ACCOUNTING INFORMATION SYSTEM REVIEWER

BY JAMES A. HALL

Prepared By: Rolien D. Acain

Mindanao State University

Part I

Overview of Accounting Information System 1

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

The Information Environment

 Operations management - directly responsible for controlling day-to-day operations

 Middle management - accountable for the short-term planning and coordination of activities
 Top management - responsible for longer-term planning and setting organizational objectives

Horizontal Flow

─ supports operations-level tasks with highly detailed information

─ e.g. sale and shipment of goods, the use of labor and materials in the production process, and internal transfers
of resources from one department to another

Vertical flow

─ distributes information downward from senior managers to junior managers and operations personnel in the
form of instructions, quotas, and budgets

 External Users
1. Trading partners - customer sales and billing information, purchase information for suppliers, and
inventory receipts information
 2. Stakeholders - entities outside (or inside) the organization with a direct or indirect interest in the
firm
 External Stakeholders - Stockholders, financial institutions, and government
agencies, e.g. financial statements, tax returns, and stock transaction
information
 Inside stakeholders - accountants and internal auditors.

WHAT IS A SYSTEM?

 A group of two or more interrelated components or subsystems that serve a common purpose
 Multiple Components - A system must contain more than one part
 Relatedness - A common purpose relates the multiple parts of the system
 Subsystem - when it is viewed in relation to the larger system of which it is a part; system when
it is the focus of attention
 Purpose - A system must serve at least one purpose, but it may serve several

System Decomposition versus Subsystem Interdependency

 System Decomposition - the process of dividing the system into smaller subsystem parts
 Subsystem Interdependency – a system’s ability to achieve its goal depends on the effective
functioning and harmonious interaction of its subsystems

AN INFORMATION SYSTEMS FRAMEWORK

Information System - the set of formal procedures by which data are collected, processed into information, and
distributed to users

 Accounting Information System (AIS)

 Accepts input, which are converted through various processes into output
information that goes to users
Transaction - an event that affects or is of interest to the organization and is processed
by its information system as a unit of work
Financial transaction - an economic event that affects the assets and equities of
the organization, is reflected in its accounts, and is measured in monetary
terms.
Nonfinancial transactions - events that do not meet the narrow definition of a
financial transaction, e.g. adding a new supplier of raw materials to the list of
valid suppliers

pro

3 Major Components of AIS

 1. Transaction Processing System (TPS) - supports daily business operations
with numerous reports, documents, and messages for users throughout the
organization
3 Transaction Cycles
1. The Revenue Cycle
2. The Expenditure Cycle
3. The Conversion Cycle

2. General Ledger/Financial Reporting System (GL/FRS) - produces the

traditional financial statements
e.g. the income statement, balance sheet, statement of cash flows,
tax returns, and other reports required by law
 Summaries of transaction cycle activity are
processed by the GLS to update the general
ledger control accounts.
 The FRS measures and reports the status of
financial resources and the changes in those
resources.
 Nondiscretionary Reporting because the
organization has few or no choices in the
information it provides
3. Management Reporting System (MRS) - provides internal management
with special-purpose financial reports and information needed for decision
making
e.g. budgets, variance reports, and responsibility reports
 Discretionary reporting because the organization can
choose what information to report and how to present it.

A GENERAL MODEL FOR AIS

 This is a general model because it describes all information systems, regardless of their technological
architecture.
Elements of the General Model
1. End users
External Users – creditors, stockholders, potential investors, regulatory agencies, tax
authorities, suppliers, and customers
Internal Users – management at every level of the organization, as well as the operatios
personnel
DATA VERSUS INFORMATION

Data - facts, which may or may not be processed (edited, summarized, or refined) and have no direct
effect on the user

Information - processed data that causes the user to take an action that he or she otherwise could not,
or would not, have taken

2. Data Sources - financial transactions that enter the information system from both internal
and external sources.
External financial transactions - economic exchanges with other business entities
and individuals outside the firm
E.g. the sale of goods and services, the purchase of inventory, the receipt of cash,
and the disbursement of cash (including payroll)
Internal financial transactions - the exchange or movement of resources within the
organization.
E.g. the movement of raw materials into work-in-process (WIP), the application of
labor and overhead to WIP, the transfer of WIP into finished goods inventory, and
the depreciation of plant and equipment

3. Data Collection – first operational stage in the information system. The objective is to
ensure that event data entering the system are valid, complete, and free from material
errors.
Relevance – by analyzing the user’s needs
Efficiency – designed to collect data only once

