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ECONOMIC CONCEPTS AND THEORY : BEC

I. Supply and Demand
A. The market matches buyers and sellers of good and services.
B. Demand is the quantity of a good or service that consumers are willing and able to
purchase at various prices.
1. Law of demand - the price of a product and the quantity demanded are
inversely related.
2. Substitution effect - when prices decrease, buyer will enter the market. The
product will be cheaper relative to other goods and is substituted for them.
3. Income effect - people buy more when prices are lower.
a. Normal goods - commodities for which demand is negatively related to
income.
b. Inferior goods - commodities for which demand is negatively related to
income.
c. Substitutes - increase is price of one product will generate an increase
in demand for another.
d. Complements - increase in the price for one product will generate a
decrease in demand for another. Bread prices go up, jelly demand goes
down
C. Demand curves
1. Elasticity of demand - the parentage change in quantity demanded divided by
the percentage change in price.
D. Supply is the amount of goods or services that producers are willing to offer at a given
price.
1. Law of supply - the price of a product and the quantity supplied are positively
related.
2. Price elasticity of supply - percentage change in quantity supplied divided by
the percentage change in price.
3. Equilibrium - the point at which the demand and supply curves intersect.
E. Law of diminishing returns - a fixed amount of production resources, the addition of
increments of labor will produce diminishing returns.
F. Law of diminishing marginal utility - useful will decline as consumers acquired
additional units of a product.

II. GDP and Business Cycles
A. National income - the measure of the output and performance of a nations economy.
1. Gross domestic product (GDP) - the total market value of all final goods and
services produced within the US whether domestic or foreign during a year.
2. Gross national product (GNP) - value of output produced with the US owned
resources regardless of their location. GNP is GDP plus output of US owned
resources abroad minus foreign owned resources in the US.


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3. Measurement of GDP can use one of two approaches.
a. Income approach - GDP is sum of various types of income such as
wages, interest, rents, indirect business taxes, net foreign income.
b. Expenditure approach - GDP is sum of spending such as personal
consumption spending, gross private domestic investment, government
purchases, net exports.
4. Net domestic product - GDP - deprecation (consumption of fixed assets)
5. National income - NDP + US net income earned abroad - indirect business
taxes such as sales taxes.
6. Personal income - NI - corporate taxes - social security contributions +
transfer payments
7. Disposable income - PI - personal income taxes
B. Business cycles
1. Peak phase - economy has reached its highest level of production (GDP).
2. Trough - low levels of economic activity and under use of resources.
3. Recovery (expansion) - increasing economic activity.
4. Recession - activity severely contracts.
5. Depression - conditions are similar but longer lasting.
C. Economic indicators -
1. Consumer price index (CPI) - based on prices of 364 goods and services over
time.
2. Leading indicators such as new orders, building permits, weekly production.
3. Lagging indicators - unemployment consumer credit,
D. Employment
1. Natural rate of unemployment - the long-term rate that would exist even if
there were no cyclical unemployment.
2. Full employment - when the real rate of unemployment is equal to the natural
rate.
3. Frictional unemployment - employees are between jobs.
4. Structural unemployment - includes those who have skills but do not match
the required skill levels. by employers.
5. Cyclical unemployment - downturn in the business cycle.

III. Fiscal Economics
A. Deals with the ability of the economy to generate and maintain full employment over
the long run without government intervention. Three assumptions about this theory.
1. The difference between savings plans and investment plans is fundamental to an
understanding of changes in the level of income.
2. Price flexibility cannot be relied upon to provide full employment.
3. Equilibrium GDP does not necessarily provide full employment.
B. Multiplier - a change in consumption, investment, net exports or government spending
results in a multiplied change in equilibrium GDP.
1. Marginal propensity to consume (MPC) - the percentage of additional income
that is consumed.
2. Marginal propensity to save (MPS) - the percentage of additional income that
is saved.
a. MPC + MPS = 1 or MPS = 1 - MPC


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IV. Money and the Economy
A. M1 - coins and currency, checking deposits
B. M2 - M1 plus savings, small time deposits, money market accounts.
C. Monetary policy by the FED is designed to control the economy through the supply of
money in the banking system. Tools to accomplish this are:
1. Reserves
2. Discount rates.

