ACN 2213-1 | ACCOUNTING INFORMATION SYSTEM

CHAPTER 01: THE INFORMATION SYSTEM- AN ACCOUNTANT’S PERSPECTIVE

3RD YEAR-1ST SEMESTER | A.Y 2024-2025

CHAPTER OUTLINE personnel in the form of

I. The Information Environment instructions, quotas, and budgets
A. Information System Objectives • Upward: summarized information
B. What is a System? moves up from operations to
C. An Information Systems Framework management for decision-making
D. Accounting Information System (AIS) Represents exchanges between
E. Management Information System (MIS) the organization and external users.
F. Acquisition of Information Systems Group of External Users
[1] Trading Partners: Customer sales and
II. Organizational Structure
Third Flow billing information, purchase information,
A. Business Segments and inventory receipt information
B. Functional Segmentation [2] Stakeholders: Direct or indirect interest
C. The Accounting Function in the firms with information exchange
D. Information Technology includes financial statements, tax returns,
and stock transaction information.
III. Evolution of Information System Models
A. The Manual Process Model
B. The Flat-file Model
INFORMATION SYSTEMS OBJECTIVES
C. The Database Model Fundamental objectives to support:
D. The REA Model The firm’s day-to-day operations
E. Enterprise Resource Planning Systems (ERP) Operation personnel use information to assist
IV. The Role of Accountants 1
them in the efficient and effective discharge of
A. As Users their daily tasks.
B. As System Designers Management decision management
C. As System Auditors Managers use information to assist them in
2
planning and control decisions related to their
THE INFORMATION ENVIRONMENT areas of responsibility.

To begin the
The stewardship function of management
External users receive stewardship information
Study of AIS through traditional financial statements and
3 other mandated reports.
Business Resource
Internally, managers received stewardship
Information vital to the information from various responsibility reports
survival of a business Stewardship: Manager’s responsibility to properly manage
the resources and reports on their activities.
• Information is a business resource
o Business resource: Could be raw materials, capital,
WHAT IS A SYSTEM?
and labor
• A group of two or more interrelated
INTERNAL & EXTERNAL FLOWS OF INFO.
components or subsystems that serve a
common purpose
• Some systems are naturally occurring, and
some are artificial
o Natural System: All life forms
▪ Example: Plants and Animals
o Artificial System: Man-made
▪ Example: Clocks, Submarines, Social systems,
and Information Systems

ELEMENTS OF A SYSTEM
Multiple Containing more than one part.
Example: Yo-yo with a string attached is a
Components system. Without the string, it is not a system
LEVELS OF ACTIVITY • Each part function
Product-oriented work independently of the others but
Base Level Such as manufacturing, sales, distributions,
billing, and cash receipts all parts serve a common
Operation Directly responsible for controlling Relatedness objective.
Management day-to-day operations • If a component does not
Short-term planning and contribute to a common goal, it
Middle is not a part of the system.
coordination of activities necessary
Management • System is called a subsystem
to accomplish objectives.
Top Longer-term planning and setting when it is viewed in relation to
Management objectives. the larger system of which it is a
FLOW OF INFORMATION part
System vs. • Subsystem is called a system
Supports operations-level task with Subsystem
highly detailed information about when it is the focus of attention.
Example: Animals, plants, and other life
the many business transactions forms are system, but they are also
Horizontally affecting the firm. subsystem of the ecosystem (in which they
Includes events such as sale and shipment, are part of).
use of labor and materials, and internal
transfers of resources from one dept. to • Must serve at least one purpose
another. but can serve several
Purpose
• Downward: distributes information • When system ceases to serve a
Vertically from senior managers to junior purpose, it should be replaced.
managers and operations
 ACN 2213-1 | ACCOUNTING INFORMATION SYSTEM
CHAPTER 01: THE INFORMATION SYSTEM- AN ACCOUNTANT’S PERSPECTIVE
3RD YEAR-1ST SEMESTER | A.Y 2024-2025

AN INFORMATION SYSTEMS FRAMEWORK Data

Data is stored in databases,
allowing for efficient retrieval and
Storage
analysis.
Data is processed through various
Data
calculations and manipulations to
Processing
generate meaningful reports
AIS generate reports such as
Information
financial statements, balance
Reporting
sheets, and income statements

SUBSYSTEMS OF AIS
1 Transaction Processing System (TPS)
General Ledger/ Financial Reporting System
2
(GL/FRS)
3 Management Reporting System (MRS)

[1] Transaction Processing System (TPS)

• Core of the AIS
• Central to the overall function of the AIS.
• Supports daily business operations with numerous
• Information System (IS): The set of formal reports, documents, and messages for users
procedures by which data are collected, stored, throughout the organization.
processed into information and distributed to
users.
• Distinction between AIS & MIS: The concept of Economic Events
Converts Financial
Transaction
transaction.

