What Does Scope of Work Mean?

The scope of work, which is commonly known as the SOW, has become a common term in the project management field. This is often a section of the contract signed with a contractor. Having a complete and clear scope of work before initiating the project allows accomplishing project goals under the expected timeline and reducing potential misunderstandings and conflicts.

The scope of work facilitates shared vision among the participants. It should exist whenever any job is agreed upon but it is certainly indispensable as work complexity and difficulty to describe physically the deliverables are higher or the time required to fulfill the tasks is longer. It should be written with clear terms that minimize ambiguity and misconceptions. Ideally, it should include a brief, general description of the projected work, any specific methodology, process or tool that the contractor is expected to apply during the work, detailed and well explained deliverables and deadlines for each of them.

Precise information about the remuneration must be included too. If applicable, the document might also describe how the project manager will relate and communicate with the contractor along with any other legal consideration.

Example

Ms. Mary Tolson is a young professional that participated for the very first time as project manager in a consultant firm. She managed four freelancers that designed a new custom information system for a client. The four contracts signed with the free lancers had a detailed and complete scope of work for each of them. The SOW established that assigned tasks should be delivered within 24 to 48 hours and that compensation will be based on hours worked per item.

One of the participants complained about very tight deadlines and then some of the specific dates were slightly moved forward. The project was successfully accomplished and Ms. Tolson could see the benefit of having a good scope of work previously agreed with contractors.

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What Does Internal Report Mean?

Internal reports should be carefully identified since they contain sensible information about the business health, indicators, performance and development in different areas. They are often created by employees from the organization and delivered or intended to be delivered to employees in the organization. The reports can deal with different subjects like finance, sales, marketing, human resources among others. Companies often protect themselves by classifying these documents properly as confidential, in order to avoid accidental or intended disclosure.

Staff members are also frequently asked to sign non-disclosure agreements to avoid the leakage of certain sensible information contained in these reports that might jeopardize the success of the company in certain project, product or any other field. Businesses should define a clear classification for documents and reports being generated, to separate those that are designed for internal purposes only from those that can be disclosed to the public. This is particularly important for public companies, those that trade in a stock exchange, since asymmetric information or insider information is an important matter, legally speaking.

Example

Clarks Pharmaceutical Co. is a company that produces drugs for cardiovascular diseases. The company has specialized in this field for a while and it is now working on a drug that increases the level of oxygen in the blood, to help the brain’s activity. The Project Manager recently issued an internal report that contained several observations about the drug’s behavior and results obtained during the human trials phase.

The tests revealed certain side effects that were undesirable for potential clients and the manager advised the company to change some of the components to reduce the number of side effects. Somehow, the report was leaked to the media and it caused an important decline on the company’s share price, which caused big losses to investors and shareholders.

The company conducted an investigation and had to fire a group of three employees that worked together to leak the report, since they had signed a non-disclosure agreement that prohibited the disclosure of any internal report, such as this one.

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What Does Adverse Opinion Mean?

Adverse opinions can be issued by auditors if, after a thorough review of an organization’s financial information, there is enough evidence to dispute the precision of such information. They are normally stated in a written report that precedes the financial statements and they constitute a sign of warning for the people in charge of reviewing the documents. From a business standpoint, an adverse opinion is an undesirable auditing outcome.

A company that gets such a report might face an in-depth investigation from its shareholders or even from tax authorities. Also, from an investor’s perspective, a company with inaccurate financial data can’t be properly analyzed; therefore a potential investment might be withheld until the issue is resolved. These reports are often drafted by Certified Public Accountants, either as self-employed professionals or as an accounting firm. The report must disclose in detail the reasons why this opinion is being given.

Example

Book Publishing Co. is a company that publishes and promotes science fiction books. Financial Analysts have been saying that this company had a great year since some of its books became U.S. top-sellers. Recently the company issued its 2016 annual report and it seems its auditors gave the company an adverse opinion. According to the auditor’s report the company has been recording purchase orders from clients as revenues, before the invoice is issued. These orders, the auditors claimed, are just business commitments that haven’t been fulfilled yet, since the company doesn’t have enough inventories to deal with all these orders right now.

This practice contradicts some important accounting principles and the auditors concluded that sales were overstated at least 30%. This report affected the company’s shares negatively in the New York Stock Exchange and the CEO is yet to pronounce about the issue.