V. Unemployment, Inflation, Deflation, Government
A. Unemployment - types
1. Frictional - caused by the normal workings of the labor market.
2. Structural - aggregate demand is sufficient to provide full employment but the
distribution of demand does not relate to labor force.
3. Cyclical
4. Seasonal
5. Regional
6. Technological.
B. Inflation
1. Cost-push - increased production costs are passed on to the consumer.
2. Demand-pull - demand for goods and services is excessive.
3. Consumer price index
C. Governments role
1. Taxation
a. Progressive
b. Regressive
c. Proportional
2. Direct taxes are paid by the taxpayer directly such as income taxes.
3. Indirect taxes are paid by someone else even though the individual will
eventually pay the taxes.

VI. International Trade
A. Comparative advantage - countries should produce products when they have the
competitive advantage for sale and buy when they do not.
1. Production possibilities curve - represents the tradeoffs between two alternative
goods that can be produced from the same amount of resources.

VII. Trade Barriers
A. The following items are barriers to successful trade.
1. Tariffs - consumption taxes to restrict imports.
a. Antidumping taxes
2. Import quotas
a. Embargo - total ban on some kinds of imports.

VIII. Foreign Currency Rates and Markets
A. Exchange rate determination
1. Spot rate - rate paid for immediate delivery of a currency.
2. Forward exchange rate - future price of currency.
B. Avoiding the problem through hedging.


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1. Purchased or selling forward contracts.

IX. Balance of Payments
A. Balance of trade is difference between total exports and imports of goods.


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AUDITING AND BUSINESS INFORMATION SYSTEMS

I. Characteristics of Computer Processing
A. Transaction trails - trails may exist for only a short period of time
B. Uniform processing of transactions - computers will process transactions in the same
manner and helps eliminate errors.
C. Segregation of functions - in a manual system segregation of duties helps prevent
errors and fraud. In a computer system, one operator may be performing overlapping
duties. Therefore, other controls must be in place to help prevent problems.
D. Possible errors and fraud - the possibility of individuals getting access to data,
changing data and access to assets is greater in a computer environment.
E. Better supervision - management can use analytical tools to watch over the situation
better than in a manual system. It improves the quality of information as well.

II. Information Systems - covers 4 areas
A. Operational level - transaction processing systems (TPS)
1. Part of the accounting system such as general journal and ledgers, payroll
records, cash records, production planning records.
B. Knowledge level - knowledge work systems (KWS)
1. Used by profession and technical professional. Such things as CAD or
computer aided design systems and office automation systems (OAS) are used
to process normal information
C. Management level - Management information systems (MIS) and decision support
systems (DSS).
1. Used to help management in monitoring, controlling, decision-making and
ordinary administrative functions such as logistics, personnel, marketing,
finance, manufacturing, etc. It is very interactive and helps automate certain
decisions where logic can be implemented.
2. Accounting information systems (AIS) is used to process financial
transactions. This system records journal entries and the ledger system.
D. Strategic level - executive support systems (ESS) or Executive Information System
1. This system helps management with changing unstructured problems and is
focused on the broader more narrow decisions that senior management must
make.


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III. Systems Development and the Life Cycle Approach
A. The System Development life cycle approach - used the develop highly structured
application systems. The major advantage is better management and control of the
entire process. The steps are:
1. Proposal - application that addresses the need for a system, support for it, and
the scheduling of the process.
2. Feasibility study - determines whether the system is technically, economically
and operationally feasible. One looks at the cost-benefit analysis
3. Information requirements - the requirements of users, reports needed, databases
and other operating characteristics.
4. General design - user specifications, inputs and outputs of the system,
processing flow, controls, and documentation.
5. Physical system design
6. Physical database design
7. Procedure development - layout chart
8. Flowcharting and diagrams
9. Program development - coding and testing the system.
a. Structured programming - divides the system into modules that can
concurrently be programmed.
b. Computer aided systems engineering (CASE) - It allows software
design and development through computer documentation for routine
types of programs.
10. Implementation - installation and operation
a. System conversion
b. Training
c. Follow-up

IV. Effects of It on Business Processes
A. The effects of this process relates to information security, privacy, risk management,
internal controls.