TRANSACTION A transaction processing system Records

Defined as an event that affects or is of interest to the
organization and is processed by its IS as a unit of work Distribute
Operation Accounting
Financial Personnel Records
Transaction
Information Output
Inputs
System Users
Information
Nonfinancial
Transaction • Deals with business events that occur frequently.
Information System accepts inputs (transactions) • To deal with processing thousands of
which are converted into output information which transactions, similar types of transactions are
goes to users for decision making. grouped into transaction cycles
TYPES OF TRANSACTIONS TRANSACTION CYCLES IN TPS
Input of IS
Transactions The Revenue Cycle
1 Handles transactions related to sales and revenue
They are closely generation
related
Financial Nonfinancial
2 The Expenditure Cycle
Economic Event Residual Definition
Handles transactions related to purchases

3 The Conversion Cycle

• Economic event that affects the Deals with production-related transactions
assets and equities of the entity.
[2] General Ledger/Financial Reporting
• Reflected in its accounts and is
Financial measured in monetary terms
Systems (GL/FRS)
Examples: Sales of products, purchase of • Aggregate and summarize financial data from
inventory, and cash disbursement and TPS to generate financial statements and reports.
cash receipts.
• Do not meet the narrow • Summaries of transaction are
definition of a financial processed
Nonfinancial transaction. General • To update the general ledger control
• Firm has no legal obligation to Ledger account
process it correctly – or at all. System Less common and infrequent events (stock
transactions, mergers, and suit settlements)
ACCOUNTING INFORMATION SYSTEM may have no formal processing cycle, and they
enter GLS through alternate sources.
• A specialized subset of information systems that
• Measures the status of financial
processes financial transactions.
resources and changes in those
FEATURES OF AIS resources and communicate the
Financial
information to external users.
AIS capture data from various Reporting
Data sources, including sales invoices, System • This type of reporting is called
Capture purchase orders, and payroll nondiscretionary reporting (few to
records no choice in the information it
provides)
 ACN 2213-1 | ACCOUNTING INFORMATION SYSTEM
CHAPTER 01: THE INFORMATION SYSTEM- AN ACCOUNTANT’S PERSPECTIVE
3RD YEAR-1ST SEMESTER | A.Y 2024-2025

KINDS OF REPORTS DATA VS. INFORMATION

General Maintains a record of all • Distinction between data and information has
Ledger financial transactions pervasive implications for the study of
Financial Balance sheet, income information systems.
Statements statement, cash flow statement • If output from the information system fails to
[3] Management Reporting Systems (MRS) cause users to act, the system serves no purpose
here
• Provide the internal financial information needed
to manage a business. Data Information
Facts that may or may
TYPICAL REPORT FROM MRS Causes the user to act
not be processed or decide (it has value)
1 Budgets Ex. Raw numbers & Names
Planned financial allocations Data alone doesn’t
Variance Reports Determined by the
2 cause any action or
Compare actual performance against budgets effect it has on the user,
have a direct impact
not by its physical form.
Cost-Volume-Profit Analysis on decisions
3 Analyze the relationship between costs, volume, One person’s information is another person’s data
and profits.
Current Cost Data Reports [B] DATA SOURCES
4
Use up to date (current) cost information. Data Sources
• Financial transaction that enters the IS from
• Type of reporting is called discretionary reporting
either internal or external resources
since organization can choose what information
to report and how to present. External Financial Transactions
• Most common source of data
A GENERAL MODEL FOR AIS • Economic exchange with other business
entities and individuals outside the firm
Example: Sales of goods and services, purchase of inventory,
receipt of cash, and disbursement of cash (inclusive of payroll)

Internal Financial Transactions

• Exchange or movement of resources within the
organization
Example: Movement of raw materials into work-in process,
application of labor and overhead to WIP, transfer of WIP into
finished goods inventory, and depreciation of PPE.