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What Does Unqualified Opinion Mean?

The job of an auditor is to determine the degree of accuracy and reliability of any financial statements being reviewed by them. There are four main opinions that an auditor can state in terms of his appraisal of a particular financial statement, these are: unqualified opinions, qualified opinions, disclaimer opinions and adverse opinions. By issuing an unqualified opinion the auditor declares that he has performed a thorough review of the company’s financial information and procedures to conclude that the financial statements being presented reflect, to the best of his judgment, the current financial situation of the company.

The standard guideline used by auditors to determine if accounting procedures being used are adequate is the Generally Accepted Accounting Principles (GAAP). Compliance with these principles is crucial for an auditor to express an unqualified opinion.

Here’s an example of how this work.

Example

White Paper Co. is a company that manufactures napkins. The company’s fiscal year has ended and they are currently working on their annual report to present it to its shareholders. This annual report includes last year’s financial statements and these statements must be audited by an independent auditor. After performing his assessment the auditor issued an unqualified opinion about the statements. What does this mean for the shareholders that will review the annual report?

According to our concept, an unqualified opinion is a report issued by an auditor that declares the soundness and reliability of a company’s financial statements. In this case, by getting this opinion, the shareholders of the company can be assured that the results that are shown in the annual report are an accurate reflection of what is currently going on with the company.

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What Does Segregation of Duties Mean?

The practice of segregating duties is an important part of setting a robust internal control system. The process of segregation starts by identifying weak points in the company processes, these weak points are normally those that may have some room for negligence or intentional misconduct that will translate into a money loss without anyone noticing. By separating critical duties, the company can protect his assets against wrong doings.

This is particularly important in the financial department and on inventory procedures; in the case of the financial department, the person authorizing payments must be different from the person preparing them and recording them in the company books. By separating these duties, the degree of convolution that must take place for a fraud to be committed is much more complex and this reduces the motivation to engage in such fraudulent activities.

Let’s try to illustrate this concept with an example,

Example

No More Cables LLC is a company that manufactures wireless devices for homes. The company is currently reviewing its internal control processes and it started by reviewing some tasks at the financial department. The company identified some weak spots, processes where fraud might be committed without the company noticing. One of these processes is the raw material inventory process. in each of these processes. According to our previous definition, how could they reduce the risk of fraud in this process?

As we previously stated, segregation of duties is a practice that reduces the risk of fraud or negligence in a given process. If the company wants to strength this process it has to break the process into pieces, an example of that might be: first inventory count, second inventory count and final physical inventory approval, by having different stages the company can assign each of them to different people.

In this case, the process should be done by 3 different people, one person doing the 1^st count, another one doing the 2^nd one and the last person approving the final count. By doing this, the duties are being segregated effectively and, in consequence, the risk of committing fraud is being reduced.

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What does the yellow book mean?

What is the definition of the yellow book? The Yellow Book is used by CPAs and governmental auditors who audit the Federal government, state governments, and even local governments. The Yellow Book includes audit standards and guidance for both financial and performance audits. The main audit standards addressed in the Yellow Book relate to:

• Independence
• Due Care
• Continuing Professional Education (CPE)
• Supervision
• Quality Control

Let’s look at some examples.

Example

In the US, GAAP or Generally Accepted Accounting Principles are the standards of accounting for all public companies with some international standard exceptions. GAAP is established and created by the FASB or the Financial Accounting Standards Board.

Auditing standards in the US are set by the ASB or the Auditing Standards Board. These standards set the professional expectations for auditors while auditing companies in the private sector. ASB does not create auditing standards for the public sector like government bodies.

Accounting standards for the public sector are created by the GAO or the Government Accountability Office. The standards that the GAO creates are commonly referred to as the GAGAS or Generally Accepted Governmental Auditing Standards.

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What Does Working Papers Mean?

One of the most common forms of working papers is a worksheet. Worksheets are used to summarize year-end accounting processes, post adjusting journal entries, create trial balances, and prepare financial statements.

Other working papers are used to track and record client records for accounts receivable, fixed asset purchases, and liabilities. In most cases, accountant working papers are extremely detailed because the working papers represent the accountants’ findings and evidence in the engagement.

Example

Auditors must keep detailed work paper for every aspect of their audits. The Sarbanes Oxley Act of 2002 requires that auditors audit, test, and document not only the internal control structure of publicly traded entities but also the efficiency and effectiveness of the internal controls.