V. Enterprise Resource Planning (ERP)
A. ERP is designed to integrate business-wide information systems by creating one
database linked to all of the other applications.
1. The architecture of an ERP deals with client-server configuration such as local
area networks and wide area networks and database management systems.
B. Material requirement planning (MRP) - designed to control materials used in a
production setting by placing raw materials into production at the precise moment of
need.
C. Manufacturing resource planning (MRP-II) - a more advanced stage of MRP that
integrates production, sales, inventory, scheduling and cash flows into one control and
planning system.

VI. Artificial Intelligence
A. AI is computer software designed to perceive, reason, and understand business
decisions. It begins with:
1. Knowledge database
2. Inference engine to help make decisions.


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3. Heuristics or exploration problem-solving techniques that uses self-education
methods to evaluate feedback and improve performance.
4. Network logic to learn from mistakes.
5. Fuzzy logic system to deal with imprecise data and problems that have many
solutions.
B. These systems allow us to make decisions quicker and with more uniformity, such as
choosing an audit program within a given set of circumstances.

IT CONTROLS
I. Functional Areas of IT Operations
A. Controls should ensure that the system is running efficient and effectively.
1. Control environment and the assignment of authority and responsibility.
B. Segregation of duties
1. Database administrator - overall responsibility for developing and
maintaining the database and controls of data.
2. Systems analyst - the architect of the system. They flowchart and design the
system.
3. Programmers - write the program according to the design from the analyst.
4. Operators - data entry.
5. Help desk - log in problems and provide helpful information to users.
6. Data conversion operators - data preparation and transmission from remote
terminals.
7. Librarians - controls the programs and documentation.
8. End users- applies the application programs.

II. Disaster Recovery and Business Continuity
A. Recovery plans deal with the regeneration of information and files should they be
destroyed. They create backup copies for such situations.
B. The various types of processes dictate the type of recovery plans necessary.
1. Batch processing - checkpoint procedures involve capturing data and program
indicators at specific points and storing those valued in another file. Processing
could be restarted at one of the checkpoints.
2. Online processing - rollback and recovery involves dumping the master file
contents onto a backup file.
3. Database management system - used dual logging with the use of two
transaction logs written simultaneously on two separate storage media.
C. Hot and cold sites
1. Hot site is an arrangement with the hardware vendor to provide a fully
operational backup facility configured to the users needs in case of emergency.
2. Cold site does not have this capability.

III. Documentation and Development Methods
A. Systems documentation - narratives, flowcharts, definitions, input and output forms,
record layouts, etc.
B. Program documentation - program flowcharts, source code, and test data, data
structure.


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C. Operating documentation - setup, files, input procedures, run times, recovery
procedures and controls.
D. Procedural documentation - master plan and operations to be performed, files, and
data definition.
E, User documentation - describes the system and producers for data entry, error
checking and correction, and formats and uses of reports.



IV. Hardware Controls
A. Dual read - an input device may read an input twice for comparison.
B. Duplicate circuitry - allows the arithmetic logic unit of the CPU to perform
calculations twice and compare.
C. Echo check - provides peripheral device to return a signal sent by the CPU such as a
printer before printing.
D. Write protection - all data storage media, except hard disks, have a ring, table or notch
that can be used to prevent writing.
E. Parity check - adds a digit to the end of a binary code to determine if data has been
altered.

V. Access Controls
A. Physical security controls - limit access and protect against environment risks and
natural catastrophes.
B. Logical security controls - needed for communications network and connections
externally.
1. Passwords and ID numbers.
a. Encryption - uses algorithm to scramble text for transmission.
b. Callback - user to call the computer, give id, hang up, and wait for an
authorized number.
c Biometrics - uses physical characteristics to id a person
VI. Application Controls - relate to the actual operations of the computer system.
A. Types of controls
1. Preventive - attempts to head off problems before they occur.
2. Detective - checks to determine if preventive controls are working. These
might also be called feedback controls.
3. Feedforward - help look into the future and control future events - budgets.
4. Directive - provide for limitations in decision making within parameters.
5. Corrective - controls designed to fix problems.
B. Input Controls - are concerned with the accuracy and completeness of date entered
into the processing system.
1. Control totals - designed to detect errors in processing by being aware of the
information before processing.
a. Batch totals - such as total hours by department.
b. Record counts - how many being processed.
c. Hash totals - non-accounting number such as social security numbers.
2. Computer editing