[C] DATA COLLECTION

• The model depicts the relationship between the Data Collection
key elements in an AIS Application • First operation stage in the information system
• The most important stage in the system
KEY ELEMENTS OF GENERAL MODEL
Objective
A End Users
• Ensure that event data entering the system are
B Data Sources valid, complete, and free from materials errors.
C Data Collection
Design rules of Data Collection Procedures:
D Data Processing
(1) Relevance
E Database Management • Information should capture only relevant
F Information Generation data
G Feedback • Designer’s task is to determine what is and
what is not relevant
[A] END USERS • Should filter irrelevant facts from the
External Users system.
• Creditors, stockholders, potential investors,
regulatory agencies, tax authorities, suppliers, and (2) Efficiency
customers • Designed to collect data only once
• Data can be made available to many
Internal Users users
• Management at all levels of the organization as well • Eliminate capturing same data that often
as operations personnel.
leads to data redundancy.
Internal Reporting o Same data save more than once overloads
• Characterized by frequent changes in the facilities which causes inconsistencies among
the redundant elements and reduce the
information needed by internal users.
system’s effectiveness
• This volatility poses a significant challenge to
system designers [D] DATA PROCESSING
o Must balance the information requests and
• Tasks range from simple to complex
needs against legal, economic, internal control,
• Processing data to produce information
and security issues
• Frequent change in IS due to changing needs Examples:
can increase the risk of errors and frauds. • Mathematical Algorithms for production scheduling
application
ACN 2213-1 | ACCOUNTING INFORMATION SYSTEM
CHAPTER 01: THE INFORMATION SYSTEM- AN ACCOUNTANT’S PERSPECTIVE
3RD YEAR-1ST SEMESTER | A.Y 2024-2025

• Statistical Techniques for sales forecasting, and posting • Information could be an operational
and summarizing procedures document.
[E] DATABASE MANAGEMENT Characteristics of a Useful Information:
Database (1) Relevance
• Physical repository for financial and • Content of report must serve a purpose
nonfinancial data • Could support a decision or a task
• Could be a filing cabinet or computer disk • Should present only relevant data
• Business data are organized in a logical o Irrelevancies detract attention from the true
message of the report and may result in
hierarchy.
incorrect decisions.
The Data Hierarchy (2) Timeliness
• Must be no older than the time frame of the
action it supports
(3) Accuracy
• Must be free from error
• Materiality: A problem specific concept
• Material error exist when amount of
inaccuracy causes the user to make poor
decision,
• Designer must balance an accurate yet
timely information
(4) Completeness
• No piece of essential information should be
missing.
(5) Summarization
• Information should be aggregated in
accordance with user’s needs.
• Lower-level managers tend to need a
highly detailed information.
Data Attribute
• Most elemental piece of potentially useful [G] FEEDBACK
data in the database • A form of output that is sent back to the system
• Attribute: Logical and relevant characteristic as a source of data
of an entity about which the firm captures • Could be internal or external
data • Used to initiate or alter a process
o Each attribute is relevant since it contributes to the
information content MANAGEMENT INFORMATION SYSTEM
o Absence of any single relevant attribute diminishes • Requires information that goes beyond the
the information content. domain of AIS
Record • Processes nonfinancial transactions that are not
• A complete set of attributes for a single normally process by traditional AIS
occurrence within an entity class
MIS APPLICATION IN FUNCTIONAL AREAS
• Every record in the database must be unique
in at least one attribute • Portfolio Management Systems
Finance
• Primary Key: Unique identifier attribute • Capital Budgeting Systems
• Artificial Key: No natural attribute • Market Analysis
• Secondary Key: Nonunique attributes Marketing • New Product Development
• Product Analysis
File • Warehouse Organization &
• Complete set of records of an identical class Scheduling
• Organization’s database = Entire Collection of Distribution • Delivery Scheduling
such files • Vehicle Loading & Allocation
Models
Database Management Fundamental Task
• Human Resource Management
(1) Storage: Assign keys to new records and
System
stores them properly. Personnel
o Job Skill Tracking System
• When processing is complete, storage restores the
update record and place it in the database.
o Employee Benefit System
(2) Retrieval: Task of locating and extracting an THE NEED TO DISTINGUISH AIS AND MIS
existing record from the database for • SOX mandates corporate management to
processing.
design and implement internal controls over the
(3) Deletion: Permanently removing obsolete or
financial reporting process.
redundant records from the database.
• Controls include FRS, GLS, and TPS
[F] INFORMATION GENERATION • Management must certify these controls, and
Information Generation external auditors evaluate their effectiveness.
• Process of compiling, arranging, formatting,
and presenting information to users
 ACN 2213-1 | ACCOUNTING INFORMATION SYSTEM
CHAPTER 01: THE INFORMATION SYSTEM- AN ACCOUNTANT’S PERSPECTIVE
3RD YEAR-1ST SEMESTER | A.Y 2024-2025

