1.

2 & M2
Generally Accepted Accounting Principles, or GAAP, are sets of accounting principles, standards
and procedures that companies use to compile their financial statements. GAAP are a
combination of authoritative standards, and simply the commonly accepted ways of recording
and reporting accounting information. (Accounting Coach, 2015)
GAAP are imposed on companies so that investors have a minimum level of consistency in the
financial statements they use when analyzing companies for investment purposes. It covers such
things as revenue recognition, balance sheet item classification and outstanding share
measurements. Companies are expected to follow GAAP rules when reporting their financial
data via financial statements.
As financial reporting involves significant professional judgments by accountants, these concepts
and principles ensure that the users of financial information are not mislead by the adoption of
accounting policies and practices that go against the spirit of the accountancy profession.
(Accounting Simplified, 2015) Accountants must therefore actively consider whether the
accounting treatments adopted are consistent with the accounting concepts and principles.
Relevance
Information should be relevant to the decision-making needs of the user. Information is relevant
if it helps users of the financial statements in predicting future trends of the business, or
confirming or correcting any past predictions they have made. Same piece of information which
assists users in confirming their past predictions may also be helpful in forming future forecasts.
For example, A client fails to pay the $500 he owes to a company having net assets of worth
$10M is not relevant to the decision making needs of users of the financial statements.
However, if the amount of default as big as $5M, the information becomes relevant to the users
as it may affect their view regarding the financial performance and position of the company.
Timeliness
This refers to the need for accounting information to be presented to the users in time to fulfill
their decision-making needs. It protects users of the accounting information from using old and
outdated ones.
For example, regulatory authorities tend to impose restrictions on the maximum number of days
that companies may take to issue financial statements to the public.
Completeness
Information must be complete in all financial statements. Incomplete information reduces not
only the relevance of the financial statements, it also decreases its reliability since users will be
basing their decisions on information which only presents a partial view of the affairs of the
entity.
Consistency
Financial statements must be comparable to another from period to period in order for the users
to derive conclusions of the organizations financial performance and standing. Financial
statements of the organization must also be consistent with other organizations within the same
line of business. (Accounting Simplified, 2015) This should aid users in analyzing the

performance and position of one company relative to the industry standards. It is therefore
necessary for entities to adopt accounting policies that best reflect the existing industry practice.
For example, a retail shop valued its inventory on the basis of FIFO method in the past, it must
continue to do so to uphold consistency in the reported inventory balance. A switch from FIFO
to LIFO basis of inventory valuation may cause a change in the value of inventory between the
accounting periods mostly due to seasonal changes in prices of goods.
Realization
Also known as revenue recognition principle, refers to the application of accruals concept
towards the recognition of revenue. (Accounting Simplified, 2015) Under this principle, the
seller recognizes revenue when it is earned even if cash from the transaction has been received or
not.
For example, a business receives orders from customers in advance, but requires a down
payment. They deliver the goods to the respective customers within a specific period upon which
it receives the remaining balance from the list price. The business must not recognize any
revenue until the goods are delivered to the respective customers.
Understandability
Presentation of financial statements have to be in a manner that is easily understandable by a user
who possesses a reasonable level of knowledge of the business, economic activities and
accounting in general provided that such a user is willing to study the information with
reasonable diligence. (Accounting Simplified, 2015) This means that understandability of the
information is necessary for its relevance to the users.
For example, if the accounting activities involved in a business are too intricate for a user to
understand despite the user having adequate knowledge of accountancy in general, then this
would weaken the reliability of the whole financial statement because users will be forced to
base their economic decisions on other undependable information.
Materiality
Information is material if its omission or misstatement could influence the economic decisions of
users taken on the basis of the financial statements. (Accounting Simplified, 2015)
Materiality relates to the significance of transactions, balances and errors contained in the
financial statements. Information contained in the financial statements must therefore be
complete in all material respects in order for them to present current standing of the organization.
Substance Over Form
Substance over form is an accounting concept which means that the economic substance of
transactions and events must be recorded in the financial statements rather than just their legal
form in order to present a true and fair view of the affairs of the entity. (Accounting Simplified,
2015).
This concept entails the use of judgment on the part of the preparers of the financial statements
in order for them to derive the business sense from the transactions and events and to present
them in a manner that best reflects their true essence. Legal aspects of transactions may have to
be disregarded at times in order to provide more useful and relevant information to the users of
financial statements.

