ACCOUNTING INFORMATION SYSTEMS

Chapter 1: The Information System:

An Accountant’s Perspective
Learning Objectives

• After studying this chapter, you should:

• Understand the primary information flows within the business environment.
• Understand the difference between accounting information systems and
management information systems.
• Understand the difference between a financial transaction and a nonfinancial
transaction.
• Know the principal features of the general model for information systems.
• Be familiar with the functional areas of a business and their principal activities.
• Understand the relationship between external auditing, internal auditing, and
information technology auditing.
Information
Environment

Information flow to decision makers and other users to meet a variety of

internal needs.
 Internal
Information
Flows

• Horizontal flow supports operations-level tasks with highly

detailed information about the many business transactions
affecting the firm
• Vertical flows of information
• downward flows — instructions, quotas, and budgets
• upward flows — summarized transaction and operations
data
 Internal
Information
Flows

• Horizontal flow supports operations-level tasks with highly

detailed information about the many business transactions
affecting the firm
• Vertical flows of information
• downward flows — instructions, quotas, and budgets
• upward flows — summarized transaction and operations
data
 External
Information
Flows

• Third flow represents exchanges between the organization

and users in the external environment.
• trading partners – customers suppliers
• Stakeholders - Stockholders, financial institutions, and
government agencies
 • What is an Information System?
• An information system is the set of formal procedures
by which data are collected, processed into information,
and distributed to users.

AN • Transactions
INFORMATION • A transaction is an event that affects or is of interest to
the organization and is processed by its information
SYSTEMS system as a unit of work.
FRAMEWORK
• Financial transactions
• economic events that affect the assets and equities
of the organization e.g., purchase of an airline ticket

• Nonfinancial transactions
• all other events processed by the organization’s
information system e.g., an airline reservation — no
commitment by the customer
 AN
INFORMATION
SYSTEMS
FRAMEWORK
 • AIS subsystems process financial transactions and
nonfinancial transactions that directly affect the processing
of financial transactions.

• Example: changes to customers’ names and addresses

Accounting are processed by the AIS to keep the customer file
current. Although not technically financial
Information transactions, these changes provide vital information
for processing future sales to the customer.
System
• AIS subsystems
• Transaction processing system (TPS)
• supports daily business operations
• General Ledger/ Financial Reporting System (GL/FRS)
• produces financial statements and reports
• Management Reporting System (MRS)
• produces special-purpose reports for internal use
AIS versus
MIS
Accounting Information Management Information
Systems (AIS) Systems (MIS) process
process financial transactions; nonfinancial transactions that
e.g., sale of goods and are not normally processed by
nonfinancial transactions that traditional AIS; e.g., tracking
directly affect the processing customer complaints
of financial transactions; e.g.,
addition of newly approved
vendors
 MIS
Applications
 General
Model for AIS

elements of the general model

• end users • data processing
• data sources • database management
• data collection • Information generation
• feedback.
 • Data vs Information
• Data are facts, which may or may not be
processed (edited, summarized, or refined)
Elements of and have no direct effect on the user.
General In contrast,
• Information causes the user to take an
Model for AIS action that he or she otherwise could not,
or would not, have taken. Information is
often defined simply as processed data.
 • Data sources are financial transactions
that enter the information system from
both internal and external sources.
• External financial transactions are the most
common source of data for most
Elements of organizations.
General • sale of goods and services, the purchase of inventory, the
receipt of cash, and the disbursement of cash (including
Model for AIS payroll).
• Internal financial transactions
• movement of raw materials into work-in-process (WIP)
application of labor and overhead to WIP, the transfer of
WIP into finished goods inventory, and the depreciation of
plant and equipment.
 Functions for transforming data into
information according to the general
AIS model:
Transforming
1. Data Collection
the Data into
2. Data Processing
Information
3. Database Management
 Data Collection
• Capturing transaction data
• Recording data into forms
Transforming • Validating and editing the data

the Data into TWO RULES THAT GOVERN THE DESIGN OF DATA
Information COLLECTION PROCEDURES:
Relevance – data that can contribute to information/ decision
making
Efficiency - avoidance of redundancy
 Data Processing
Once data are collected is requires processing
to produce information. Ranges from simple to
Transforming complex.
the Data into • mathematical algorithms (such as linear
programming models) used for production
Information scheduling applications
• statistical techniques for sales forecasting
• posting and summarizing procedures used for
accounting applications.
Transforming
the Data into
Information