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a. Self-checking digits - a pre-tested number is assigned to an item and
entered by this number. If the number is entered incorrectly, the
computer will catch the problem.
b. Validity check - checks the validity of a number against a master file of
pre-approved numbers.
c. Reasonableness tests - put a limit on the number of hours an employee
can work in a week or the amount of pay they can make in a week and
the computer will edit against that amount and not process entries in
excess.
d. Sequence checks - records are in the right order.
C. Processing Controls
1. Procedures to prevent processing incorrect files and identify the operator who
caused the error.
2. Logic checks are incorporated to provide assurance that transactions are
properly valued.
3. Run-to-run totals are verified where appropriate.
D. Output controls
1. Control totals.
2. Limit processing time.
3. End of run markers for completeness.
4. Controlling distribution of the reports.

VIII. End-User Computing (EUC)
A. This involves user-create systems that are maintained and operated outside the normal
system.
B. Audit trails are usually bad since the operator created the system and it might have poor
documentation.

IX. Internet Security
A. Passwords.
B. Firewall - separates an external network and prevents passage of specific types of
traffic from entering the system.

HARDWARE, SOFTWARE AND DATA
I. Characteristics of an Information System
A. Hardware - The physical components of the system which include the CPU (arithmetic
logic unit, controls, primary storage), drives, disks, printers, terminals, etc.
1. Mainframes - large, high-speed computers.
2. Microcomputers - such as personal computers are small but have many
independent business applications.
3. Workstations - desktop machines but have enhanced math and graphic abilities
4. Storage devices include
a. Random access - has direct access to data no matter how it is stored
physically.
b. Sequential - data is processed in the order it is stored. Can be indexed to
get one to the point in the text quicker - like a textbook.
c. Magnetic tape -cheap form of secondary storage.


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d. Magnetic disks - larger space for storage.
e. CD-ROM
f. WORM - read once write many and cannot be erased.
5. Peripheral devices
a. Magnetic ink character reader (MICR) - banks use to read checks.
b. Point of sale terminals such as teller machines.
c. Voice recognition compares ones voice with their patterns.
d. Optical scanners - used to pass a light pen over the price tage to record.
e. Laser bar code scanners - reads bar codes to record transaction.
B. Software - the brains behind the operations of the computer.
1. Operating systems or supervisory program - performs the functions of
controls, scheduling, and interfacing with the application programs. They
include utility programs that perform basic operations such as merging
and sorting files.
a. Multiprogramming - a program can be accessed and data sent to print
while another program is opened and running.
b. Multiprocessing - multiple CPUs process data while sharing
peripherals.
2. Utility programs - perform simple tasks such as sorting and merging file.
3. Source program - language used in the original program, which is a high level
language.
a. BASIC
b. COBOL
c. FORTRAN
d. Java
e. Pascal
f. C, C+, C++
4. Object program - the program, which was converted to a machine-readable
form from the source program.
5. Interpreter program - converts a source program into an object program one
line at a time and must be done with every use of the computer.
6. Compiler program - converts source program to object program for the entire
program at once.
7. Application program or user program - program used to process data such as
Excel, Word, etc.
8. Database management system - an intermediate program, which controls the
processing of data for an entire system database through access controls.

III. Data Structure
A. Terms for data systems
1. Bit - a zero or one and is the smallest unit of measurement for a computer.
2. Byte - group of 8 bits.
3. Field - a group of related characters such as id numbers
4. File - group of related fields such as an address.
5. Transactions file - data for a given account.
6. Master file - permanent data file such as general ledger accounts.


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IV. The Role of Information Systems Within Business
A. The role of IS today for the accountant is to process complex accounting information
and reports the results to management in a timely manner so that business decision can be
made effectively. The decision is extremely dependent upon the quality and
correctness of the information. Therefore, proper design and controls are a vital element of
any information system.




PROCESSING MODES, DATABASES, AND NETWORKS

I. Processing Systems
A. Batch Process
1. Transactions are accumulated and processed in groups. The transaction
summary is then posted to a mater file (general ledger). This system is simple
and easy to operate but is slow. An example of this system would be payroll.
B. On-Line, Real Time Systems
1. On-line systems give individuals immediate access to data. Real time refers to
the ability of the individual to update data immediately. This system is fast but
more difficult to audit.
C. Distributed Processing Systems (Decentralized vs. centralized)
1. Refers to the fact that instead of using mainframes for access to programs and
files, there is a stand-alone computer on the desk of an individual with full
programming and processing capabilities.
D. Separate File System
1. Each file is updated individually in separate processing runs.