• Modern information systems require a to those that have operations

conceptual view to distinguish key processes, risk dispersed across the world.
areas, and legal responsibility. • To manage such operations,
• Without this model, management and audit management of the firm are
responsibilities may not be met efficiently. organized around each
geographic segment as a
ACQUISITION OF INFORMATION SYSTEMS quasi-autonomous entity.
• Organization obtains information systems thru: • Allows organization to devote
(1) Develop customized systems from scratch specialize management,
through in-house system development labor, and resources to
activities segments, as if they are
Product
(2) Purchase preprogrammed commercial separate firms.
Segment
systems from software vendors • Applicable for companies with
• Larger organization with unique and changing highly diversified products
needs engage in in-house development organized around product
o Formal process by which this is accomplished is called the lines.
system development life cycle. • Divides organization into areas
• Smaller companies and other large firms with of specialized responsibility
standardized information needs are the buyer for based on task
market commercial software. Business • Areas are determined
Function according to the flow of
TYPES OF COMMERCIAL SOFTWARE Segment primary resources
1 Turnkey Systems Examples of business function segments
are marketing, production, finance,
2 Backbone Systems and accounting.
3 Vendor-supported systems
FUNCTIONAL SEGMENTATION
Turnkey Systems • Common method of organizing a business entity
• Finished and tested system ready for • Functional segments derive from flow of
implementation. resources
• General-purpose systems or systems customed • Segments and functions will vary among
to a specific industry. organizations.
• A good turnkey system has built-in software
FUNCTIONAL AREAS OF A FIRM
options which allows users to customize input,
output, and process through menu choices.
Backbone Systems
• Basic system structure on which to build
• Primary processing logic is preprogrammed,
and the vendor designs the user interface to
suit the client’s unique needs.
• A compromise of a custom system and a turn-
key system
• Can produce satisfactory results but it is costly.
FUNCTIONS FROM RESOURCES
Vendor-supported Systems
• Custom system that client purchase
commercially.
• Software vendor designs, implements, and
maintain the system for its client.

ORGANIZATIONAL STRUCTION AND AIS

• Design and/or audit of AIS require an
understanding of the functional segments and
activities that constitute an organization MATERIAL MANAGEMENT
structure. • Objective: Plan and control the materials
inventory.
BUSINESS SEGMENTS • Entity should have sufficient inventories on
• Firms organize into segments to promote internal hand to meet production needs yet avoid
efficiency through specialization of labor and excessive inventory levels.
cost-effective resource allocation. • Idle Inventory: Can become obsolete, stolen,
or lost.
COMMON APPROACHES OF SEGMENTATION • Safety Stock: Buffer stock maintained to carry
Geographic • To gain access to resources, them through the lead time between placing
Segment markets or lines of distribution an order and its arrival.
ACN 2213-1 | ACCOUNTING INFORMATION SYSTEM
CHAPTER 01: THE INFORMATION SYSTEM- AN ACCOUNTANT’S PERSPECTIVE
3RD YEAR-1ST SEMESTER | A.Y 2024-2025

