General Ledger and

- Describe the activities, information needs, and key decisions made in theChapter
general # 18
ledger and reporting system, explain the general threats in the cycle, and describe the
controls that can be used to mitigate those threats.
- Explain the process for updating the general ledger, the threats to that process, and
the controls that can be used to mitigate those threats.
- Explain the purpose and nature of posting adjusting entries, the threats to that
process, and the controls that can be used to mitigate those threats.
- Explain the process of preparing financial statements, the threats to that process, the
controls that can be used to mitigate those threats, and how IT developments such as
XBRL can improve the efficiency and effectiveness of preparing financial statements.
- Describe the process for producing various managerial reports, the threats to that
process, and how tools like responsibility accounting, the balanced scorecard, and well-
designed graphs can help mitigate those threats.

Muhammad Zia Shaukat

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Table of Contents
Introduction.......................................................................................................................3
General Ledger and Reporting System................................................................................3
Process................................................................................................................................. 4
Detailed Operational Data:...............................................................................................4
Regular Financial Updates:...............................................................................................4
Compliance Reports:........................................................................................................ 4
Threats and Controls............................................................................................................ 4
1) Update General Ledger...............................................................................................5
Process................................................................................................................................. 5
Accounting Subsystems:...................................................................................................5
Treasurer's Office:.............................................................................................................6
Threats and Controls............................................................................................................ 6
1. Input, Edit and Processing Controls........................................................................6
2. Reconciliations And Control Reports......................................................................8
3. The Audit Trail............................................................................................................8
2) Post Adjusting Entries.................................................................................................8
Process................................................................................................................................. 8
1) Accruals:.................................................................................................................8
2) Deferrals:................................................................................................................8
3) Estimates:...............................................................................................................9
4) Revaluations:..........................................................................................................9
5) Corrections:............................................................................................................9
Threats and Controls............................................................................................................ 9
a) Dual Scrutiny:......................................................................................................... 9
b) Spreadsheets with Safeguards:..............................................................................9
c) Standardize & Automate:...........................................................................................9
d) Keep it Locked Down:.............................................................................................9
e) Check and Double Check:.....................................................................................10
3) Prepare Financial Statements....................................................................................10
Process............................................................................................................................... 10
Threats and Controls.......................................................................................................... 10
  Avoiding Misleading Financial Statements: Double Defense Against Errors and
Judgments...................................................................................................................... 10
 Minimizing Numerical Errors:.................................................................................. 10
 Addressing Judgment-Based Errors:.........................................................................10
 Combating Judgment Errors:....................................................................................10
4) Produce Managerial Reports.....................................................................................11
Process............................................................................................................................... 11
 ERP Systems: Budgeting and Beyond for Smart Decisions.......................................11
 Budgeting for Every Need:.......................................................................................11
 Insights at Your Fingertips:.......................................................................................11
 Accountants as Data Champions:.............................................................................11
Threats and Controls.......................................................................................................... 12
 Introduction
This chapter discusses the information processing operations involved in updating the
general ledger and preparing reports that summarize the results of an organization’s
activities. The general ledger and reporting system plays a central role in a company’s
accounting information system. Its primary function is to collect and organize data from the
following sources:
 Each of the accounting cycle subsystems provides information about regular
transactions. (Only the principal data flows from each subsystem are depicted, to
keep the figure uncluttered.)
 The treasurer provides information about financing and investing activities, such as
the issuance or retirement of debt and equity instruments and the purchase or sale
of investment securities.
 The budget department provides budget numbers.
 The controller provides adjusting entries

General Ledger and Reporting System

Figure shows the typical design of an online general ledger and reporting system.
Process
The central database needs to be a one-stop shop for everyone looking for information
about the organization. It must provide:
Detailed Operational Data: Managers need in-depth, real-time insights into their
areas to make informed decisions.
Regular Financial Updates: Investors and creditors rely on timely financial
statements and performance updates to assess the organization's health.
Compliance Reports: Specific government requirements must be met through
accurate data reporting.
To achieve this, the system goes beyond periodic reports and lets users explore the data
themselves through online queries. This keeps everyone informed, from the boardroom to
the government.

