems and Procedures Manuals: Organizations should document their operations, providing clear instructions on what, when, where, and how
tasks should be performed. Manuals have both advantages (e.g., easier supervision, training) and disadvantages (e.g., costly to create, require
regular updates).

Adam Omar (AAT & ACCA Tutor) 07823807630

9. Review of Office Procedures

Continuous Review: Systems should be regularly reviewed and updated to reflect changes in the organization. Reviews should address both the
overall office function and the detailed procedures within it.

10. Regulation and Legislation Affecting the Accounting Function

Government and Self-Regulation: Regulations protect business entities, consumers, employees, and society at large. Accounting systems must
adapt to any changes in regulation, such as tax rate changes.

Board’s Conceptual Framework: Financial statements must provide useful information to stakeholders, adhering to qualitative characteristics like
relevance, faithful representation, comparability, verifiability, timeliness, and understandability.

Generally Accepted Accounting Practice (GAAP): GAAP includes all authoritative accounting practices, extending beyond accounting standards
to include legal requirements and stock exchange rules.

Adam Omar (AAT & ACCA Tutor) 07823807630

11. Summary of Chapter 1

Systems: Include social, information, accounting, and economic systems.

Regulation & Legislation: Compliance with the Companies Act 2006 and IFRS Standards is essential.

Organizations: Characterized by collective goals, social arrangements, and controlled performance.

Accounting Function: Encompasses financial and management accounting, internal audit, and treasury management.

Structure: Involves concepts like decentralization, scalar chain, and span of control.

Control Mechanisms: Include standards, sensors, comparators, effectors, and feedback in control systems.

Adam Omar (AAT & ACCA Tutor) 07823807630