Sub-function of Materials Management: • Incorrect shipment, damaged items, or

(1) Purchasing excessive delays can result in customer
• Ordering inventory when inventory fall to dissatisfaction and lost sales
their reorder point • Success depends on filling orders accurately,
• Varies among organization packaging it correctly, and shipping them
• Nature of business and type of inventory quickly.
determine the extent of the purchasing
function PERSONNEL FUNCTION
(2) Receiving • Entity’s valuable resource: Competent and
• Task of accepting inventory previously reliable employees
ordered by purchasing • Objective: effectively manage this resource.
• Includes counting and checking the Includes recruiting, training, continuing education, counseling,
physical condition of items evaluating, labor relations, and compensation administration.
• First and only opportunity to detect
incomplete deliveries and damaged FINANCE FUNCTION
merchandise before they move into the • Manages the financial resources of the firm
production process. through banking, treasury activities, portfolio
(3) Stores management, credit evaluation, cash
• Physical custody of inventory received disbursement, and cash receipts.
• Releases these resources to production as • Administers the daily flow of cash in and out of
needed the firm.
PRODUCTION FUNCTION THE ACCOUNTING FUNCTION
Production Activities
• Occur in the conversion cycle ROLES OF THE ACCOUNTING FUNCTION
Accounting captures and records the
Broad Classes of Production Activity financial effects of the economic events.
(1) Primary Manufacturing Activities: Shape and 1 st
Includes events such as movement of raw materials into
assemble raw materials to finished goods. production, shipment of finished goods to customers,
(2) Production Support Activities: Ensure that cash flows into the firm and deposits in the bank.
primary manufacturing activities operate Accounting distributes transaction
efficiently and effectively information to operation personnel to
coordinate their key task
Production Support Activities 2nd Accounting functions that contribute directly to the
(1) Production Planning business operations: inventory control, cost accounting,
• Scheduling flow of materials, labor and payroll, accounts payable, accounts receivable,
machinery billing, fixed asset accounting, and the general ledger.
• Requires information about the status of sales
orders, raw materials inventory, finished THE VALUE OF INFORMATION
goods inventory, and machine and labor • A valuable information to a user is determined
availability by its reliability.
(2) Quality Control • Purpose of Information: Lead user to a desired
• Monitors the manufacturing process at action.
various points • Information must possess:
• To ensure that the finished product meets the o Relevance
quality standard o Accuracy
• Detects problems early to facilitate o Completeness
corrective action. o Summarization
o Timeliness
• Failure to check results to waste of materials
• Unreliable information has no value
and labor
(3) Maintenance ACCOUNTING INDEPENDENCE
• Keeps the machinery and facilities in running
• Information reliability relies on the concept of
order
accounting independency.
• Prevention is key which is why many
manufacturers have elaborated preventive • Accounting activities must be separate and
maintenance programs independent from functional areas that
manage and maintain custody of physical
MARKETING FUNCTION resources.
• Marketplace needs to know about and have • Accounting should support the function with
access to a firm’s product information but should not participate in the
• Marketing function deals with strategic physical activities.
problems with product promotion, advertising,
INFORMATION TECHNOLOGY (IT) FUNCTIONS
and marketing research
• Daily activities as sales order entry.
1 Data Processing
2 Systems Development and Maintenance
DISTRIBUTION FUNCTION 3 Database Administration
• Activity of getting the product to customer 4 Network Administration
after the sale. Holds specific internal control concerns for
management and auditors

DATA PROCESSING
 ACN 2213-1 | ACCOUNTING INFORMATION SYSTEM
CHAPTER 01: THE INFORMATION SYSTEM- AN ACCOUNTANT’S PERSPECTIVE
3RD YEAR-1ST SEMESTER | A.Y 2024-2025

• Utilizes IT personnel, computer hardware, satisfy those needs. Participants are the
software, and corporate data. following:
• Supports user information needs through o Systems Professionals: Gathers facts about the
transaction processing and reporting. user’s problems, analyze the facts, and
• Configurations vary among business entities. formulate a solution. New information is the
• Centralized and distributed data processing product of their effort.
models exist. ▪ Example: Systems analysts, database, designers, and
programmers
• Many organizations use a combination of both.
o End users: For whom the system is built
Centralized Data Processing (CDP) o Stakeholders: Individuals inside and outside of
• Data processing performed by large computers the firm who have interest in the system but are
in a common data center. not end users.
• System Maintenance: Assumes responsibility for
Centralized Data Processing Approach keeping it current with user needs. Usually
consumes 80-90% of the total cost of system’s life.

DISTRIBUTED DATA PROCESSING (DDP)

• Localized transaction processing for each user
segment.
• Each user segment has necessary IT personnel,
facilities, hardware, software, and data.
• Functions independently, no data sharing.
• Sharing occurs through network connections.
• Both models have benefits, risks, and internal
control implications.

• End users process transactions from terminals in ADVANTAGES OF DDP

respective departments connected to the Data can be entered and edited at
Cost Reduction the IPU, and application complexity
central computer and database.
can be reduced.
• Centralized computing resources allow for intra- Improved Cost Benefits from improved
organization communication and data sharing Control management attitudes outweigh
between user departments. Responsibility the additional costs incurred
Providing more customized support
Improved User
IT AREAS OF OPERATION has direct benefits for user morale
Satisfaction
1 Database Administration and productivity
If a disaster destroys a single site, its
2 Data Processing Backup transactions can be processed by
3 Systems Development and Maintenance the other IPUs