Threats and Controls

All general ledger and reporting cycle activities depend on integrated database so there
could be some potential threats and control procedures. A couple of them are listed below

Table 18-1: Threats and Controls in the General Ledger and Reporting System

1) Update General Ledger

Updating the general ledger involves recording and reflecting any financial transactions that
occur within an organization's accounting system. This process ensures that all financial data,
such as revenue, expenses, assets, and liabilities, are accurately documented and classified
according to standardized accounting principles.
Process
The general ledger, the heart of financial information, stays current through two main
channels:
Accounting Subsystems:
Imagine mini-accountants constantly monitoring specific areas like sales or purchases.
Instead of updating the general ledger after every single transaction (imagine the
paperwork!), they batch things up.
These "subsystems" summarize transactions for a set period (day, week, month) into one
journal entry.
So, instead of recording each sale individually, one entry might summarize all sales for the
week, debiting accounts receivable and cash, and crediting sales. Same goes for expenses,
purchases, etc.
Treasurer's Office:
For special events like issuing bonds or buying stocks, the treasurer provides the info needed
for separate journal entries. These are non-routine, one-off situations.
Journal Voucher File - A file that stores all journal entries used to update the general ledger.

Threats and Controls

Two related threats are inaccurate and unauthorized journal entries to update the general
ledger. Both can lead to poor decision making based on erroneous information in financial
performance reports. To avoid such inconsistences and threats input, edit and processing
controls are introduced.
1. Input, Edit and Processing Controls
Validity Check: A validity check to ensure that general ledger accounts exist for each account
number referenced in a journal entry.
 Scenario: Entering a customer ID on an order form.
 Check: The system verifies if the customer ID exists in the customer database before
accepting the order.
 Benefit: Prevents orders being placed for non-existent customers.
Example: Ensuring that a date entered falls within an expected range, such as not allowing
future dates or dates too far in the past.
Field Check: Field (format) checks to ensure that the amount field in the journal entry
contains only numeric data.
 Scenario: Entering a payment amount on a purchase form.
 Check: The system ensures the field only allows numeric characters and decimal
points, preventing alphabetic inputs.
 Benefit: Avoids incorrect calculations due to invalid data format.
Example: Verifying that numeric fields contain only digits, or that text fields do not contain
special characters or numbers.
Zero-Balance Check: A zero-balance check to verify that total debits equal total credits in a
journal entry.
 Scenario: Posting debits and credits in a General Ledger journal entry.
 Check: The system verifies that the sum of debits equals the sum of credits, ensuring
correct account balances.
 Benefit: Maintains the integrity of accounting records and identifies imbalances.
Example: Verifying that the sum of credits equals the sum of debits in a transaction,
ensuring that the transaction is balanced.
Completeness Test: A completeness test to ensure that all pertinent data are entered,
especially the source of the journal entry.
 Scenario: Submitting a sales report.
 Check: The system ensures all required fields, like product codes, quantities, and
prices, are filled before accepting the report.
 Benefit: Prepares complete and accurate reports for analysis.
Example: Checking that all required fields in a form or database entry are filled out before
allowing the entry to be processed or submitted.
Closed-Loop Verification: Closed-loop verification matching account numbers with account
descriptions, to ensure that the correct general ledger account is being accessed.
 Scenario: Matching vendor invoices to purchase orders.
 Check: The system automatically compares invoice details with corresponding
purchase orders to ensure correct goods and prices were received.
 Benefit: Reduces errors and fraudulent transactions by matching data across
different sources.
Example: The accountant enters the account number they believe to be "Office Supplies,"
which is 1250. The accounting system automatically retrieves the account description
associated with account number 1250 from the chart of accounts. It finds the description to
be "Office Supplies. The system compares the entered account number (1250) with the
retrieved account description ("Office Supplies"). If the account number and description
match, the system verifies the account as valid and allows the transaction to proceed.
Sign Check: A sign check of the general ledger account balance, once updating is completed,
to verify that the balance is of the appropriate nature (debit or credit).
 Scenario: Checking an inventory account balance in a financial statement.
 Check: The system verifies that the account balance has the correct sign (debit or
credit) based on its account type.
 Benefit: Identifies obvious accounting errors like misplaced debits and credits.
Example: Verifying that the signs (positive or negative) of numbers in a financial transaction
are correct. For example, a credit entry should have a negative sign while a debit entry
should have a positive sign.
Run-to-Run Totals: Calculating run-to-run totals to verify the accuracy of journal voucher
batch processing. (The computer calculates the new balance of the general ledger account,
based on its beginning balance and the total debits and credits applied to that account, then
compares that with the actual account balance in the updated general ledger. Any
discrepancies indicate a processing error that must be investigated.)
 Scenario: Processing batches of payroll records.
 Check: The system calculates and compares totals (e.g., total gross pay, total
deductions) at various stages of processing to ensure data consistency.
 Benefit: Detects errors or omissions early in the processing cycle, minimizing impact
on subsequent calculations.
Example: Keeping track of the total number of transactions processed or the total value of
transactions processed during each processing run. This helps ensure that no transactions
are lost or duplicated between processing runs.
Strong access controls, including multifactor authentication and compatibility tests based on
access control matrices, reduce the risk of unauthorized journal entries
2. Reconciliations And Control Reports
Reconciliations and control reports can detect whether any errors were made during the
process of updating the general ledger. One form of reconciliation is the preparation of a
trial balance. The trial balance is a report that lists the balances for all general ledger
accounts.
Its name reflects the fact that if all activities have been properly recorded, the total of all
debit balances in various accounts should equal the total of all credit balances; if not, a
posting error has occurred.
3. The Audit Trail
The audit trail is a traceable path that shows how a transaction flows through the
information system to affect general ledger account balances. It is an important detective
control that provides evidence about the causes of changes in general ledger account
balances.

