Accounting Information Systems - An Overview

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ACCOUNTING INFORMATION SYSTEMS AN OVERVIEW

What is an AIS? A system is a set of two or more interrelated components that interact to achieve a goal. Consists of 5 components: 1. People Who create and operate the system and perform various functions. 2. Software Used to process data. 3. Procedures The flow of transaction in system. 4. Information Technology Infrastructure - Computer and IT. 5. Data All documentation use in the process.
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ACCOUNTING INFORMATION SYSTEMS AN OVERVIEW

These 5 components enable AIS to fulfill 3 important functions: 1. Collecting and storing data about activities & transactions 2. Transforming data into useful information for making decisions 3. Providing adequate controls to safeguard the organizations assets
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Why Study The AIS?

In Statement of Financial Accounting Concepts No.2, The FASB Defined accounting as an information system Stated that the primary objective of accounting is to provide information useful to decision makers.
DDW 2283 ACCOUNTING INFORMATION SYSTEM
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Why Study The AIS?

The Accounting Education Change Commission recommended that the accounting curriculum should provide students with a solid understanding of 3 essential concepts: 1. The use of information in decision making. 2. The nature, design, use and implementation of an AIS 3. Financial information reporting
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Why Study The AIS?

To understand how the accounting system works. How to collect data about an organizations activities and transactions How to transform that data into information that management can use to run the organization How to ensure the availability, reliability, and accuracy of that information
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Why Study The AIS?

Auditors need to understand the systems that are used to produce a companys financial statements. Tax professionals need to understand enough about the clients AIS to be confident that the information used for tax planning and compliance work is complete and accurate.
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Why Study The AIS?

One of the fastest growing types of consulting services entails the design, selection and implementation of new Accounting Information System. A survey conducted by the Institute of Management Accountants indicates that work relating to accounting systems was the single most important activity performed by corporate accountants.
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Role of AIS in the Value Chain

An organizations value chain consists of nine interrelated activities that collectively describe everything it does. The five primary activities consist of the activities performed in order to create, market, and deliver products and services to customers and also to provide post-sales services and support.

Firm infrastructure Human resource Technology
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n rgi Ma
tr o ppuS s e ti v t c A i i
Purchasing / Procurement Service Inbound Operati Outboun Marketi logistics Repair d ng & ons logistics Sales Maintenan Receiving
& Storing Materials Manufactu Distributio Advertisin ring Repackagi n Shipping g Selling ng ce
Ma rg in
Primary Activities
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The Value System

The value chain concept can be extended by recognizing that organizations must interact with suppliers, distributors, and customers. An organization's value chain & the value chains of its suppliers, distributors, and customers collectively form a value system.
Raw Materials Supplier Manufacturer Distributor Retailer Consumer
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AIS can add value to an organization by providing accurate and timely information so that the five primary value chain activities can be performed more effectively and efficiently. A well designed AIS can do this by:
1. Improving quality and reducing the costs of products or services 2. Improving efficiency of operations by providing more timely information. 3. Improved decision making by providing accurate information in a timely manner. 4. Sharing of knowledge, perhaps thereby improving operations and even providing a competitive advantage.
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AIS and Corporate Strategy

Two Basic Strategies Product differentiation and Low cost strategy Three Basic Strategic Positions Variety-based, needs-based and access-based strategic position
(Based on Michael Porter, world-renowned professor of business at Harvard)
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OVERVIEW OF BUSINESS PROCESS

Business Activities & Information Needs 1st Important Function: Collecting and storing data about the activities performed by an organization. 1. Capture transaction data on source documents 2. Record transaction data in journals 3. Post data from journals to ledgers, which sort data by account type
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Business Activities & Information Needs

2nd Important Function: Transforming data into information that is useful for making decisions. In manual system, this information is provided in the form of reports that fall into 2 main categories: 1. Financial Statements 2. Managerial reports
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3rd Important Function: Providing adequate controls to safeguard the organizations assets. 1. Ensure information produced is reliable. 2. Ensure that business activities are performed efficiently and in accordance with managements objectives. 3. Safeguard organizational assets.
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AIS and its subsystems Financing cycle includes the events of obtaining funds from investors and creditors and repaying them Human Resources (Payroll) cycle includes the events of hiring and paying employees Expenditure cycle includes the purchases and cash disbursement events
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Production cycle includes the events of transforming raw materials and labor into finished products Revenue cycle includes the sales and cash receipts events These various transaction cycles relate to one another and interface with the general ledger and reporting system.
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Transaction Processing: Documents & Procedures

