AccountingInformation

System(AIS)
asummary

Ethics,
Ethics, business
business ethics,
ethics, computer
computer ethics
ethics
1. Ethicsprinciples of conduct that individuals
use to make choices and to guide their behavior
in situations that involve the concepts of right
and wrong (conflicts)
2. Business ethicshow managers determine what
is considered to be right conduct; and then how
the right conduct can be achieved in the conflict
3. Computer ethicsethical use of hardware,
software, computer networks, and databases, as
well the societal impacts of these items

Fraud
Fraud and
and fraud
fraud triangle
triangle

Fraud is any dishonest act by an employee that results in personal benefit to the
employee at a cost to the employer
Fraud denotes a false representation of a material fact made by one party to another
party with the intent to deceive and induce the other party to justifiably rely on the
fact to his or her detrimentcommon law to meet the following 5 conditions:
1. False representation There must be a false statement or a nondisclosure.
2. Material fact A fact must be a substantial factor in inducing someone to act.
3. Intent There must be the intent to deceive, or the knowledge that ones statement is
false.
4. Justifiable reliance The misrepresentation must have been a substantial factor on
which the injured party relied.
5. Injury or loss The deception must have caused injury or loss to the victim of the
fraud.

Categories
Categoriesof
offraud:
fraud:
1.1. fraudulent
fraudulentstatements
statements
2.2. corruption
corruption
3.3. asset
assetmisappropriation
misappropriation

Why does
fraud
occur?
Fraud
Triangle

Rationalization = Ethics

ExamplesEnron, WorldCom, Adelphia

Underlying Problems

Lack of Auditor Independence: auditing firms also engaged by

their clients to perform non-accounting activities
Lack of Director Independence: directors who also serve on the
boards of other companies, have a business trading relationship,
have a financial relationship as stockholders or have received
personal loans, or have an operational relationship as employees
Questionable Executive Compensation Schemes: short-term stock
options as compensation result in short-term strategies aimed at
driving up stock prices at the expense of the firms long-term
health
Inappropriate Accounting Practices: a characteristic common to
many financial statement fraud schemes
Enron made elaborate use of special purpose entities.
WorldCom transferred transmission line costs from current
expense accounts to capital accounts.
5

Internal control
ISA (International Standards on Auditing) 315

COSO cube

Internal control is a process,

effected by an entitys board of
directors, management and other
personnel, designed to provide
reasonable assurance regarding the
achievement of objectives in the
following categories:
1. Effectiveness and efficiencies
of operations
2. Reliability of reporting
3. Compliance with applicable
laws and regulations
and 4. Safeguard assets (AICPA SAS)
6

Organizational charta manufacturing

company

Internal control is designed and implemented

to address identified business risks that
threaten the achievement of any of internal
control objectives".

Components & Activities of effective internal control

1. Control Environment
Actions, policies, and procedures
reflecting the overall attitude of top
management, directors, and owners of
an entity about internal control and its
importance

1.Demonstrates commitment to integrity and ethical values

2.Exercises oversight responsibility
3.Establishes structure, authority and responsibility
4.Demonstrates commitment to competence
5.Enforces accountability

2. Risk Assessment
Managements identification and analysis of risks
relevant to the preparation of the financial statements
according to reporting standards.

3. Control Activities
Policies and procedures that
management established to meet its
objectives for financial reporting

6.Specifies suitable objectives

7.Identifies and analyzes risk
8.Assesses fraud risk
9.Identifies and analyzes significant change

10.Selects and develops control activities

11. Selects and develops general controls over technology
12.Deploys through policies and procedures

4. Information & Communication

13.Uses relevant information

14.Communicates internally
15.Communicates externally

Methods used to initiate, record, process and report an entitys

transactions and to maintain accountability for related assets

5. Monitoring Activities
managements ongoing and periodic assessment
of the quality of internal control performance to
determine whether controls are operating as
intended and modified when needed

16.Conducts ongoing and/or separate evaluations

17.Evaluates and communicates deficiencies

C RI
ontrol

isk

nformation

onitoring

nvironment

5 components/principles of internal
control as an interrelated and integrated
processreliable reporting

Limitations of Internal Controls

1.
2.
3.
4.
5.