Database Administration DISADVANTAGES OF DDP

• Maintain data resources in a central location Over 5% of the total operations
that is shared by all end users. Mismanage of budget should be controlled and
Resources monitored centrally for significant
• Headed by the database administrator in which
expenditures.
they are responsible for the security and integrity Uncoordinated decisions, resulting
of the data base. Hardware &
in incompatible operating systems,
Software
technology platforms, and
Data Processing Incompatibility
communication disruptions
• Group that manages the computer resources Autonomous systems development
used to perform the day-to-day processing of activities leads to user areas
Redundant Tasks reinventing the wheel, resulting in
transactions
data redundancy and redesigning
• Consists of the following functions: common application programs.
o Data Control: Traditionally, responsible for receiving The distribution of IT functions
batches of transaction documents for processing then creates small units, allowing
distribute back to the users. Today, it is usually Consolidating
incompatible functions to overlap,
Incompatible
automated and distributed back to the end users. violating internal control and
o Data Conversion: Transcribes transaction data from causing potential misuse.
source (paper) documents to digital media. IPU managers struggle to attract
o Computer Operations: Managed by the computer highly qualified computer
operations group and run a strict scheduled controlled professionals due to limited
Hiring Qualified
by the central computer. opportunities for personal growth
Professionals
o Data Library: Room often adjacent to the computer and advancement, resulting in
center that provides safe storage for the offline data programming errors and system
failures.
files. Handled by the data librarian who receive, store,
retrieve, and have the custody of files. Uneven application of standards for
system development, programming
Systems Development and Maintenance Lack of languages, hardware, and
Standards performance necessitates central
• System Development: Responsible for analyzing implementation of these standards
the user needs and for designing new systems to to mitigate risks.
 ACN 2213-1 | ACCOUNTING INFORMATION SYSTEM
CHAPTER 01: THE INFORMATION SYSTEM- AN ACCOUNTANT’S PERSPECTIVE
3RD YEAR-1ST SEMESTER | A.Y 2024-2025

o Effective functioning of the software and

SYSTEMS DEVELOPMENT & MAINTENANCE
hardware that constitute the organizations’
• System Development Function: The process by
network.
which organizations acquire information systems
o Monitoring network activity to ensure network
• System Maintenance Function: Responsible for
used are in accordance with company
making changes to existing systems to
policies and secure from attack of hackers.
accommodate changes in user needs.
OUTSOURCING THE IT FUNCTION
SYSTEM DEVELOPMENT FUNCTION
• IT outsourcing involves selling IT resources to a
Acquiring an Information System third-party vendor for a contract period of five to
Information System ten years.
• IT employees are often transferred to the
outsourcing vendor.
purchase build
• Cloud computing, a variant of IT outsourcing, is
Commercial Software Custom Systems location-independent computing where shared
data centers deliver hosted IT services over the
Internet.
Commercial Software (Turnkey Systems) • Cloud computing services fall into three
• Available for both general accounting use categories:
and industry-specific applications o Software as a service (SaaS): Ready-made software
applications over the internet, which are hosted and
• Commercial Software packages are managed by a provider.
sometimes called turnkey systems since they o Infrastructure as a service (IaaS): Provides virtualized
computing resources over the internet, such as virtual servers,
are often implemented with little to no storage, and networking
modification. o Platform as a service (PaaS): Platform that allows developers
to build, run, and manage applications without dealing with
Custom Systems underlying infrastructure
• Develop through a formal process called the • The risk to the client firm is not necessarily
systems development life cycle knowing where its data are being processed.
• Require the organization to have a in-house • Advantages to the client organization include
team of qualified and experienced IT access to computing power, paying only for
professionals. what it uses, and flexible, short-term contracts.
• More expensive than commercial software • IT outsourcing is a growing phenomenon with
packages since organization must absorb all both advantages and risks that management
the development costs. and auditors need to recognize.

SYSTEM MAINTENANCE FUNCTION EVOLUTION OF INFORMATION SYSTEM MODELS

• System modifications can range from trivial to • Newest technique does not immediately replace
significant. older models
• Maintenance changes can impact multiple • Modern auditor needs to be familiar with the
system modules. operations features of all AIS that they are likely
• Between 80-90% of a system's total cost may be to encounter
incurred due to maintenance.
• These activities are significant financial THE MANUAL PROCESS MODEL
investments in hardware, software, and • The oldest and most traditional form of
personnel. accounting systems.
• They also pose significant risks that management • Tasks: order-taking, warehousing, manufacturing
and accountants need to control. goods, shipping, and placing orders.
• Manual record keeping is often used as a training
DATABASE ADMINISTRATION aid but is rarely used in practice today.
• Maintaining resources in a central location that is • Studying manual systems helps establish a link
shared by all authorized end users between the AIS course and other accounting
• Data administration headed by database courses.
administration are tasked to maintain security • Helps understand the logic of a business process
and integrity of the database. without being swayed by technology.
NETWORK ADMINISTRATION • Manual procedures facilitate understanding of
• Network: Collection of interconnected internal control activities.
computers and communication devices that THE FLAT-FILE MODEL
allows users to communicate, access data and • Often associated with legacy systems, large
applications, and share information and mainframe systems implemented in the late
resources. 1960s to 1980s.
• Network Administration: • End users own their data files, not sharing them
with others.
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CHAPTER 01: THE INFORMATION SYSTEM- AN ACCOUNTANT’S PERSPECTIVE
3RD YEAR-1ST SEMESTER | A.Y 2024-2025