II. Databases
A. Database system
1. Database system - software that helps utilize the data within the system. It
allows for one single storage site for all data without any redundancy. Data
integrity is of ultimate importance since contamination ruins the data for all
users.
2. Database management system - software that helps communication take place
between application programs and regulates the access and ownership of data
structures.
3. Database structure would include - we get to data with pointers and keys
a. Hierarchical - data ownership looks like an organizational chart.
b. Network - each element can have multiple owners.
c. Relational - each element is connected logically based upon their
interrelationships.
4. Data dictionary - describes the use of data from the database in applications.
5. Schema - a description of the logical structure of the database since data is
stored randomly.

III. Data Communications and Networks
A. Movement of data


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1. Multiplexors - switching devices that route the flow of data.
2. Modem - hardware device to convert digital signals from terminals and
the CPU into analog for transmission.
3. Communication channels
a. Narrowband - telegraph lines
b. Voice band - telephone lines.
c. Broadband - multiple paths that permits simultaneous
transmissions of different kinds of data.

B. Types of networks
1. Value-added networks (VAN) - mailbox services where the sender and
receivers are never directly connected to each other but runs through a third
party network.
2. Local area network (LAN) - local distribution of data
3. Wide area network (WAN) or distributed data processing - distributed in a
wide geographic area
C. Applications
1. Electronic mail
2, Voice mail
3. Teleconferencing
4. Fax machines
5. Electronic bulletin board - database into which computer users may dial to
read or post messages.
D. Network configuration - how lines of communication will flow in a network.
1. Point-to-point - from one terminal to another along a straight line.
2. Bus - many connected computers where the line of communication is along a
straight line.
3. Ring - the communication line connects the computers in a circle.
4. Fully connected - the lines of communication go directly from one terminal to
another.
5. Star - a dedicated server is placed in the center and the individual terminals
from out from that center like a star. Communication flows through the server
before going to the intended terminal.

E-COMMERCE
I. EDI
A. The communication of electronic documents directly from a computer in one business
to a computer in another business.
B. It uses standards to convert documents into an electronic form.
C. Encryption is a vital part of the protection of secure information.

II. Electronic Funds Transfer
A. The ability for financial institutions worldwide to access and transfer funds.

III. Point of Sale Transactions
A. A point of sale system captures and transmits a retail transaction instantly.


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IV. Software Attacks
A. Protection from malicious software
1. Trojan horse - an innocent program houses a hidden function meant to destroy.
2. Virus - copies itself from file to file.
3. Worm - copies itself from computer to computer.




AUDITING IN A COMPUTER ENVIRONMENT
I. Auditing in a Computer Environment - the auditor must test the EDP system to see if it is
working the way it is designed to work.
A. Test data approach - auditor may develop test data by using valid and invalid data and
entering this into the system and see how it is processed. Such things as invalid
numbers, duplicate entries, excess hours.
B. Integrated test facility (ITF) - establishes a dummy entity within a client's system to
see if the data will be processed correctly.
C. Snapshots - auditor embeds software routines at different points within an application
to capture and report images of selected transactions as it is processed at preselected
points in the program.
D. System control audit review file (SCARF) - uses software embedded in the system to
gather information at predetermined points in a system. It is stored and reported to the
auditor at predetermined intervals.
E. Parallel simulation - auditor builds a program independent of the client's software.
The two programs are run parallel to each other and the outputs are compared for
consistency.
F. Code review - auditor reviews computer code in the client's
program looking for an inappropriate code or program logic.
G. Code comparison - EDP control group keeps a control copy of the original program
(blueprint) and compares the original copy to the program currently in use looking for
changes.

IX. On-Line Real Time System Controls
A. In this type of system, the major concern is access and the ability to change data without
leaving an audit trail.
1. Use passwords to enter the system.
2. Passwords should periodically be voided and changed.
3. Input editing is very important - validity checks.
4. All activity should be logged into a history file with user identification.
5. File backup should be maintained.


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