Business Entity
Financial accounting is based on the premise that the transactions and balances of a business
entity are to be accounted for separately from its owners. (Accounting Simplified, 2015) The
business entity is therefore considered to be separate from its owners. Therefore, any personal
expenses incurred by owners of a business will not appear in the income statement of the entity.
For instance, any expenses of owners are paid out of assets of the business, would be considered
to be drawings for the purpose of accounting.

1.1 & M1
Accounting records are any type of electronic or hard copy documents that provides information
regarding the financial status of an individual or business. (Accounting Coach, 2015) These
documents are used to create more detailed accounting records such as ledgers, journals, and
other types of accounting books.
The main function of these documents is to keep track of all financial transactions related to a
given period of time. Along with money transactions, these books of account also make it
possible to determine the balance between assets and liabilities.
Journals
Journals are books that records journal entries. A journal entry is a formal accounting entry used
to identify a business transaction. The entry itemizes accounts that are debited and credited, and
should include some description of the reason for the entry.

Purchases Journal
The purchases journal is used for recording credit purchases such as merchandise for
resale to customers, business supplies, equipment, and other such purchases.

Sales Journal
Sales journals are used for recording sales of merchandise on account, also known as
credit sales.

Cash Payments Journal

The Cash Payments Journal is used to record all cash payments made by a company. All
transactions in the cash payments journal involve the disbursement of cash.

Cash Receipts Journal

The Cash Receipts Journal is used to record sales of merchandise for cash. All
transactions in the cash receipts journal involve the receipt of cash.

Ledgers
A general ledger is the master set of accounts that summarize all transactions occurring within an
entity. It is comprised of all the individual accounts needed to record the assets, liabilities, equity,
revenue, expense, gain, and loss transactions of a business. Detailed transactions are recorded
directly in these general ledger accounts.

Source Documents
A source document is the original document that contains the details of a business transaction. A
source document captures the key information about a transaction, such as the names of the
parties involved, amounts paid, the date, and the substance of the transaction. Source documents
are frequently identified with a unique number, so that they can be differentiated in the
accounting system. The numbering of documents is particularly useful, since it allows a company
to investigate whether any documents are missing. (Accounting Tools, 2015)

Source Documents: Deposit Slip

When a business receives payments from customers, they deposit the money into the
business account. Deposit slips are good supporting record of who has paid. On a deposit
slip, it will list the customer name and the amount of each payment. Accounting clerks or
bookkeepers uses these information to update customers balances.

Source Documents: Invoice

An invoice is a document submitted to a customer, identifying a transaction for which the
customer owes payment to the issuer.

Source Documents: Receipts

Receipts are a formal, written acknowledgment that something of value has been
received.

1.3
Accounting systems provide a computerized method of recording and keeping track of daily,
monthly and yearly financial operations of a business. Additionally, small and large businesses
use accounting systems to generate data that enables them to make accurate management
decisions.
Compatibility with Business
The functions of accounting systems are influenced by the nature of business and the operations
of that business. Different industries require different types of systems and different features in
accounting systems. (Wicks, 2015) Having the appropriate accounting system ensures that the
system meets the specific goals of a business.
The business daily activities would also influence the type of accounting system required. In
general, an accounting system is effective to the extent that it is compatible with daily business

needs, such as storing client information, creating invoices, keeping account of and tracking
inventories.
Perception
How its users perceive an accounting system influences its effectiveness and relevance.
Employees refusal to accept to changes in accounting systems may be due to complication of
the system, effectiveness of an existing system or apprehension over the introduction of
accounting controls and auditing.
Level of Training
When accounting systems are introduced to a business environment, training users is a key
requirement. The level and nature of training attained by users influences the way in which the
system serves to meet business objectives. (Wicks, 2015) A lack of adequate training among
users, such as managers and supervisors, can cause the accounting system to be a problem
instead of a solution in this case.
Implementation
Implementation involves integrating the accounting system into the operations of a business.
Implementation partners include team members, and importantly, the service provider. A poorly
implemented system, which lacks the support of team members and the follow-up of the service
provider, will fail.

