Internal Flows of Information

Chapter 1: The Information System: An Accountant’s Perspective
Internal Flows of Information
 Horizontal flows – used primarily at operations level to capture transaction and operations data
 Vertical flows
 Downward flows – instructions, quotas, budget
 Upward flows – aggregated transaction and operations data
The higher the level of the organization, the greater the need for aggregated information and
less need for detail.
Information is a business source that needs to be appropriately managed and is vital for the
survival of contemporary businesses.
 System – group of interrelated multiple components or subsystems that serve a common

purpose
A system is called a subsystem if it is viewed as a component of a larger system. A subsystem is

viewed as a system if it is the focus of attention.
 System decomposition – process of dividing a system into smaller subsystems

 System interdependency – distinct parts are not self-contained; reliant upon functioning parts
of the system
 Information system – set of formal procedures by which data are collected, processed into
information and distributed to users
 Accounting information system – processes financial transactions and nonfinancial transactions
that directly affect the processing of financial transactions
 Management information system – process nonfinancial information that are not normally
processed by the traditional AIS
 Transaction – a business event
o Financial transactions – economic events that affect the assets an equity of an
organization
o Non-financial transactions – all other events processed in the organization’s IS
AIS Subsystems
 Transaction processing systems (TPS) - supports daily business operations

 General ledger/financial reporting systems (GL/FRS) - produces financial statements and
reports
 Management reporting system (MRS) - produces special purpose reports for internal use
Data sources – financial transactions that enter the IS from internal and external sources
 External financial transactions – most common source of data

 Internal financial transactions – involve exchange or movement of resources within the
organization
Transforming Data into Information (Process)

1. Data collection – capture transaction data, record data onto forms, validate and edit data
2. Data processing – classifying, transcribing, sorting, batching, merging, calculating, summarizing,
comparing
3. Data management – storing, retrieving, deleting
4. Information generation – compiling, arranging, formatting, presenting
Characteristics of Useful Information
 Relevance – serves a purpose

 Timeliness – no older than the time period of the action it supports
 Accuracy – free from material errors
 Completeness – all essential information is present
 Summarization – aggregated in accordance with user’s needs
The goal of an information system is to support the stewardship function of management,

management decision making and the firm’s day-to-day operations.
The structure of an organization helps allocate responsibility, authority and accountability.
 Segmenting – common method of organizing
Functional Areas
 Inventory/materials management
 Production
 Marketing
 Distribution
 Personnel
 Finance
 Accounting
 Computer services
Accounting independence – accounting activities must be separate and independent of the functional
areas maintaining resources
The Computer Services Function
 Distributed data processing – reorganizing computer services function into small information
processing units that are distributed to end users and placed under their control
 Central data processing – all data processing is performed by one or more large computers
housed at a central site that serves users throughout the organization
Advantages of distributed data processing
 Cost reductions in hardware and data entry tasks

 Improved cost control responsibility
 Improved user satisfaction since control is closer to user level
 Backup of data can be improved through the use of multiple data storage files
Disadvantages of distributed data processing

 Loss of control
 Mismanagement of company’s resources
 Hardware and software incompatibility
 Redundant tasks and data
 Consolidating tasks usually segregated
 Difficulty attracting qualified personnel
 Lack of standards
Manual process model – transaction processing, information processing and accounting are manually
performed by people, usually using paper documents. It is useful to study because it links AIS with other
accounting subjects, often easier to understand business processes when not shrouded in technology
and it facilitates understanding internal controls.
Data redundancy problems
 Data storage – excessive storage costs of paper document and magnetic form
 Data updating – changes or updates must be done multiple times
 Currency of information - potential problem of failing to update multiple files
 Task-data dependency – user's inability to obtain additional information as needs change
 Data integration – separate files are difficult to integrate across multiple users
REA Model – accounting framework for modelling an organization’s economic resources, economic
events, economic agents and interrelationships among them
Entity-relationship diagrams (ERD) - often used to model these interrelationships
Accountants must be able to clearly convey their needs to the systems professional who design
the system.
Conceptual system – determines the nature of the information required, its sources, its destination and
the accounting rules that must be applied
The accounting function is responsible for the conceptual system while the computer function is
responsible for the physical system.
Accountants as System Auditors
 External auditors
o Attest to fairness of financial statements
o Assurance service: broader in scope than traditional attestation audit
 IT Auditors – evaluate IT often as part of internal audit
 Internal auditors – in house IT and IT appraisal services

Internal Flows of Information

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Chapter 1: The Information System: An Accountant’s Perspective

Internal Flows of Information

 System – group of interrelated multiple components or subsystems that serve a common

A system is called a subsystem if it is viewed as a component of a larger system. A subsystem is

 System decomposition – process of dividing a system into smaller subsystems

 Transaction processing systems (TPS) - supports daily business operations

 External financial transactions – most common source of data

Transforming Data into Information (Process)

Characteristics of Useful Information

 Relevance – serves a purpose

The goal of an information system is to support the stewardship function of management,

The structure of an organization helps allocate responsibility, authority and accountability.

 Segmenting – common method of organizing

The Computer Services Function

Advantages of distributed data processing

 Cost reductions in hardware and data entry tasks

Disadvantages of distributed data processing

Data redundancy problems

Entity-relationship diagrams (ERD) - often used to model these interrelationships

Accountants as System Auditors

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