4. Data Processing – Once collected, data usually require processing to produce information
Examples: mathematical algorithms (such as linear programming models) used
for production scheduling applications, statistical techniques for sales
forecasting, and posting and summarizing procedures used for accounting
applications.
5. Database Management – its physical repository for financial and nonfinancial data
 ,
Levels in the Data Hierarchy
1. Data Attribute - most elemental piece of potentially useful data in
the database;
Attribute is a logical and relevant characteristic of an
entity about which the firm captures data.
2. Record - a complete set of attributes for a single occurrence within
an entity class.
Assign artificial keys to records - customer account
number
3. Files - a complete set of records of an identical class, e.g. AR file

Database Management Tasks

1. Storage – assigns keys to new records and stores them in
their proper location in the database
2. Retrieval – locating and extracting an existing record from
the database for processing
3. Deletion – permanently removing outdated or redundant
records from the database
6. Information Generation – the process of compiling, arranging, formatting, and presenting
information to users
Characteristics of a Useful Information
1. Relevance - the contents of a report or document must
serve a purpose
2. Timeliness - the age of information is a critical factor in
determining its usefulness
3. Accuracy – Information must be free from material errors.
In providing information, system designers seek a
balance between information that is as accurate as
possible, yet timely enough to be useful.
4. Completeness - No piece of information essential to a
decision or task should be missing
5. Summarization – Information should be aggregated in
accordance with the user’s needs
 7. Feedback – (Internal & External) a form of output that is sent back to the system as a
source of data

Information System Objectives

1. To support the stewardship function of management.

2. To support management decision making
3. To support the firm’s day-to-day operations

Acquisition of Information Systems

1. They develop customized systems from scratch through in-house systems development activities
2. They purchase pre-programmed commercial systems from software vendors
System Development Life Cycle – the formal process by which this is accomplished
3 Basic Types of Commercial Software
1. Turnkey Systems – completely finished and tested systems that are ready for
implementation
2. Backbone Systems – consist of a basic system structure on which to build; a compromise
between a custom system and a turnkey system
3. Vendor Supported Systems – customized systems that client organizations purchase
commercially rather than develop in-house

ORGANIZATIONAL STRUCTURE

1. Responsibility
2. Authority
3. Accountability

BUSINESS SEGMENTS

1. Geographic Location
2. Product Line
3. Business Function

Functional Segmentation
Material Management

1. Purchasing
2. Receiving
3. Stores

Production

1. Production planning
2. Quality control
3. Maintenance

Marketing

1. Product Promotion
2. Advertising
3. Market Research

Distribution

1. Filling orders accurately

2. Packaging correctly
3. Shipping quickly

Personnel

1. Recruiting
2. Training
3. Continuing Education
4. Counseling
5. Evaluating
6. Labor Relations
7. Compensation administration
Finance

1. Banking and Treasury Activities

2. Portfolio Management
3. Credit Evaluation
4. Cash Disbursements
5. Cash Receipts

THE ACCOUNTING FUNCTION

 Accounting captures and records the financial effects of the firm’s transactions.
 Accounting function distributes transaction information to operations personnel to coordinate
many of their key tasks
1. Inventory Control
2. Cost Accounting
3. Payroll
4. Accounts Payable
5. Accounts Receivable
6. Billing
7. Fixed Asset Accounting
8. General Ledger

The Value of Information

 Reliability – relevance, accuracy, completeness, summarization, timeliness

Accounting Independence

 Accounting activities must be separate and independent of the functional areas maintaining resources
 Accounting supports these functions with information but does not actively participate
 Decision makers in these functions require that such vitl information be supplied by an independent
source to ensure its integrity

THE INFORMATION TECHNOLOGY/COMPUTER SERVICES FUNCTION

1. Centralized Data Processing Approach - performed by one or more large computers housed at a central site
Primary Areas:
1. Database Administration
2. Data Processing
Functions
 Data Control
 Data Conversion
 Computer Operations
 Data Library

3. Systems Development And Maintenance

Related Functions
 Systems Development - responsible for analyzing user needs and for
designing new systems to satisfy those needs.
 Systems professionals - systems analysts, database designers, and
programmers who design and build the system
  End users - they are the managers who receive reports from the system
and the operations personnel who work directly with the system as part
of their daily responsibilities
 Stakeholders - they include management, internal auditors, and
consultants who oversee systems development
2. Distributed Data Processing Approach (DDP) - involves reorganizing the IT function into small information
processing units (IPUs) that are distributed to end users and placed under their control.
 End-User Computing
 Commercial Software
 Networking
 Office Automation
Disadvantages of DPP
1. Loss of Control
2. Mismanagement of organization-wide resources
3. Hardware and software incompatibility
4. Redundant tasks
5. Consolidating incompatible activities
6. Hiring qualified professionals
7. Lack of standards

