FAQs

Frequently, questions related to accounting and auditing have an answer that would be considered the politically correct (PC) answer. This is the answer that is given in meetings, in articles and in general discussion with accountants and auditors. There is also a real answer (RA). The real answer should give an indication of what is really going on behind the scenes and why the PC answer is the one presented. Have a question?

  • How does the PCAOB impact my IT department?

    PC – The PCAOB has no impact on your IT department.


    RA – If your company issues financial statements generated from IT resources, the PCAOB is impacting your department through the audit firm that was engaged to audit the financial statements.
  • I just started in IT my manager would know this- wouldn’t he...mmm...shouldn’t he? I am confused.

    PC – none


    RA – While it seems reasonable that a more seasoned IT professional should know this stuff, your manager probably had the same course curriculum as you. If they did go on to a master’s degree or were in a program that required an accounting class, chances are very good that the class taught basic bookkeeping, such as classifying and recording transactions and how to prepare financial statements. Friggin’ Bean Counters, discusses the historical reasons of how we got here and why the rules are in place. The book also goes beyond basic double entry accounting and explains how IT “fits into” the accounting process.

     


  • I’m in IT - why do I need this?

    PC – none


    RA – There are several reasons why a diligent IT professional would want to know about accounting, here are a few.
    1. With the onslaught of cloud applications, IT is becoming less of a strategic department. I many companies, the CIO is reporting to the CFO rather than the CEO.
    2. The more knowledgeable IT is regarding the accounting and reporting requirements, the more reliable the financial statements become because the systems and data are more secure.
    3. When IT understands that audit process and the risks the auditors are trying to validate are mitigated, the more efficient and effective the controls will become.
    4. If IT understands how their roles impact accounting, the better the relationship between IT and accounting will become.

  • If a company has three bank accounts for processing payments, what is the minimum number of ledgers it needs?

    PC – Each bank account should have its own ledger for tracking activity.


    RA – When asked a vague question like this, ask the following questions, “When you say ledger, do you mean general ledger or do you mean a subsidiary ledger?” “Is your general ledger set up to have one controlling account with multiple “cost center” accounts?” The answers to these questions would have an impact on the way you would answer the original question. For example, if they mean subsidiary ledger, then each account should have its own ledger, but there could be only one general ledger account as long as the balance equals the combined subsidiary ledgers.

     


  • The auditors tell me that the PCAOB is requiring certain controls. How can this be?
    • PC – Management is responsible for control activities that mitigate the risks identified that keep the organization from meeting their objectives.
    • RA – Through audit standards, the PCAOB is requiring the audit firm to perform certain procedures to support the opinion they will issue on the financial statements. The audit firm believes the control needs to be in place so they can obtain the support the PCAOB requires.

     


  • What are two or three types of special journals?

     

    PC – none


    RA – There are actually 4 special journals. They are the sales journals, cash receipts journals, purchases journals, and cash payments journals. In today’s world of technology, the sales journal could be the POS system, the purchases journal could be the PO module in the ERP (depending on the company setup) and the cash receipts / cash payments journal could be the banking module in the ERP system.

     


  • What exactly would be an "accounting spin" to what specific IT discussion/problem/concern etc?

    PC - none


    RA - An "accounting spin" on an IT discussion/problem/concern would include a discussion on the impacts on the accounting records and/or compliance efforts that involve accounting. For example, if the IT discussion is around a new revenue application, we could discuss such topics as:
  • What is a book of original entry?

    PC - None


    RA - In a manual bookkeeping system, the book of original entry refers to journals in which business transactions are initially recorded, such as an accounts receivable ledger. The information in these journals/ledgers is then summarized and posted into a general ledger. In an automated system, the book of original entry could be the POS system used by the company or any ancillary system that is recording financial transaction that are then processed by the accounting system.

     


  • What is a general ledger?

    PC - None


    RA – The general ledger, also referred to as the GL is a complete record of all financial transactions for a company.

     


  • What is accounting?

    PC – None.


    RA – a system of setting up, maintaining, reporting and auditing the books of a business.

     



  • What is bookkeeping?

    PC - None


    RA – Every financial transaction is impacting 2 general ledger accounts.

     


  • What is double-entry bookkeeping?

    PC - None


    RA – Every financial transaction is impacting 2 general ledger accounts.

     

     

     


  • What is the difference between accounts receivable (AR) and accounts payable (AP)?

    PC – none


    RA – Accounts receivable represents the amount of money your customers owes your business. Accounts payable represents the amount of money your business owes your vendors.

     


  • What is the purpose of developing business metrics?

    PC – none


    RA – Developing reliable business metrics is a quantifiable way to measure, track and assess the status of a specific process.

     


  • When a company is using double-entry accounting, what elements of the general ledger must be equal?

    PC – none


    RA – Debits must equal credits, no matter how many accounts the transaction impacts. The general ledger is the book of original entry and all accounts are included on either the income statement or balance sheet.

     


  • Who are the PCAOB?

    PC – The PCAOB is an acronym for the Public Company Accounting Oversight Board and their name says it all. They were created as a private sector company to oversee the audits of public companies for the purpose of protecting investors. They were created by the Sarbanes-Oxley Act of 2002. The PCAOB creates audit standards that must be followed by accounting firms that audit public companies. All audit standards issued by the PCAOB must be approved by the U.S. Securities and Exchange Commission (SEC). The PCAOB’s responsibilities include the following: registering public accounting firms; establishing auditing, quality control, ethics, independence, and other standards relating to public company audits; conducting inspections, investigations, and disciplinary proceedings of registered accounting firms; and enforcing compliance with Sarbanes-Oxley.


    RA – The PCAOB was created to oversee the accounting profession as it relates to audits of public companies. Even though they are a “private-sector” company, they are controlled by the SEC. The SEC  has the authority to oversee the PCAOB’s operations, to appoint or remove members, to approve the PCAOB’s budget and rules, and to entertain appeals of PCAOB inspection reports and disciplinary actions As with agency created from legislation, they are constantly extending their reach to justify their existence.

  • Why did you think this book was a good idea?

    PC – none


    RA - I have really worked with many IT professionals as both an accounting manager and an auditor trying to get systems implemented or support for systems that we are using. Many of these interactions were so frustrating and adversarial that a lot of times, my staff and I would come up with workarounds so we wouldn’t have to bother IT. During a period of transition in my life, I decided to pursue a Master’s degree in IT. As I was writing papers, I would put the accounting spin on my discussion. Many of my classmates were just wowed by the information I was providing.

     


  • Why is it easier for someone to perpetrate fraud using a journal entry than with a ledger?

    PC – If the access controls and segregation of duties are properly set up in the ERP it would not be easier for someone to perpetrate fraud using journal entries.


    RA – When asked a vague question like this, please get clarification of what type of fraud they are asking about. If someone is committing financial statement fraud, then making top-side entries outside of the ledger would be the easiest way. However, if they are talking about stealing money or other assets, then making false entries in the general ledger would be one way to attempt cover up the fraud. But the easiest way to steal money, would be to set up a fictitious vendor and process fictitious invoices.

     


  • Why should IT know the difference between accounting and bookkeeping?

    PA - None


    RA – The ERP system that is used for the accounting, is actually performing the bookkeeping function.