M3
In the case of Best Caf, it is recommended that they implement an electronic system. It would
be able to run reports much faster than manual accounting systems. Balances would be updated
automatically. It also ensures a more accurate and efficient accounting cycle. Where previously,
mistakes could be made by manual processes, accounting software reduces these mathematical
errors.
Most new software doesnt allow for input of incorrect data such as credit-debit mistakes, and it
automates postings to various ledgers and journals, virtually making data capturing mistakes
obsolete.
Accounting software offers the advantage of viewing records at just the click of a mouse and can
run a variety of reports. Preparation of your financial statements would be easier.
However, in the case of the reluctant bookkeeper, a lack of support from management can render
the accounting system irrelevant to the decision-making functions of the organization. The
accounting supervisor must now make sure that implementation of the new system runs
smoothly so that the current bookkeeper can slowly adjust. A little encouragement and assurance
that the new system wont take away his employment can help. Input and support from
implementation partners ensures that the accounting system performs its functions properly.
2.1

Business risk is influenced by numerous factors, including sales volume, per-unit price, input
costs, competition, overall economic climate and government regulations. (Investopedia, 2004)
Risks are inevitable, but can be escaped from. Management must be familiar with the major
types of risk their companies face and must be knowledgeable on how these can be avoided.
Business risks can have an effect on companies one at a time or through a collection of decisions
made by its management.
Business risk comes from underestimating cash flows from business operations. Many
companies have high sales, great products, or efficient production methods, that is, their ability
to turn these activities into the cash necessary to run their operations. (Vitez, 2015)
Product Risk
The biggest risk a company faces is offering products or services for sale to consumers.
Offering products that consumers do not want or need quickly is bad for business, as well
as offering a faulty product or a cheaply made product for a high price.
Market Risk
Failure to understand the marketplace limits, such as supply, demand, or price will create
unprofitable situations for a company and lead to department failures or company
bankruptcy. Market risk can also include competitors, which will limit the amount of
market share companies can gain when entering new markets or industries. (Vitez, 2015)
Execution Risk
A poorly executed business plan will render any opportunities for the company to earn a
profit useless. Factors like expensive raw materials, labor, or production facilities will
have a higher production cost, resulting in higher consumer price. These prices are higher
than the market is willing to pay.
Finance Risk
All companies to start new operations or expand current operations use financing. When
companies use too much leverage, bank loans or credit lines to finance their operations,
cash flow will be severely limited because banks require monthly repayments.
In the case of CTS, since the fake accident that was made by a corrupt employee of the
company, this affect the companys trustworthiness and may cause the company to be
denied bank loans in the future.
Operational Risk
Operational risks are the risk of loss resulting from inadequate or failed internal
processes, people and systems, or from external events.
For CTS, there were operational risks involved due to the actions of the corrupt
employee. This proved that the company had a very inadequate monitoring of their
internal processes.

D1
Risk management is crucial to fraud control, guiding the development of an effective fraud
control plan and associated strategies and activities to minimize the opportunities for fraud to
occur. Risk management provides a framework to identify, analyze, evaluate, and treat fraud
risks. (Investopedia, 2009)

In the case of CTS, here are the things they can change to improve their system and prevent any
more schemes within their organization.
Analyzing the claims history of clients so that they can easily detect any discrepancies or unusual
uniformity to certain claims.
Performing a thorough crosscheck for every claim could also help. CTS must now initialize a
department that is solely for crosschecking claims. The company can also utilize ClaimSearch
Thousands of insurance companies, self-insured entities and third-party administrators report all
of their claims to ISO ClaimSearch, an anti-fraud information system. The system was created by
Insurance Services Office, Inc., and covers auto, property and liability claims. Cross-checking a
new claim against all of those in this database, which makes it easier to sniff out staged-accident
rings, pinpoint those submitting multiple claims for the same loss and other scams.
Lastly, CTS must now get rid of that corrupt employee. The company must now be more
meticulous in their selection process. CTS must now try to prevent such fraud by running credit
checks on all prospective employees. Applications from those with bad credit or financial issues
are flagged as those more likely to commit fraud.