Advantages of DPP

1. Cost reductions in hardware and data entry tasks

2. Improved cost control responsibility
3. Improved user satisfaction since control is closer to the user level
4. Ability to Backup, wide range of data storage site

THE EVOLUTION OF INFORMATION SYSTEM MODELS

1. THE MANUAL PROCESS MODEL

o constitute the physical events, resources, and personnel that characterize many
business processes
 order-taking
 warehousing materials
 manufacturing goods for sale
 shipping goods to customers
 placing orders with vendors
 record keeping
2. THE FLAT-FILE MODEL
o most often associated with so-called legacy systems
o describes an environment in which individual data files are not related to other
files
Data Redundancy Problems
 Data Storage
 Data Updating
 Currency of Information
 Task-Data Dependency
 Flat Files Limit Data Integration
3. THE DATABASE MODEL
 Database Management System (DBMS) - a special software system that is programmed
to know which data elements each user is authorized to access
Through data sharing, the following traditional problems associated with the flat-file
approach may be overcome:
 Elimination of data redundancy
 Single update.
 Current values

4. THE REA MODEL

 An accounting framework for modelling an organization’s critical resources, events, and agents
and the relationships between them
 Resources - objects that are both scarce and under the control of the enterprise
 Events - phenomena that affect changes in resources.
 Agents - individuals and departments that participate in an economic event
5. ENTERPRISE RESOURCE PLANNING SYSTEMS (ERP)
 Enables an organization to automate and integrate its key business processes.
 Breaks down traditional barriers by facilitating data sharing, information flows, and the
introduction of common business practices among all organizational users
 ERP packages are sold to client organizations in modules that support standard processes

Some common ERP modules include:

 Asset Management
 Financial Accounting
 Human Resources
 Industry-Specific Solutions
 Plant Maintenance
 Production Planning
 Quality Management
 Sales and Distribution
 Inventory Management

THE ROLE OF THE ACCOUNTANT

o ACCOUNTANTS AS USERS
 Accountants must provide a clear picture of their needs to the professionals who design
their systems.
 For example, the accountant must specify accounting rules and techniques to be used,
internal control requirements, and special algorithms such as depreciation models

o ACCOUNTANTS AS SYSTEM DESIGNERS

 Accounting Function
Conceptual System - specifying the criteria for identifying delinquent customers and the
information that needs to be reported.

 IT Function
Physical System - the medium and method for capturing and presenting the
information.

o ACCOUNTANTS AS SYSTEM AUDITORS

  Auditing - a form of independent attestation performed by an expert—the auditor—
who expresses an opinion about the fairness of a company’s financial statements.
 Attest Function – referred to this auditing service
 External Auditing - independent auditing because CPA firms that are independent of the client
organization’s management perform them
Represent third-party outsiders
 Assurance - professional services, including the attest function, that are designed to
improve the quality of information, both financial and nonfinancial, used by decision
makers
 IT Auditing - usually performed as part of a broader financial audit
 Internal Auditing - appraisal function housed within the organization.
Represents the interests of management

Why Is It Important to Distinguish between AIS and MIS?

 SOX legislation requires that management design and implement internal controls over the entire financial
reporting process
 SOX further requires that management certify these controls and that the external auditors express an opinion
on control effectiveness.
 Management and auditors need a conceptual view of the information system that distinguishes key processes
and areas of risk and legal responsibility from the other (non-legally binding) aspects of the system.
 Without such a model, critical management and audit responsibilities under SOX may not be met

 Management Information System (MIS)

1. Processes nonfinancial transactions that are not normally processed by
traditional AIS
 CHAPTER 2

INTRODUCTION TO TRANSACTION PROCESSING

 2.1 AN OVERVIEW OF TRANSACTION PROCESSING

Transaction Cycles

 Capture financial transactions, record the effects of transactions in accounting records, and provide information
about transactions
 Produce much of the raw data from which management reports and financial statements are derived
 Process financial transactions – external and internal

The Expenditure Cycle

 Acquisition of materials, property, and labor in exchange for cash

2 Parts of Expenditure Transactions

1. Physical Component – acquisition of the goods

2. Financial Component – cash disbursement to the supplier

Major Subsystems

1. Purchases/accounts payable system

2. Cash disbursements system
3. Payroll System
4. Fixed asset system

The Conversion Cycle

2 Major Subsystems

1. The Production System

2. The Cost Accounting System

The Revenue Cycle

Primary Subsystems

1. Sales order processing

2. Cash receipts

2.2 ACCOUNTING RECORDS

 Manual Systems
Traditional Records Used
1. Documents

3 Types

1. Source Documents - result in some documents being created at the beginning (the source) of the transaction.

2. Product Documents - the result of transaction processing rather than the triggering mechanism for the
process

3. Turnaround Documents - product documents of one system that become source documents for another
system

2. Journals - record of a chronological entry

2 Types
 1. Special Journals - to record specific classes of transactions that occur in high volume
2. Register - to denote certain types of special journals or log; payroll register
2. General Journals - to record nonrecurring, infrequent, and dissimilar transactions