Possibility of honest errors or

human failures/mistakes
Circumvention via collusion to
commit fraud
Management override on
internal controls
Changing conditions
especially in companies with
high growth
Operation of a control may not
be effective eg information
produced for the purposes of
internal control (e.g. exception
report) is not effectively used
because the individual
responsible for reviewing the
information does not
understand its purpose or fails
to take appropriate action.

6.

7.

8.

Edit checks in a software program that are

designed to identify and report
transactions that exceed specified credit
limits may be overridden or disabled.
In designing and implementing controls,
management may make judgments on the
nature and extent of the controls it
chooses to implement, and the nature and
extent of the risks it chooses to assume.
Smaller entities have fewer employees
which may limit the extent to which
segregation of duties is practicable.
However, in a small owner-managed
entity, the owner-manager may be able to
exercise more effective oversight than in a
larger entity. This oversight may
compensate for the generally more limited
opportunities for segregation of duties.
10
10

Why the fuss?

Top executives? Management? Employees?

Exposure/risk of weak internal

controls:
1. Destruction of an asset
2. Theft of an asset
3. Corruption of information
4. Disruption of the information system
4 points of failure:
1. Assume that Internal Control
is auditors job
2. Fail to link risks and controls
3. Inadequate monitoring of
controls
4. Ignore reality e.g. management
over-ride is always present

Examples of Financial Risk:

1. Accounting processes
2. Auditing matters
3. Compliance with regulatory issues
4. Falsification of reports/records
5. Fraud
6. Improper receipt of gifts
7. Improper vendor activity
8. Theft
9. Waste and Abuse
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10. Misuse of resources

Information flow horizontal & vertical

An information system
(IS) is the set of formal
procedures by which data
are collected, processed
into information, and
distributed to users.
Goals of information system:
1. To support the stewardship function of management
2. To support management decision making
3. To support the firms day-to-day operations
12

AIS versus MIS?

Information
Systems
Accounting
Information
Systems
TPS

GLS
&
FRS

MRS

TPS = Transaction processing system

GLS = General ledger system
FRS = Financial reporting system
MRS = Management reporting system

Management
Information
Systems
Financial
Management
Systems

Marketing
Systems

Distribution
Systems

13

Human
Resource
Systems

Accounting Information
System (AIS):
1. It identifies, collects,
processes, and
communicates economic
information about a firm
using a wide variety of
technologies.
2. It captures and records
the financial effects of
the firms transactions.
3. It distributes transaction
information to operations
personnel to coordinate
many key tasks.

Subsystems of AIS:
1. Transaction processing
system (TPS)
supports daily business
operations, eg purchasing
2. General Ledger/ Financial
Reporting System (GL/FRS)
produces financial statements
and reports, eg profit or loss
statement, balance sheet
3. Management Reporting
System (MRS)
produces special-purpose
reports for internal use, eg
budget, sales analysis
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Functions for
transforming data
into information:
1. Data Collection
2. Data Processing
3. Data
Management
4. Information
Generation

Components/functions of AIS
input, processing & output

15

Characteristics of useful
information:
1. Relevance: serves a
purpose
2. Timeliness: no older
than the time period of
the action it supports
3. Accuracy: free from
material errors
4. Completeness: all
information essential
to a decision or task is
present
5. Summarization:
aggregated in
accordance with the
users needs

Management Level
and Decision Type

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Data Processing Functions

1. Distributed Data
Processing

2. Centralized Data
Processing

Most companies fall in between

Reorganizing the
computer services
function into small
information
processing
units that are
distributed
to end users and
placed under their
control

All data processing is performed

by one or more large computers
housed at a central site that
serves users throughout the
organization.
Primary areas:
1. database administration
2. data processing
3. systems development
4. systems maintenance

18

Control activities:
a)
1.
2.
b)
1.
2.
3.
4.
5.
6.