2.2
Hugs Anyone Company is using the periodic inventory system. This simply means that
merchandise inventory and cost of goods sold are not updated continuously. Instead, purchases
are recorded in Purchases account and each sale transaction is recorded via a single journal entry.
Thus cost of goods sold account does not exist during the accounting period. It is determined at
the end of accounting period via a closing entry.
Given that, HAC would have a hard time in determining the actual inventory on hand and the
ones coming from suppliers. Also, HAC will know how much inventory it has at the beginning
and end of every period, on the contrary it wont know precisely how much inventory is on hand
in the middle of an accounting period.
If HAC were to switch to perpetual systems, merchandise inventory and cost of goods sold are
updated continuously on each sale and purchase transaction. Some other transactions may also
require an update to inventory account for example, sale/purchase return, purchase discounts etc.
Purchases are directly debited to inventory account whereas for each sale two journal entries are
made, one to record sale value of inventory and other to record cost of goods sold. Purchases
account is not used in perpetual inventory system.
In using the perpetual inventory system, HAC will now be able to see exactly how much
inventory they have on hand at any given moment, thereby making it easier to know when to
order more. Second, it improves the accuracy of the companys financial statements because it
allows very accurate recordkeeping as to the Cost of Goods Sold over a given period. The only
catch is, it may be costly.
In conclusion, using a perpetual system would be advantageous for HAC.
2.3 & D3
A business can lose a significant amount of assets due to fraud. At an extreme level, the effects of
fraud can even shut down a company. Consequently, a business owner should make ongoing
efforts to create an environment in which fraud is less likely to arise. (Accounting Tools, 2015)
For Here and There, irregularities in their procedures for handling cash receipts are present. Here
are the different types of business frauds that the business is susceptible to, and ways on how
they can avoid it.
Check Tampering, any scheme in which a person steals his/her employers funds by forging or
altering a check on one of the organizations bank accounts, or steals a check the organization
has legitimately issued to another payee.
To avoid check tampering, HAT must keep blank checks locked up, account for all checks,
including voids. Also, HAT must insist on timely bank receipts, and review them.
Skimming, in skimming, cash is stolen from an organization before it is recorded on the
organizations books and records. Like when an employee accepts payment from a customer but
does not record the sale.

To avoid or detect employees that are skimming funds, ensure that receipts are issued for every
sale, and balance cash to total receipts at end of day. Additional security cameras and security
detail would also help avoid any attempt from employees.
Billing, any scheme in which a person causes his/her employer to issue a payment by submitting
invoices for fictitious goods or services, inflated invoices or invoices for personal purchases.
To avoid and detect billing fraud, HAT must require signed approval for all expenditures. The
company must also separate duties of a manager approving invoices and cutting of the
checks/receiving payment. Lastly, management must regularly review deposit slips.
Expense Reimbursement is any scheme in which an employee makes a claim for
reimbursement of fictitious or inflated business expenses. Employee files fraudulent expense
report, claiming personal travel, non-existent meals, etc.
To avoid and detect expense reimbursement frauds, HAT must require receipts, with business
reason stated, for all reimbursed items, especially for items amounting more than P5.000. They
must also require approval signature on all reimbursements. Most importantly, track expense
reimbursement claims against records and across peers to look for trends.
Cash Larceny, this is any scheme, in which cash is stolen from an organization after it has been
recorded on the organizations books and records. (The Business Owner, 2015) For instance,
employee steals cash and checks from daily receipts before they can be deposited in the bank,
and before it can be detected, there would be a revision of the cut-off.
To avoid cash larceny, business owner opens all mail and stamps all checks on the back for
deposit only with your company, also investigate all bad debts. To detect this, the owner must
conduct a spot audit of the establishment is in order.

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