Data Processing Cycles consists of 4 steps: 1. Data Input data input accuracy and efficiency can be improved by turnaround documents & source data automation. 2. Data Processing periodic updating of stored data about resources is batch processing, immediate updating as each transaction occurs is referred as online, real time processing.
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Transaction Processing: Documents & Procedures

3 Data Storage entity is something about which information is stored, each entity has attributes or characteristics of interests, which needed to be stored 4. Information Output useful for decision making
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Providing Information For Decision Making

Two main categories: 1. Financial statements designed for external parties to use in making decisions about extending credit to or investing in the organization 2. Managerial reports 2 important types of managerial reports are budgets and performance reports.
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Internal Control Considerations

(Refer to the basic objectives of the 3rd important
function of AIS) To accomplish those objectives, 2 important methods: 1. Providing adequate documentation on all business activities. 2. Ensuring effective segregation of duties.
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CONTROL & AIS

AIS Threats - Natural and political disasters, software errors and equipment malfunctions, unintentional acts and intentional acts (computer crimes)
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THREATS 1. Nature and political disaster 2. Software errors and equipment malfunctions 3. Unintentional acts
4. Intentional acts
EXAMPLES 1. Fire, floods, earthquake and wars. 2. Hardware failures, software errors or bug, power outages and fluctuation. 3. Innocent errors or omissions, misplace data. 4. sabotage, computer fraud and crime.
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Overview of Control Concepts

Internal control plan and methods of an organization uses to safe-guard assets, provide accurate and reliable information, promote and improve operational efficiency, and encourage adherence to prescribed managerial policies. Internal control structure consists of policies and procedures to provide a reasonable level of assurance.
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Overview of Control Concepts

3 IMPORTANT FUNCTIONS: Preventive controls deter problems before they arise Defective controls needed to discover problems as soon as they arise Corrective controls remedy problems discovered with detective controls
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The Control Environment
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Consists of the following factors:

1. Commitment to integrity and ethical values 2. Managements philosophy and operating style 3. Organizational structure 4. Audit committee of the BOD 5. Methods of assigning authority and responsibility 6. Human resources policies and practices 7. External influences
Control Activities Generally, control procedures fall into one of the following five categories:
1. Proper authorization of transaction and activities 2. Segregation of duties 3. Design and use of adequate documents and records 4. Adequate safeguards of assets and records 5. Independent checks on performance
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Risk Assessment Major steps in risk assessment strategy:

1. Identify threats 2. Estimate risk 3. Estimate exposure 4. Identify controls 5. Estimate costs and benefits 6. Determine cost-benefit effectiveness
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Information and Communication 5 primary objectives of information and communication:

1. Identify and record valid transactions. 2. Properly classify transactions. 3. Record transactions at proper monetary value. 4. Record transactions in proper accounting period. 5. Present transactions in financial statements.
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Monitoring Performance Key methods of monitoring performance including:

1. Effective supervision 2. Responsibility accounting 3. Internal auditing
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COMPUTER BASED INFO SYSTEM CONTROL
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Controls Related to More Than One Reliability Principles 1. Strategic Planning and Budgeting 2. Developing a System Reliability Plan 3. Documentation
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What constitutes a RELIABLE SYSTEM

FOUR principles to determine if the system is reliable: 1. Availability A system is always available for operations. 2. Security The systems is protected against any unauthorized physical or logical access. 3. Maintainability The system is user friendly and can be modify when necessary. 4. Integrity System can process complete transaction, accurate, timely and have proper authorization.
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Availability
To ensure information system availability, organizations need to minimize system downtime and develop disaster recovery plans. Minimizing system downtime among the methods are policies and procedures, appropriate insurance, preventive maintenance, uninterrupted power system and fault tolerance.
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Availability
Disaster recovery plan its objectives include:
1. Minimize the extent of disruption, damage and loss 2. Temporarily establish an alternative means of processing information 3. Resume normal operations as soon as possible 4. Train and familiarize personnel with emergency2283 ACCOUNTING INFORMATION SYSTEM DDW operations
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Availability
A sound disaster recovery plan should contain the following elements: 1. Priorities for recovery process 2. Insurance 3. Backup data and program files 4. Specific assignments 5. Backup computer and telecommunications facilities 6. Periodic testing and revision 7. Complete documentation
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Security Classification of controls:

1. Segregation of duties within the systems functions 2. Physical access controls 3. Logical access controls 4. Protection of PC and client/server network 5. Internet & e-commerce controls
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COMPUTER FRAUD AND SECURITY

