AN INFORMATION SYSTEM'S

Accounting FRAMEWORK
Information Systems Information System - is the set of formal procedures by
which data are collected, processed into information, and
Chapter 1 - The Information System: An distributed to users.
Accountant's Perspective
The distinction between AIS and MIS centers on the
Information - a business resource; vital to the survival of concept of a transaction. The information system accepts
the contemporary business organization. input, called transactions, which are converted through
various processed into output information that goes to
Information Flows - can either be internal or external. users.
External Information Flows can either be trading Transaction - input; can either be financial transactions
partners or stakeholders. or nonfinancial transactions; an event that affects or is of
Trading Partners - exchanges include customer sales and interest to the organization and is processed by its
billing information, purchase information for suppliers, information systems as a unit of work.
and inventory receipts information; Financial Transaction - an economic event that affects
Stakeholders - are entities outside (or inside) the the assets and equities of the organization, is reflected in
organization with a direct or indirect interest in the firm. its accounts, and is measured in monetary terms. Examples
Examples include stockholders, financial institutions, and include sales of products to customers, purchases of
government agencies. inventory from vendors, and cash disbursements and
receipts.
All user groups have unique information requirements.
Nonfinancial Transactions - are events that do not meet
the narrow definition of a financial transaction. Examples
SYSTEM include adding a new supplier of raw materials to the list
System - can be natural or artificial; group of two or more of valid suppliers.
interrelated components of subsystems that serve a
common purpose.
MAJOR SUBSYSTEMS OF
ELEMENTS OF A SYSTEM ACCOUNTING INFORMATION
1. Multiple Components - a system must contain more
than one part. SYSTEMS
1. Transaction Processing Systems (TPS) - supports
2. Relatedness - parts of the system must have a common
daily business operations with numerous reports,
purpose or objective.
documents, and messages for users throughout the
3. System versus Subsystem - a system is called a organization.
subsystem when it is viewed in relation to the larger
2. General Ledger/Financial Reporting System
system of which it is a part. Likewise, a subsystem is called
(GL/FRS) - produces the traditional financial statements,
a system when it is the focus of attention.
such as the income statement, balance sheet, statement of
4. Purpose - a system must serve at least one purpose, but cash flows, tax returns, and other reports required by law.
it may serve several.
3. Management Reporting System (MRS) - provides
An example of an artificial system is an automobile. internal management with special-purpose financial
reports and information needed for decision making such
TWO POINTS OF IMPORTANCE IN THE STUDY as budgets, variance reports, and responsibility reports.
OF INFORMATION SYSTEMS THE MANAGEMENT INFORMATION SYSTEM
1. SYSTEM DECOMPOSITION - process of dividing
Management Information System (MIS) - processes
the system into smaller system parts.
nonfinancial transactions that are not normally processed
2. SUBSYSTEM INTERDEPENDENCY - a system's by traditional AIS table.
ability to achieve its goal in harmonious interaction of its
subsystems. TRANSACTION PROCESSING SYSTEM
The TPS is central to the overall function of the
Control should be provided on a cost-benefit basis. It is information system by converting economic events into
neither economical nor necessary to back up every financial transactions, recording financial transactions in
subsystem. the accounting records (journals and ledgers), and
distributing essential financial information to operations definition. Information is determined by the effect it has
personnel to support their daily operations. on the user, not by its physical form.
The TPS deals with business events that occur frequently. One person’s information is another person’s data.
Information allows users to take action to resolve conflicts,
GENERAL LEDGER/FINANCIAL REPORTING reduce uncertainty, and make decisions.
SYSTEMS
The GL/FRS are two closely related subsystems.
DATA SOURCES
However, because of their operational interdependency, Data Sources – are financial transactions that enter the
they are generally viewed as a single integrated system. information system from both internal and external
The bulk of the input to the GL portion of the system sources. External financial transactions are the most
comes from the transaction cycles. Summaries of common source of data for most organizations. These are
transaction cycle activity are processed by the GLS to economic exchanges with other business entities and
update the general ledger control accounts. individuals outside the firm. Examples include the sale of
goods and services, the purchase of inventory, the receipt
The FRS measures and reports the status of financial of cash, and the disbursement of cash (including payroll).
resources and the changes in those resources. The FRS
communicates this information primarily to external users. Internal financial transactions involve the exchange of
This type of reporting is called non-discretionary because movement of resources within the organization. Examples
the organization has few or no choices in the information include the movement of raw materials into WIP, the
it provides. application of labor and overhead to WIP, the transfer of
WIP into finished goods inventory, and the depreciation of
MANAGEMENT REPORTING SYSTEM plant and equipment.
The MRS provides the internal financial information
needed to manage a business. Typical reports produced by
DATA COLLECTION
the MRS include budgets, variance reports, CVP analyses, Data Collection is the first operational stage in the
and reports using current (rather than historical) cost data. information system. The objective is to ensure that event
This type of reporting is called discretionary reporting data entering the system are valid, complete, and free from
because the organization can choose what information to material errors. In many respects, this is the most
report and how to present it. important stage in the system.