2) Post Adjusting Entries

Post Adjusting Entries are a crucial step in the accounting cycle, occurring after journalizing
initial transactions and preparing an unadjusted trial balance. They update and adjust
account balances to reflect their true economic value at the end of an accounting period,
typically a month or year.

Process
Adjusting entries originate from the controller’s office, after the initial trial balance has been
prepared. Adjusting entries fall into five basic categories:
1) Accruals: Accruals are entries made at the end of the accounting period to reflect
events that have occurred but for which cash has not yet been received or disbursed.
Examples include the recording of interest revenue earned and wages payable.
Example: A company has provided services to a client but has not yet received payment
by the end of the accounting period. To recognize the revenue earned, the company
records an accrual by debiting Accounts Receivable and crediting Service Revenue.
2) Deferrals: Deferrals are entries made at the end of the accounting period to
reflect the exchange of cash prior to performance of the related event. Examples
include recognizing advance payments from customers as a liability and recording
certain payments (e.g., rent, interest, and insurance) as prepaid assets.
Example: A company pays for a one-year insurance policy in advance. At the end of
each month, the company recognizes one-twelfth of the insurance expense by
debiting Insurance Expense and crediting Prepaid Insurance to reflect the portion of
the policy that has expired.
3) Estimates: Estimates are entries that reflect a portion of expenses expected to
occur over a number of accounting periods. Examples include depreciation and bad-
debt expenses.
Example: A company estimates that 2% of its credit sales will be uncollectible. At the end
of the accounting period, the company adjusts its allowance for doubtful accounts by
debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts to reflect the
estimated number of uncollectible accounts.
4) Revaluations: Revaluations are entries made to reflect either difference
between the actual and recorded value of an asset or a change in accounting
principle. Examples include a change in the method used to value inventory, reducing
the value of inventory to reflect obsolescence, or adjusting inventory records to
reflect the results noted during a physical count of inventory.
Example: A company revalues its fixed assets to reflect their fair market value. If the
revaluation results in an increase in the value of an asset, the company records a
revaluation gain by debiting Revaluation Surplus (or Equity) and crediting the
respective asset account. If the revaluation results in a decrease in value, the
company records a revaluation loss by debiting the respective asset account and
crediting Revaluation Surplus (or Equity).
5) Corrections: Corrections are entries made to counteract the effects of errors
found in the general ledger.
Example: A company discovers an error in the recording of a purchase transaction,
where a $500 purchase was mistakenly recorded as $50. To correct this error, the
company debits Purchases for $450 (to correct the understatement) and credits
Accounts Payable by the same amount.
Threats and Controls
Bad Journal Entries Can Lead to Bad Decisions: Inaccurate or unauthorized adjusting entries
can distort financial statements, leading to poor decision-making. To avoid this, several
controls are recommended:
a) Dual Scrutiny: Both the treasurer (for regular entries) and the controller (for
adjusting entries) must use data entry controls like validity checks and field checks to
ensure accurate input.
b) Spreadsheets with Safeguards: Adjusting entries often live in
spreadsheets, so using error protection controls like drop-down menus and cell
formatting can minimize mistakes.

c) Standardize & Automate: Recurring adjustments like depreciation should

be created in a standard file to improve accuracy and avoid omissions.
d) Keep it Locked Down: Strong access controls ensure only authorized
personnel can make adjustments.
e) Check and Double Check: Regular reconciliations and audit trails act as
safety nets, helping catch unauthorized or inaccurate entries before they cause
damage.