Fraud is any and all means a person uses to gain an unfair advantage over another person. Fraud process 3 characteristics associated with fraud:
Theft of something valuable. Conversion of stolen assets into cash. Concealment of crime to avoid detection.
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Fraud Process
Common & effective way to hide a theft 1. Charge stolen item to an expense. 2. Lapping scheme. 3. Kiting scheme. Why Fraud Occurs? 1. Pressure 2. Opportunities 3. Rationalization
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Computer Fraud
Any illegal act for which knowledge of computer technology is essential for its perpetration, investigation, or prosecution. Computer fraud includes the following: Unauthorized theft, use, access, modification, copying, and destruction of software or data. Theft of money by altering computer records or the theft of computer time
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Computer Fraud
Theft or destruction of computer hardware. Use or the conspiracy to use computer resources to commit a felony. Intent to illegally obtain information or tangible property through the use of computers.
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Computer Fraud
Computer fraud classifications:
Input The simplest and common way to commit a fraud is to alter computer input. Processor Computer fraud can be committed through unauthorized system use, including the theft of computer time and services. Computer Instructions Computer fraud can be accomplished by tampering with the software that processes company data.
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Computer Fraud
Data Computer fraud can be perpetrated by altering or damaging a companys data files or by copying, using or searching them without authorization. Output Computer fraud can be carried out by stealing or misusing system output.
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Computer Fraud
Preventing and Detecting Computer Fraud 1. Make fraud less likely to occur. 2. Increase the difficulty of committing fraud. 3. Improve detection methods. 4. Reduce fraud losses. 5. Prosecute and Incarcerate fraud perpetrators.
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SYSTEMS DEVELOPMENT & DOCUMENTATION TECHNIQUES
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Data Flow Diagrams (DFD) - describes the flow of data within an organization - composed of 4 basic elements 1. Data sources and destinations 2. Data flows 3. Transformation processes 4. Data stores
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Data Flow Diagram Symbols

Data sources and destinations Data flows Transformation processes Data stores
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Data sources and destinations represents an organization or individual that sends or receives data that the system uses or produces. An entity can be both a source and a destination. Data flows represents the flow of data between processes, data stores and data sources and destinations.
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Processes represent the transformation of data from inputs to outputs. Data stores a temporary or permanent repository of data. Data dictionary contains a description of all data elements, stores, and flows in a system. Typically, a master copy of data dictionary is maintained to ensure consistency and accuracy throughout the development process.
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Flowcharts
Flowchart is an analytical technique used to describe some aspect of an information system in a clear, concise, and logical manner. Flowchart symbols: 1. Input/output symbols devices or media that provide input to or record output from processing operations
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Flowcharts
2. Processing symbols either show what type of device is used to process data or indicate when processing is completed manually. 3. Storage symbols represent the device used to store data that the system is not currently using 4. Flow and miscellaneous symbols the flow of data and goods
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Flowcharts
Document Flowchart: Illustrates the flow of documents and information among areas of responsibility within the organization. Flowcharts that describe and evaluate internal controls are often referred to as internal control flowcharts.
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Revenue Cycle Business Activities

Four basic business activities performed in the revenue cycle: 1. Sales order entry 2. Shipping 3. Billing 4. Cash collections
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Objectives of Revenue Cycle

In the revenue cycle, AIS should provide adequate controls to ensure that the following objectives are met: 1. All transactions are properly authorized. 2. All recorded transactions are valid (actually occurred. 3. All valid, authorized transactions are recorded. 4. All transactions are recorded accurately.
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Objectives of Revenue Cycle

5. Assets (cash, inventory, and data) are safeguarded from loss or theft. 6. Business activities are performed efficiently and effectively.
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Objectives
Sales order entry primary objectives are to accurately and efficiently process customer orders, ensure that company gets paid for all credit sales and all sales are legitimate, and to minimize the loss of revenue arising from poor inventory management. Shipping primary objectives are to fill customer orders efficiently and accurately and to safeguard inventory.
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Objectives
Billing and Accounts receivable primary objectives are to ensure that customers are billed for all sales, invoices are accurate, and customer accounts are accurately maintained Cash collection primary objective is to safeguard customer remittances
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Sales Order Entry

THREAT Incomplete or inaccurate customer order Credit sales to customers with poor credit Legitimacy of orders CONTROL ROCEDURES Data entry edit checks Credit approval by credit manager Signatures on paper documents
Stock outs, carrying costs, and Inventory control system markdowns