• Stand-alone applications perform data • Centralizes organization's data into a shared

processing, not integrated systems. database.
• All users have access to the necessary data for
Flat-file Model their objectives.
• Access to data is controlled by a database
management system (DBMS).
• DBMS is programmed to know which data
elements each user is authorized to access.
• User programs send data requests to the DBMS,
which validates and authorizes access based on
user's authority level.
• Auditors should consider the organization's
procedures for assigning user authority.

PROBLEMS IN FLAT-FILE THAT IS OVERCOMED

IN DATABASE MODEL
Each data element is stored only
Eliminate once, thereby eliminating data
Redundancy redundancy and reducing data
collection and storage costs.
Data element exists in only one
place, it requires only a single
Single
update procedure. This reduces
• Multiple users need separate data sets structured Update
the time and cost of keeping the
to their specific needs. database current.
o Example: Accounting function needs customer sales data A single change to a database
organized by account number for outstanding balances.
Current attribute is automatically made
• Marketing needs customer sales history data Values available to all users of the
organized by demographic keys for targeting attribute.
new product promotions and selling product
upgrades. THE REA MODEL
• Product services group needs customer sales • An accounting framework for modeling critical
data organized by products and structured to resources, events, and agents (REA) and their
show scheduled service dates. relationships.
• Identifies, captures, and stores accounting and
SIGNIFICANT PROBLEM OF FLAT-FILE non-accounting data in a relational database.
Organizations must incur costs for • Allows for creation of user views that cater to all
multiple collection and storage organizational needs.
Data Storage procedures, leading to • Promotes integration through the development
duplicated data, compromising
of AIS.
private data needs.
• Proposed in 1982 as a theoretical accounting
Organizations store extensive
data in files that require periodic model.
Data updating. Separate files for users • Revealed as a practical alternative to traditional
Updating result in separate changes for accounting framework.
each user, increasing the task • REA is a conceptual model, not a physical
and cost of data management. system.
The issue of not updating all user
files affected by a status change COMPONENTS OF REA
is different from performing • Economic resources are
Currency of
multiple updates, as improper organizational assets, scarce
Information
dissemination can lead to and under enterprise control.
outdated information in some • Traditional model excludes
users' data. Account Receivable (AR).
Task-data dependency in flat-file Resources • Account receivable is a data
approaches hinders users' ability storage and transmission record,
to obtain additional information, not essential.
Task-Data • AR values derive from difference
causing them to rely on acquiring
Dependency
new data files, which can lead to between sales to customers and
performance issues and cash received in payment.
increased costs. • Phenomena affecting resource
A single-view model that changes.
structures data to suit the primary • Results from production,
Limits Data
user's needs, potentially Events exchange, consumption,
Integration
excluding useful data for other distribution.
users. • Critical information elements in
accounting system.
THE DATABASE MODEL
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• Need for detailed capture for • SOX legislation restricts non-audit services
rich database. auditors can render to audit clients, making it
• Individuals and departments unlawful for a registered firm to provide attest
participating in economic services.
events. • IT advisory service units in public accounting firms
Agents • Have discretionary power to use
engage in risk management tasks.
or dispose of resources.
Examples include salesclerks, production o These units often play a dual role within their firms,
workers, shipping clerks, customers, and providing non audit clients with IT advisory services
vendors. and performing IT-related tests of controls as part of
the attestation function.
ENTERPRISE RESOURCE PLANNING SYSTEMS (ERP)
o The purpose of the task, not the task itself, defines
• Model for automating and integrating key
the service being rendered.
business processes
• Facilitates data sharing, information flows, and EXTERNAL AUDITING
common business practices. • Responsibility as a systems auditor was limited to
• Implementation can be a massive, long-term the attest function.
project.
Assurance Services
• Complexity and size of ERPs make it difficult for
• To enhance the quality of financial and
organizations to develop in-house.
nonfinancial information used by decision
• Consequently, most ERPs are commercial
makers.
products.
• Clients may contract assurance services for
product quality, marketability, production
THE ROLE OF ACCOUNTANTS process efficiency, or network security system
ACCOUNTANTS AS USERS effectiveness.
• Accounting function is the single largest user of • There's a gray area between assurance and
IT. consulting services, which auditors must avoid.
• Accounts must provide a clear picture of their • Consulting services to audit clients are prohibited
needs to those who will design for their system. under SOX legislation.
• Accounts participation in system development IT Auditing
should be active rather than passive. • Part of broader financial audit.
• Principal cause of design errors is from absence • Typically, under assurance services group or
of user involvement. independent.
ACCOUNTANTS AS SYSTEM DESIGNERS • Known as IT Risk Management, Information
• The accounting function is responsible for the Systems Risk Management, or Global Risk
conceptual system, and the IT function is Management.
responsible for the physical system • Attests to client's IT controls' effectiveness to
• Involves specifying certain operation rules, ensure compliance with standards.
reporting requirements, and framing internal • IT audit may be a significant part of overall audit
control objectives. due to computerized internal controls.
• Design of the conceptual system: Involves the
INTERNAL AUDITING
criterial for identifying delinquent customers and • An appraisal function within an organization.
information needed to be reported • Activities include financial statement audits,
• Physical System: Medium and method of policy compliance examination, legal obligation
capturing and presenting the information. review, operational efficiency evaluation, fraud
ACCOUNTANTS AS SYSTEM AUDITORS detection and pursuit, and IT audits.
• Auditing: Independent attestation by an expert.
EXTERNAL VS. INTERNAL AUDITING
• Express’ opinion on fairness of company's • Internal auditors represent the organization's
financial statements. interests, while external auditors represent
• Public confidence in financial statements' outsiders.
reliability. • Internal auditors often cooperate with external
• Function is also known as the attest function. auditors to achieve audit efficiency and reduce
ATTEST SERVICE VS. ADVISORY SERVICES fees.
• Advisory services: Professional services offered • Independence and competence of internal
by public accounting firms to enhance audit staff determine the extent to which
operational efficiency and effectiveness. external auditors can rely on internal audit work.
o Examples include actuarial advice, business advice, • Some internal audit departments report directly
fraud investigation services, information system design to the controller, compromising internal auditor's
and implementation, and internal control assessments for
compliance with SOX.
independence.
• Prior to SOX, accounting firms could provide • External auditors can rely on evidence gathered
advisory and attest services concurrently to by independent internal audit departments,
clients. which adds value to the audit process.
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• Internal auditors can gather audit evidence