3) Prepare Financial Statements

Preparing financial statements involves compiling and presenting financial information about
a company's performance and financial position during a specific period. The main financial
statements typically include the income statement, balance sheet, statement of cash flows,
and statement of changes in equity.

Process
 Most organizations “close the books” to produce financial statements monthly,
quarterly, and annually.
 A closing journal entry zeroes out all revenue and expense accounts in the adjusted
trial balance and transfers the net income (or loss) to retained earnings.
 The income statement summarizes performance for a period of time (usually either a
month or a year).
 The balance sheet presents information about the organization’s assets, liabilities,
and equity at a point in time.
 The statement of cash flows provides information about how the organization’s
operating, investing, and financing activities affected its cash balance.
 Two important recent regulatory and technological developments that are likely to
significantly affect the process of preparing financial statements: the proposed
upcoming change from GAAP to IFRS to submit reports.
Threats and Controls
 Avoiding Misleading Financial Statements: Double Defense
Against Errors and Judgments
While Table 18-1 highlights inaccurate financial statements as a critical threat (threat 8), we
can combat it with a two-pronged approach:
 Minimizing Numerical Errors:
Control 8.1: Using the same rigorous data processing controls for journal entries (e.g.,
validity checks, field checks) reduces the risk of simple calculation mistakes.
Control 8.2: Leveraging packaged software for financial statement generation further
minimizes numerical errors.
 Addressing Judgment-Based Errors:
IFRS: Reporting frameworks rely heavily on human judgment when classifying financial
information. This opens the door for errors, like:
Asset Classification Mishaps: Mis-categorizing fixed assets can lead to inaccurate
depreciation expenses in IFRS statements.
 Combating Judgment Errors:
Control 8.3: Extensive training and experience for personnel handling classification and
tagging can significantly reduce errors in judgment.
Control 8.4: Engaging independent external auditors acts as a crucial detective control,
catching any remaining judgment-based mistakes.
By combining these defensive measures, we can ensure that financial statements accurately
reflect the organization's performance, minimizing the risk of misleading stakeholders and
making poor decisions based on faulty information.

4) Produce Managerial Reports

Producing managerial reports involves generating and disseminating information tailored to
meet the specific needs of managers within an organization. These reports aim to provide
insights into various aspects of operations, performance, and decision-making, enabling
managers to make informed and effective choices.

Process
 ERP Systems: Budgeting and Beyond for Smart Decisions
ERP systems aren't just for recording transactions. They empower managers with powerful
tools to plan, monitor, and analyze performance. Here's what they offer:
 Budgeting for Every Need:
Operating Budget: Plan revenue and expenses for each department, guiding resource
allocation.
Capital Expenditure Budget: Track expected cash inflows and outflows for specific projects,
ensuring wise investment.
Cash Flow Budget: Compare income from operations with planned spending, predicting
potential borrowing needs.
 Insights at Your Fingertips:
Beyond static budgets, ERP systems unlock limitless reporting possibilities. Imagine:
Sales Breakdown: Analyze sales by product, salesperson, or customer, uncovering hidden
trends and top performers.
Visualized Data: Graphs and charts make complex data clear, highlighting key relationships
and anomalies.
 Accountants as Data Champions:
With their understanding of business processes, accountants can leverage these reporting
tools to:
Suggest Alternative Data Views: Uncover hidden insights by organizing and analyzing data
in new ways.
Support Informed Decision-Making: Guide managers with clear, actionable reports and
visualizations.
In essence, ERP systems become powerful partners in making smart business decisions,
fueled by data-driven insights and flexible reporting capabilities.

Threats and Controls

Threats Controls
1) Inaccurate financial statements a) Processing integrity controls
b) Use of packaged software
c) Training and audits
2) Fraudulent financial reporting a) Audits
3) Poorly designed reports and graphs a) Responsibility accounting
b) Balanced scorecard
c) Training on proper graph design