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Shipping
THREAT Shipping errors CONTROL ROCEDURES Reconciliation of sales order with picking ticket and packing slip; bar code scanner Data entry application controls
Theft of inventory
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Billing and Accounts Receivable
THREAT Failure to bill customers Billing errors Posting errors in updating accounts receivable
CONTROL ROCEDURES Separation of shipping and billing functions Data entry edit controls; price list Reconciliation of subsidiary accounts receivable ledger with general ledger; monthly statements to customers
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Cash Collections
THREAT Theft of cash CONTROL ROCEDURES Segregation of duties; minimization of cash handling; lockbox arrangement; prompt endorsement and deposit of all receipts; periodic reconciliation of bank statement with records by someone not involved in cash receipts processing
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General Control Issues

THREAT Loss of data CONTROL ROCEDURES Backup and disaster recovery procedures; access controls (physical & logical) Preparation and review of performance reports
Poor performance
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EXPENDITURE CYCLE: PURCHASING & CASH DISBURSEMENT

Expenditure cycle is a recurring set of business activities and related data processing operations associated with the purchase of and payment for goods and services. Primary objective: To minimize the total cost of acquiring and maintaining inventories, supplies and various services.
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Expenditure Cycle Business Activities

Three basic business activities in the expenditure cycle: 1. Ordering goods, supplies and services 2. Receiving and storing goods, supplies and services 3. Paying for goods, supplies and services
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Expenditure Cycle Business Activities

Those activities are mirror images of the basic activities in the revenue cycle: 1. The order goods activity generates the purchase order which serves as the customer input to the sales order entry process. 2. The receive goods activity handles the goods sent by the suppliers shipping function. 3. The pay for goods activity generates the payments that are processed by suppliers cash collection activity.
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Objectives
Order goods primary object is to minimize costs associated with maintaining an adequate supply of all needed materials. Receive and store goods primary objectives are to verify the receipt of ordered inventory and to safeguard it against loss or theft. Approve and pay vendor invoices objective is to ensure that the company pays only for goods or services that were ordered and received and to safeguard cash.
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Order Goods
THREAT Preventing stock outs and/or excess inventory CONTROL ROCEDURES Inventory control systems; perpetual inventory records
Requesting unnecessary items Accurate perpetual inventory records Purchasing goods at inflated prices Purchasing goods of inferior quality Solicit competitive bids; use of approved suppliers Use of approved vendors; approval purchase orders
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Order Goods
THREAT Purchasing form unauthorized suppliers Kickbacks CONTROL ROCEDURES Approval of purchase orders; restrict access to supplier master files Policies; require purchasing employees to disclose financial interests in suppliers; vendor audits
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Receive and Store Goods

THREAT Receiving unordered goods CONTROL ROCEDURES Require receiving to verify existence of valid purchase order Use of bar coding technology; document employee performance; Physical access controls; document all transfers of inventory
Making errors in counting
Stealing inventory
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Approve and Pay Vendor Invoices

THREAT CONTROL ROCEDURES Failing to catch errors in vendor Double check invoice accuracy; invoices training of accounts payable staff; use of ERS Paying for goods not received Only pay invoices supported by original receiving report; budgetary controls; use of ERS
Failing to take available purchase Proper filing; cash flow budgets discounts
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Approve and Pay Vendor Invoices

THREAT Paying the same invoice twice CONTROL ROCEDURES Only pay invoices supported by original voucher package
Recording and posting errors in Various data entry and accounts payable processing edit controls Misappropriating cash, checks or Restrict access to blank checks; EFTs check signing machine
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INTRO TO SYSTEMS DEV. & SYSTEM ANALYSIS

Systems Development Life Cycle Systems Analysis Operation & Maintenance Implementation & Conversion Conceptual designs Physical designs
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Planning Systems Development

2 types of system development plan: 1. Project development plan basic building block of information systems planning 2. Master plan a long range planning document that specifies what the system will consist of, how and who will develop it, how to acquire resources and where AIS is headed.
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Planning System Development

System development planning is an important step for the following key reasons: Consistency. Efficiency . Cutting edge. Lower costs. Adaptability.
1. 2. 3. 4. 5.
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Feasibility Analysis
It is prepared during systems analysis and updated as necessary. 5 important aspects of feasibility to be considered: Technical Operational Legal Scheduling Economic
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Systems Analysis
Five steps in analysis phase: 1. Initial investigation conducted to screen projects 2. Systems survey extensive study of the current AIS 3. Feasibility study conducted to determine projects viability 4. Information needs and system requirements 5. System analysis report
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INTRODUCTION TO E-BUSINESS
E-Business Models 1. Business to consumer (B2C) 2. Business to business (B2B) 3. Business to government (B2G) 4. Business to education (B2E)
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E-Business Effects on Business Processes