Accountants and auditors are required to retain their work papers for a number of years as evidence to base their audit and engagement findings on. These working papers are not only created by the accountants and auditors they are also the property of the accountants.

There have been many court cases of clients suing CPA firms to obtain the firms working papers. In most instances, the CPA firms retain the rights to their working papers except in the instance of legal fraud cases. Judges can subpoena CPA firms and require them to provide their working papers as evidence in fraud cases or auditor negligence cases.

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What Does Vouching Mean?

What is the definition of vouching? Seeking to establish the accuracy of recorded transactions, vouching ensures that all the entries in the books of accounts come with the relevant evidence, including invoices, receipts, and others. Vouching does not take into account the non-business transactions, thus helping auditors to ensure that all transactions in a firm’s book of accounts are business-related. Auditors confirm that the amounts mentioned in each transaction are truthful, disclosing the nature of a transaction, and its authorization.

Let’s look at an example.

Example

A manufacturing company submits its financial statements and book of accounts to a leading auditing firm for vouching. The auditor who undertakes the project seeks to verify that the company’s transactions are valid, business-related and properly authorized.

In the company’s cash book, the auditor identifies entries of cash sales, receipts from creditors, interest income, dividend income, mortgage payments, fixed asset sales and accounts receivable. By using this technique, the auditor reviews all the entries and seeks for the relevant documentary evidence that supports and verifies each transaction.

The auditor finds documentation of receipts, capital expenses, and others that pertain to the recorded transactions in the book of accounts. With the proof of being vouched, the auditor ensures that the claims provided in the book of accounts are justified, and the company does not engage in any type of fraud.

If the auditor didn’t vouch, he might have incurred control risk by neglecting some important information and failing to display appropriate due diligence in reviewing the company’s books. Often, auditors are guilty of fraud by presenting a company’s financial statements as valid. With the use of technique, the auditing process is accurate and transparent.

Summary Definition

Define Vouching: To vouch means to search for evidence and verify a claim asserted.

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What Does Supplementary Record Mean?

The data stored in these records typically consists of extra personal or situational information that helps management perform their jobs. Management often uses supplemental records for many different reasons. Thus, the information and details recorded in these reports varies depending on their usage. Some records have tons of details about clients, customers, and accounts, while others have small amounts of detail about production processes.

Example

For example, a production manager’s job is to control costs and make sure the production processes are meeting the demands of the company. Many controls are put in place to help the manager keep track of the employees, workflow, purchases, and expenditures, but the manager might need more information than what is traditionally recorded in the production schedules, purchasing reports, receiving reports, and vendor invoices.

For instance, a manager might want to note the parts of the operations that need to be changed in future batches or the jobs that must be run by specific employees. These notes aren’t typically recorded in a standard accounting system, but are helpful for management to make future decisions.

Likewise, an employee in charge of accounts receivable collections might keep a supplementary record with notes about customer demeanor, personality, and ability to pay future invoices. This extra information helps the employee perform his or her job by giving additional warnings about controls or customers that might need additional attention.

There really isn’t any limit to what kind or how much information can be stored or recorded in these extra records. It’s simply something that employees use to supplement the information in the actual accounting system.

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What Does Source Document Mean?

Some common examples of source documents include sales receipts, checks, purchase orders, invoices, bank statements, and payroll reports. These are all original documents that were created from a transaction and the first component in an accounting system.

Example

Source documents are used to record transactions because they are original and show an objective report of the economic activities of each transaction. For example, when a company purchases goods from a vendor, the vendor creates a receipt or invoice that shows the goods that were purchases, the purchase price, date of transaction, seller’s name, and the method of payment. This document gives the buyer’s accounting department an objective and reliable record of the purchase transaction. It also gives the vendor a document that can used to record the sale of goods.

Source documents are also used for internal control purposes as well. For example, the manufacturing department issues a purchase requisition for the goods it needs to complete its upcoming jobs. The purchase requisition is sent to the purchasing department for approval. Once it is approved, a purchase order is issued and sent to the receiving department when the goods received are compared with the purchase order.

A receiving report is issued and all three of these documents are sent to the accounting department to approve the invoice from the vendor. If all of these documents agree, the invoice is approved and the cashier issues a check for the goods.

As you can see, all of the source documents are used to ensure that only proper goods are ordered, received, and paid for.

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