Ch 1The IS An Accountants Perspective

Chapter 1The Information System: An Accountant’s Perspective

Objectives for Chapter 1
Recognize the primary information flows within the business environment.
Understand the difference between accounting information systems and management information systems.
Understand the difference between financial transactions and non-financial transactions.
Know the principal features of the general model for information systems.
Understand the organizational structure and functional areas of a business.
Be able to distinguish between external auditing, internal auditing, and advisory services as they related to accounting information systems.

2

Internal & External Information Flows

3

Internal Information Flows

Horizontal flows of information used primarily at the operations level to capture transaction and operations data
Vertical flows of information
downward flows — instructions, quotas, and budgets
upward flows — aggregated transaction and operations data
4


Information Objectives
The goal of an information system is to support
To support the stewardship function of management,
To support management decision making, and
To support the firm’s day-to-day operations.
5

What is an Information System?

An information system is the set of formal procedures by which data are collected, processed into information, and distributed to users.
6

Transactions

A transaction is a event that affects or is of interest to the organization and is processed by its information system as a unit of work.
Financial transactions
economic events that affect the assets and equities of the organization
e.g., purchase of an airline ticket
Nonfinancial transactions
all other events processed by the organization’s information system
e.g., an airline reservation — no commitment by the customer
7


Transactions
8
Financial

Transactions
Nonfinancial

Transactions
Information
System
User
Decisions

Information

What is an Accounting Information System?
Accounting is an information system.
It identifies, collects, processes, and communicates economic information about a firm using a wide variety of technologies.
It captures and records the financial effects of the firm’s transactions.
It distributes transaction information to operations personnel to coordinate many key tasks.
9


AIS versus MIS
Accounting Information Systems (AIS) process
financial transactions; e.g., sale of goods
nonfinancial transactions that directly affect the processing of financial transactions; e.g., addition of newly approved vendors
Management Information Systems (MIS) process
nonfinancial transactions that are not normally processed by traditional AIS; e.g., tracking customer complaints
10

AIS versus MIS?

11

AIS Subsystems

Transaction processing system (TPS)
supports daily business operations
General Ledger/ Financial Reporting System (GL/FRS)
produces financial statements and reports
Management Reporting System (MRS)
produces special-purpose reports for internal use
12





13
Figure 1-5
General Model for AIS

Data Sources

Data sources are financial transactions that enter the information system from internal and external sources.
External financial transactions are the most common source of data for most organizations.
E.g., sale of goods and services, purchase of inventory, receipt of cash, and disbursement of cash (including payroll)
Internal financial transactions involve the exchange or movement of resources within the organization.
E.g., movement of raw materials into work-in-process (WIP), application of labor and overhead to WIP, transfer of WIP into finished goods inventory, and depreciation of equipment
14

Transforming the Data into Information

Functions for transforming data into information according to the general AIS model:
1. Data Collection
2. Data Processing
3. Data Management
4. Information Generation
15


1. Data Collection
Capturing transaction data
Recording data onto forms
Validating and editing the data
16

2. Data Processing

Classifying
Transcribing
Sorting
Batching

17
• Merging
• Calculating
• Summarizing
• Comparing

3. Data Management

Storing
Retrieving
Deleting
18


4. Information Generation
Compiling
Arranging
Formatting
Presenting
19

Characteristics of Useful Information

Regardless of physical form or technology, useful information has the following characteristics:
Relevance: serves a purpose
Timeliness: no older than the time period of the action it supports
Accuracy: free from material errors
Completeness: all information essential to a decision or task is present
Summarization: aggregated in accordance with the user’s needs
20

Organizational Structure

The structure of an organization helps to allocate
responsibility
authority
accountability
Segmenting by business function is a very common method of organizing.
21


Functional Segmentation
Materials Management
purchasing, receiving and stores
Production
production planning, quality control, and maintenance
Marketing
Distribution
Personnel
Finance
Accounting
Information Technology
22

Accounting Independence

Information reliability requires accounting independence.
Accounting activities must be separate and independent of the functional areas maintaining resources.
Accounting supports these functions with information but does not actively participate.
Decisions makers in these functions require that such vital information be supplied by an independent source to ensure its integrity.
23

IT: Data Processing

24
Centralized Data
Processing
Distributed Data
Processing
Most companies fall in between.
All data processing
is performed by
one or more large
computers housed
at a central site
that serves users
throughout the
organization.


Primary areas:
database administration
data processing
systems development
systems maintenance
Reorganizing the
computer services
function into small
information processing
units that are distributed
to end users and
placed under their control

Distributed Data Processing Model

Accountants’ Unique Roles in AIS

Accountants must be able to clearly convey their needs to the systems professionals who design the system.
The accountant should actively participate in systems development projects to ensure appropriate systems design.
26


Accountants as System Designers
Accountants are the domain experts and responsible for the conceptual design of the AIS.
Conceptual system design involves specifying the criteria for identifying delinquent customers and the information that needs to be reported.
As the domain expert, the accountant determines the nature of the information required, its sources, its destination, and the accounting rules that need to be applied.
27

Accountants as System Auditors

External (Financial) Audits
Internal Audit
Fraud Audit

28

External (Financial) Audit

Independent attestation regarding the fairness of the presentation of financial statements
Two types of evidence
Tests of controls
Substantive tests
29

Attest Service versus Advisory Services

SOX restricts non-audit services to clients. Auditor may not provide:
bookkeeping or other services related to the accounting records or financial statements of the audit client
financial information systems design and implementation
appraisal or valuation services, fairness opinions, or contribution-in-kind reports
actuarial services
internal audit outsourcing services
management functions or human resources
broker or dealer, investment adviser, or investment banking services
legal services and expert services unrelated to the audit
any other service that the Board determines, by regulation, is impermissible.
30


Internal Audit
an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization.
Different constituencies from external audit

31

Fraud Audit

investigate anomalies and gather evidence of fraud that may lead to criminal conviction.
Initiated
When corporate management suspects employee fraud.
Or, boards of directors hire fraud auditors to investigate their own suspected executives
32

The Role of the Audit Committee

A subcommittee of the Board of Directors that has special responsibilities regarding audits.
an independent “check and balance” for the internal audit function and liaison with external auditors
Usually three people (outsiders)
SOX requires one to be a “financial expert”

33