Value Chain-Primary E-Business Activities Opportunity Inbound Logistics Acquisition of digitizable products Reduced inventory buffers
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Operations Faster more accurate production
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Outbound Logistics
Distribution of digitizable products Continuous status tracking
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Sales & marketing
Improved customer support Reduced advertising cost More effective advertising
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Post-Sale Support and Service Value Chain-Support Activities Purchasing Reduced costs 24/7 service availability E-Business Opportunity Source identification and reverse auctions
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Human resources Infrastructure Employee self-service EFT, EDI, other electronic payments
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E-Business Success Factors

2 critical factors: The degree to which those e-business activities fit and support the organizations overall business strategy. The ability to guarantee that e-business processes satisfy the 3 key characteristics: - Validity - Integrity. - Privacy
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Infrastructure For E-Business

Types of networks: 1. Local area network (LAN) network of computers and other devices such as printers 2. Wide area network (WAN) covers a wide geographic area and is often global 3. Value-added network (VAN) long distance communications system designed and maintained by independent system
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4. Internet international network of computers that are interlinked Communications software manages the flow of data across a network. It performs the following functions: 1. Access control 2. Network management
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3. Data and file transmission 4. Error detection and control 5. Data security
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ACCOUNTING INFORMATION SYSTEMS AN OVERVIEW

ACCOUNTING INFORMATION SYSTEMS AN OVERVIEW

Why Study The AIS?

DDW 2283 ACCOUNTING INFORMATION SYSTEM

Why Study The AIS?

DDW 2283 ACCOUNTING INFORMATION SYSTEM

Why Study The AIS?

DDW 2283 ACCOUNTING INFORMATION SYSTEM

Why Study The AIS?

DDW 2283 ACCOUNTING INFORMATION SYSTEM

Why Study The AIS?

Role of AIS in the Value Chain

DDW 2283 ACCOUNTING INFORMATION SYSTEM

Role of AIS in the Value Chain

The Value System

Role of AIS in the Value Chain

AIS and Corporate Strategy

(Based on Michael Porter, world-renowned professor of business at Harvard)

DDW 2283 ACCOUNTING INFORMATION SYSTEM

OVERVIEW OF BUSINESS PROCESS

Business Activities & Information Needs

Business Activities & Information Needs

DDW 2283 ACCOUNTING INFORMATION SYSTEM

Business Activities & Information Needs

Business Activities & Information Needs

Transaction Processing: Documents & Procedures

DDW 2283 ACCOUNTING INFORMATION SYSTEM

Transaction Processing: Documents & Procedures

DDW 2283 ACCOUNTING INFORMATION SYSTEM

Providing Information For Decision Making

Internal Control Considerations

DDW 2283 ACCOUNTING INFORMATION SYSTEM

CONTROL & AIS

DDW 2283 ACCOUNTING INFORMATION SYSTEM

DDW 2283 ACCOUNTING INFORMATION SYSTEM

Overview of Control Concepts

Overview of Control Concepts

DDW 2283 ACCOUNTING INFORMATION SYSTEM

The Control Environment

Consists of the following factors:

Risk Assessment Major steps in risk assessment strategy:

Information and Communication 5 primary objectives of information and communication:

Monitoring Performance Key methods of monitoring performance including:

DDW 2283 ACCOUNTING INFORMATION SYSTEM

COMPUTER BASED INFO SYSTEM CONTROL

DDW 2283 ACCOUNTING INFORMATION SYSTEM

What constitutes a RELIABLE SYSTEM

DDW 2283 ACCOUNTING INFORMATION SYSTEM

Security Classification of controls:

DDW 2283 ACCOUNTING INFORMATION SYSTEM

COMPUTER FRAUD AND SECURITY

DDW 2283 ACCOUNTING INFORMATION SYSTEM

DDW 2283 ACCOUNTING INFORMATION SYSTEM

DDW 2283 ACCOUNTING INFORMATION SYSTEM

DDW 2283 ACCOUNTING INFORMATION SYSTEM

SYSTEMS DEVELOPMENT & DOCUMENTATION TECHNIQUES

Data Flow Diagram Symbols

Data Flow Diagram Symbols

DDW 2283 ACCOUNTING INFORMATION SYSTEM

Data Flow Diagram Symbols

DDW 2283 ACCOUNTING INFORMATION SYSTEM