3. Ledgers - book of accounts that reflects the financial effects of the firm’s transactions

2 Basic Types

1. General Ledgers - the firm’s account information in the form of highly summarized control accounts
2. Subsidiary Ledgers - the details of the individual accounts that constitute a particular control account

 The Audit Trail

 For tracing transactions from source documents to the financial statements; year-end audit
 To determine their validity, accuracy, and completeness
 Confirmation – contacting customers to confirm the recorded transaction

 Computer-Based Systems

4 Types of Magnetic Files

1. Master File - generally contains account data; e.g., general and subsidiary ledgers
2. Transaction Files - temporary file of transaction records used to change or update data in a master file; sales
order, inventory receipts, cash receipts
3. Reference Files - stores data that are used as standards for processing transactions; credit file
4. Archive Files - contains records of past transactions that are retained for future reference

2.3 DOCUMENTATION TECHNIQUES

 The ability to document systems in graphic form is thus an important skill for accountants to master

 Data Flow Diagrams

 Uses symbols to represent the entities, processes, data flows, and data stores that pertain to a system

 Entity Relationship Diagrams

 Used to represent the relationship between entities
 Entities- physical resources; Events – economic transactions; Agents – salesperson, customer, vendor
 Cardinality- degree of the relationship; 1:1, 1:M, M:M

Relationship between ER Diagrams and Data Flow Diagrams

֎ A DFD is a model of system processes, and the ER diagram models the data used in or affected by
the system

 System Flowcharts
 The graphical representation of the physical relationships among key elements of a system

Flowcharting Manual Activities

1. LAY OUT THE PHYSICAL AREAS OF ACTIVITY

2. TRANSCRIBE THE WRITTEN FACTS INTO VISUAL FORMAT.
 ֎ Batch Processing - permits the efficient management of a large volume of transactions

Flowcharting Computer Processes

1. LAY OUT THE PHYSICAL AREAS OF ACTIVITY

2. TRANSCRIBE THE WRITTEN FACTS INTO VISUAL FORMAT

 Program Flowcharts
 Accountants sometimes use program flowcharts to verify the correctness of program logic

 Record Layout Diagrams

 Used to reveal the internal structure of the records that constitute a file or database table

2.4 COMPUTER-BASED ACCOUNTING SYSTEMS

 Differences between Batch and Real-Time Systems

 Batch Systems - assemble transactions into groups for processing; payroll processing
 Real-time Systems - process transactions individually at the moment the event occurs; airline
reservation

 Alternative Data Processing Approaches

 Legacy Systems versus Modern Systems

Legacy Systems

 Mainframe-based applications;
 They tend to be batch oriented;
 Early legacy systems use flat files for data storage, but hierarchical and network databases are often
associated with later-era legacy systems.

Modern Systems

 Client-server (network)–based and process transactions in real time

 Updating Master Files from Transactions

 Database Backup Procedures

 Batch Processing Using Real-Time Data Collection

 Sales journal and general ledger accounts are being processed in batch mode to achieve operational
efficiency
 Real-Time Processing - process the entire transaction as it occurs
 Improved productivity
 Reduced inventory
 Increased inventory turnover
 Decreased lags in customer billing,
 Enhanced customer satisfaction

2.5 DATA CODING SCHEMES

 creating simple numeric or alphabetic codes to represent complex economic phenomena that facilitate
efficient data processing

 A System without Codes

 Firms process large volumes of transactions that are similar in their basic attributes
 The negative effects of this approach may be seen in many parts of the organization:
1. Sales staff - promote clerical errors and incorrect shipments
2. Warehouse Personnel - impeded and shipping errors will likely result
3. Accounting Personnel - postings to the wrong accounts will be common
 A System with Codes
Other uses of data coding in AIS are to:
1. Concisely represent large amounts of complex information that would otherwise be unmanageable.
2. Provide a means of accountability over the completeness of the transactions processed.
3. Identify unique transactions and accounts within a file.
4. Support the audit function by providing an effective audit trail.

 Numeric and Alphabetic Coding Schemes

 Sequential Codes
ADVANATGES
DISADVANATGES
 Block Codes
ADVANATGES
DISADVANATGES

 Group Codes
ADVANATGES
DISADVANATGES

 Alphabetic Codes
ADVANATGES
DISADVANATGES

 Mnemonic Codes
ADVANATGES
DISADVANATGES