throughout a fiscal period, enabling efficient, less
disruptive, and less costly audits.
FRAUD AUDITS
• Increased popularity due to rampant employee
theft and financial frauds by management.
• Objective: Investigate anomalies and gather
evidence of fraud for potential criminal
conviction.
• Initiated when corporate management suspects
employee fraud.
• Fraud victims usually contract with specialized
fraud units or forensic accounting companies.
• Fraud auditors typically have CFE certification,
governed by the Association of Certified Fraud
Examiners.
THE ROLE OF THE AUDIT COMMITTEE
• The audit committee, a subcommittee of boards
of directors, has specific responsibilities for audits.
• The committee is usually composed of three
outsiders, not associated with executive
management or former officers.
• The SOX Act mandates at least one member to
be a "financial expert."
• The committee serves as an independent check
and balance for internal audit and liaison with
external auditors.
• The relationship between management and
external auditors has changed significantly, with
external auditors now reporting to the audit
committee.
• The committee must challenge internal auditors
and management when necessary.
• The committee members identify risk and serve
as an independent guardian of the entity's
assets.
• Corporate frauds often relate to audit
committee failures, including lack of
independence, lack of experienced members,
inactive committees, and absence of an audit
committee.
DESIGNER/AUDITOR DUALITY
• Accountants must understand principles of
systems design to conduct audits effectively.
• Design issues include system functions, tasks, and
internal controls.
• Understanding audit issues and concerns is
crucial for system design.
• Designers must understand audit risks and
objectives for evidence gathering.
• The accountant's dual responsibility influences
the organization and approach of the text.
• The text presents topics from the auditor's
perspective, discussing human activities, manual
procedures, and information technologies.
• The risks posed by these technologies and how
they can be mitigated through internal controls
are discussed.