Database management
Database is its physical repository for financial and nonfinancial data.
Data Hierarchy
• Attributes - logical and relevant characteristic of an entity
• Record - complete set of attributes for a single occurrence
within an entity class
• File - complete set of records of an identical class
 Database management
3 fundamental tasks:
Transforming Storage - assigns keys to new records and stores them in
proper location
the Data into Retrieval - locating and extracting an existing record from
the
Information database for processing
Deletion - permanently removing obsolete or redundant
records
 • Information Generation
• Compiling
• Arranging
• Formatting
Elements of • Presenting

General • Characteristics of Useful information

Model for AIS •
•
Relevance - must serve a purpose.
Timeliness - must be no older than the time of the action it supports
• Accuracy - free from material errors
• Completeness - No piece of essential info. should be missing
• Summarization - aggregated in accordance with the user’s needs
 • Feedback
Elements of • form of output that is sent back to the system
as a source of data.
General • an inventory status report signals the inventory control
Model for AIS clerk that items of inventory have fallen to, or below, their
minimum allowable levels.
 Fundamental Objectives
1. To support the stewardship function of management.
Stewardship refers to management’s responsibility to properly manage the
Information resources of the firm. The information system provides information about
resource utilization to external users via traditional financial statements and
other mandated reports. Internally, management receives stewardship
System information from various responsibility reports.

Objectives 2. To support management decision making.

The information system supplies managers with the information they need to
carry out their decision-making responsibilities.

3. To support the firm’s day-to-day operations.

The information system provides information to operations personnel to
assist them in the efficient and effective discharge of their daily tasks.
Organizational
Structure

The structure of an organization helps to allocate

• responsibility
• authority
• accountability
Segmenting by business function is a very common method of
organizing. This is to promote efficiencies through the specialization
of labor and cost-effective resource allocations.
 Functional
Segmentation
 Information reliability requires accounting
independence.
Accounting • Accounting activities must be separate and independent of
the functional areas maintaining resources.
Function • Decisions makers in these functions require that such vital
information be supplied by an independent source to
ensure its integrity.
 1. Data processing
INFORMATION • Centralized or Distributed Data Processing
2. Systems development and maintenance
TECHNOLOGY
3. Database administration
FUNCTION
4. Network administration
 Centralized Data Processing
• all data processing is performed by one or more large
INFORMATION computers housed at a central site that serve users
throughout the organization
TECHNOLOGY Distributed Data Processing
FUNCTION • DDP involves reorganizing the IT function into small
information processing units (IPUs) that are distributed to
end users and placed under their control.
INFORMATION
TECHNOLOGY
FUNCTION
INFORMATION
TECHNOLOGY
FUNCTION
 Potential Advantages
• Cost reductions in hardware and data entry tasks
• Improved cost control responsibility
• Improved user satisfaction since control is closer to the user level
Advantages • Backup of data can be improved through the use of multiple data
storage sites
and Potential Disadvantages

Disadvantages • Loss of control

• Mismanagement of company resources
of DDP • Hardware and software incompatibility
• Redundant tasks and data
• Consolidating tasks usually segregated
• Difficulty attracting qualified personnel
• Lack of standards
 Accountants as users
• In most organizations, accounting function is the single
largest user of IT.
Role of an • Accountants must be able to clearly convey their needs to
Accountant the systems professionals who design the system.
• The accountant should actively participate in systems
development projects to ensure appropriate systems design.
 Accountants as System Designers
• The accounting function is responsible for the
conceptual system, while the computer function is
Role of an responsible for the physical system.
Accountant • The conceptual system determines the nature of
the information required, its sources, its
destination, and the accounting rules that must be
applied.
 Accountants as System Auditors
External Auditors
• attest to fairness of financial statements
• assurance service: broader in scope than traditional
Role of an attestation audit
Accountant IT Auditors
• evaluate IT, often as part of external audit
Internal Auditors
• in-house IS and IT appraisal services