IT controls
General controls
Application controls
Physical controls:
Transaction
authorization
Segregation of duties
Supervision
Accounting records
Access control
Independent
verification

3 levels of control :
1. Preventive control
minimize potential of
problems (fraud / error)
2. Detective control discover
the problem which has
occurred
3. Corrective control
rectify /remedy the problem
that was encountered:
a) Identify cause of the problem
b) Correct the problem
c) Modify the system to
minimize similar problem in
the future
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A transaction
1. Financial transaction
. is an economic event that affects the assets and equities
of the firm, is reflected in its accounts, and is measured
in monetary terms
. similar types of transactions are grouped together into
three transaction cycles:
1. expenditure cycle
2. conversion cycle
3. revenue cycle
2. Non-financial transactions
. all other events processed by the organizations
information system
. e.g. an airline reservation no commitment by the
customer

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Each transaction cycle has 2 primary subsystems

1. Expenditure Cycle: time lag between the two due to credit
relations with suppliers expenses, payroll, fixed assets; cash
and credit:
physical component (acquisition of goods, services,
assets)
financial component (cash disbursements to the supplier)
2. Conversion Cycle :
production system (planning, scheduling, and control of
the physical product through the manufacturing process)
cost accounting system (monitors the flow of cost
information related to production)
3. Revenue Cycle: time lag between the two due to credit
relations with customers cash and credit:
physical component (sales order processing)
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financial component (cash receipts)
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Relationship between transaction cycles

Figure 2-1

22

Relationship of GLS to other information

subsystems
Billings

Financial
Reporting
System

Management
Reporting
System

Cash
Disbursements

Sales

Cash
Receipts

Cost
Accounting

General
Ledger
System
(GLS)

Inventory
Control

Payroll

Accounts
Payable

Fixed
Assets

General Ledger System Reports

1. General Ledger data storage and analysis
a) listings of transactions
b) allocation of expenses to responsibility centers eg cost,
profit and investment centers
c) trial balance showing account balances
2. Financial Statements disclosures, comparison of
account balances with prior periods and budgets
a) Statement of financial position (balance sheet)
b) Statement of Profit or Loss (income statement)
c) Statement of cash flows
3. Managerial Reports - analysis
a) analysis of sales, cost of sales, expenses, profit or loss
b) analysis of receivables, payables, fixed assets, ratios
4. Chart of Accounts coded listing of accounts;
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classification of transactions

Problem Structure
Reflects and affects how well decision makers understand
and solve problems. Elements of problem structure are data,
procedures, objectives

Non-Traditional IS

Traditional IS

Information System

Management Level

Problem Structure
Unstructured

Strategic
Management
Tactical
Management

Partially
Structured

Operations Management
Operations

Structured
25

Flow Chart
A flow chart is:
1. an organized combination of shapes, lines, and texts
that graphically illustrates a process or structure
2. a pictorial representation showing all of the steps in
a process
3. transcribing facts into visual diagrams, using a
standard set of symbols in a clear, concise, and
logical manner
As Is current state baseline
Could Be improved state transition
Should Be optimal state
26

Uses of flow chart

1. Define and analyze processes, people, documents, etc
2. Build a step-by-step picture of the process for
analysis, discussion, or communication purposes
3. Define, standardize, or find areas for improvement in
a process
4. Flowcharts are recognized as one of the most
important ways to effectively communicate ideas
between people who may differ in knowledge,
education, and position
Training
Troubleshooting
Testing
Improving
a process
27

5 documentation techniques
1. Data flow diagrams (DFD) logical flow of data
and what is happening in a system; 3 types context,
physical and logical
2. Entity relationship diagram (ERD) graphical
representation of entities and their relationships to
each other; 3 types of relationships between entities:
1 to 1, 1 to many, many to many
3. System flowcharts (SF) relationship between
inputs, processing, and outputs for a system
4. Program flowcharts (PF) sequence of logical
operations performed in a computer program
5. Record layout diagram internal structure of digital
records in a flat-file or database table
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An example
flowcharting
symbols

Program flowchart details the logic of processes

performed by the computer as the
programmers blueprint for writing the actual
computer program

5 categories of
flowcharting
symbols:
1. Input
2. Processing
3. Output
4. Data stores
5. Connectors
A

A, 2
PLEASE REFER TO REFERENCE & READING RESOURCES
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Anexampleofan
interrelatedand
integratedsystem
enabledby
INFORMATION
TECHNOLOGY

30

Enabling

Industries

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