Accounting Fundamentals and Bookkeeping

Double Entry Accounting System vs Single Entry Accounting System

The Double Entry Accounting System is considered more systematic and scientific than the Single Entry System for the following reasons:

1. Complete and systematic record Under the double entry system, every transaction is recorded in two aspects — debit and credit — in the journal and then posted to the ledger. Thus both aspects of every transaction are fully captured. In the single entry system, only one aspect (usually cash and personal accounts) is recorded, so the records remain incomplete.

2. Arithmetical accuracy can be checked The double entry system follows the rule that every debit has an equal credit. Hence a Trial Balance can be prepared and, if it tallies, the arithmetical accuracy of the books is proved. In the single entry system no such trial balance can be prepared, so errors remain undetected.

3. True profit or loss can be determined Under the double entry system, all nominal accounts (income and expenses) are maintained, so a Trading and Profit & Loss Account can be prepared to ascertain the true profit or loss. In the single entry system, profit is usually estimated by comparing opening and closing capital, which is only an approximation.

4. True and fair financial position All real and personal accounts are maintained under the double entry system, so a proper Balance Sheet can be prepared showing the true financial position. The single entry system cannot present a reliable balance sheet.

5. Full information and control The double entry system provides detailed information about debtors, creditors, assets, liabilities, income and expenses, which helps in cost control, planning and decision-making. The single entry system gives very limited information.

6. Reliability and acceptability Because the records are complete, accurate and verifiable, the accounts prepared under the double entry system are accepted by banks, tax authorities, investors and courts. Single entry accounts lack such reliability and legal acceptability.

Conclusion Since the double entry system records both aspects of every transaction, allows preparation of trial balance, trading account, profit & loss account and balance sheet, and provides complete, accurate and verifiable information, it is more systematic and scientific than the single entry system.

Interrelationship between internal control, internal auditing and external auditing

These three are not separate activities but three layers of one assurance system, arranged in a chain:

1. Internal control is the base. It is the whole system of rules, procedures, segregation of duties, authorisation, physical safeguards and reconciliations set up by management to ensure that transactions are valid, recorded correctly and assets are safe. It is the first line of defence and operates continuously, at every desk, in every transaction.

2. Internal auditing is the review of internal control. Internal audit is an independent, in-house appraisal function that tests whether the internal control system is actually working, identifies weaknesses (weak segregation of duties, missing approvals, unreconciled cash, etc.) and reports to top management. It is the second line of defence. Its existence strengthens internal control, because staff know their work will be checked; and its findings are the main evidence on which management improves internal control.

3. External auditing is the independent verification of both. External audit (OAG in the public sector) is done by an outside body not employed by the entity. It examines the financial statements and, in doing so, tests and relies on internal control and on the work of internal audit. It gives an independent opinion to the legislature/public. It is the third line of defence.

Thus the relationship is circular and supportive: internal control is the base → internal audit evaluates internal control → external audit evaluates internal control and internal audit and reports independently → the report goes back to management/legislature, which again strengthens internal control. Weak internal control increases the workload and risk of both audits; a strong internal audit reduces the extent of external audit checking but never replaces the external auditor's own independent opinion.

Major problems related to auditing in the Nepali public sector

1. Weak internal control and internal audit. Internal audit units in most government offices are understaffed, lack qualified auditors and are placed under the same head who is to be audited, so independence is lost. Internal audit reports are often not acted upon.
2. Delay in audit and in settlement of audit irregularities (beruju). Audit reports are tabled late; huge amounts of arrears remain unsettled for years, and the responsibility for recovery is not fixed.
3. Non-implementation of audit findings. The OAG's annual report is discussed but its recommendations are rarely implemented; the same irregularities repeat every year.
4. Lack of qualified and independent auditors. Shortage of trained auditors, and political or administrative pressure on audit staff, weaken the quality and objectivity of audit.
5. Inadequate evidence and records. Poor book-keeping, missing vouchers, cash-based and manual accounting, and non-compliance with accounting standards make auditing difficult and unreliable.
6. Weak follow-up and accountability. Absence of an effective Public Accounts Committee follow-up mechanism and of penalties for those responsible means audit does not translate into accountability.
7. Limited coverage and use of IT. Many entities are not audited in time or in depth, and the use of computer-assisted audit techniques is still limited.

In short, internal control, internal audit and external audit form a mutually dependent chain of assurance; in Nepal this chain is weakened mainly by poor internal control, weak and dependent internal audit, delayed and unimplemented audit reports, and lack of accountability for audit irregularities.