Two rules govern the design of data collection procedures:

A GENERAL MODEL FOR AIS relevance and efficiency. The information system should
The elements of the general model are: capture only relevant data. The data collection stage
should be designed to filter irrelevant facts from the
1) End Users system.
2) Data Sources
3) Data Collection Efficient data collection procedures are designed to collect
4) Data Processing data only once. Capturing the same data more than once
5) Database Management leads to data redundancy and inconsistency.
6) Information Generation
7) Feedback
DATA PROCESSING
Data Processing – tasks range from simple to complex.
END USERS Examples include mathematical algorithms, statistical
End Users – can either be internal or external. External techniques, and posting and summarizing procedures used
users include creditors, stockholders, potential investors, for accounting applications.
regulatory agencies, tax authorities, suppliers, and
customers. Internal users include management at every
DATABASE MANAGEMENT
level of the organization, as well as operations personnel. Database – an organization’s physical repository for
Internal reporting poses a less structured and generally financial and nonfinancial data. Regardless of the
more difficult challenge than external reporting. database’s physical for, we can represent its contents in a
logical hierarchy.
DATA VERSUS INFORMATION
Data – are facts which may or may not be processed DATA ATTRIBUTE
(edited, summarized, or refined), and have no direct effect Data Attribute – most elemental piece of potentially
on the user. useful data in the database. An attribute is a logical and
relevant characteristic of an entity about which the firm
Information – causes the user to take action that he or she captures data.
otherwise could not, or would not, have taken. It is often
simply defined as processed data, but this is an inadequate
RECORD FEEDBACK
Record – complete set of attributes for a single occurrence Feedback – a form of output that is sent back to the system
within an entity class. Examples include a particular as a source of data. Feedback may be internal or external
customer’s name, address, and account balance. Every and is used to initiate or alter a process.
record in the database must be unique in at least one
attribute.
INFORMATION SYSTEMS OBJECTIVES
FILES Each organization must tailor its information system to the
File – complete set of records in an identical class. For needs of its users. Therefore, specific information system
example, all the AR records of the organization constitute objectives may differ from firm to firm. Three
the AR file. For example, all the AR records of the fundamental objectives are, however, common to all
organization constitute the AR file. The organization’s systems:
database is the entire collection of these files.
1. To support the stewardship function of
DATABASE MANAGEMENT TASKS management. Stewardship refers to
Database Management- involves three fundamental management’s responsibility to properly manage
tasks: storage, retrieval, and deletion. the resources of the firm. Internally, management
receives stewardship information from various
The storage task assigns keys to new records and stores responsibility reports.
them in their proper location in the database. 2. To support management decision-making. The
information system supplies managers with the
Retrieval is the task of locating and extracting an existing information they need to carry out their decision-
record from the database for processing. After processing making responsibilities.
is complete, the storage task restores the updated record to 3. To support the firm’s day-to-day operations. The
its place in the database. information system provides information to
Deletion is the task of permanently removing obsolete or operations personnel to assist them in the efficient
redundant records from the database. and effective discharge of their daily tasks.

INFORMATION GENERATION ACQUISITION OF INFORMATION

Information Generation – process of compiling,
arranging, formatting, and presenting information to users. SYSTEMS
Regardless of physical form, useful information has the 1. Organizations develop customized systems from
following characteristics: relevance, timeliness, accuracy, scratch through in-house systems development
completeness, and summarization. activities.
2. Organizations purchase preprogrammed
RELEVANCE commercial systems from software vendors.
The contents of a report or document must serve a purpose.
System Development Life Cycle – formal process in
TIMELINESS which larger organizations with unique and frequently
The age of information is a critical factor in determining changing needs engage in in-house development.
its usefulness. Information must be no older than the time
of the action it supports. BASIC TYPES OF COMMERCIAL
ACCURACY SOFTWARE
Information must be free from material errors. At the very 1. Turnkey Systems – completely finished and
least, system designers seek a balance between tested systems that are ready for implementation.
information that is as accurate as possible, yet timely Typically, they are general-purpose systems or
enough to be useful. systems customized to a specific industry.
2. Backbone Systems – consist of a basic system
COMPLETENESS
structure on which to build. This system is a
No piece of information essential to a decision or task
compromise between a custom system and a
should be missing.
turnkey system. This approach can produce
SUMMARIZATION satisfactory results, but customizing the system is
Information should be aggregated in accordance with the costly.
user’s needs. 3. Vendor-supported System – customized
systems that client organizations purchase
commercially. The software vendor designs,
implements, and maintains the system for its
client. This is a popular option with health care
 and legal services organizations that have 1. Primary Manufacturing Activities – shape and
complex system requirements. assemble raw materials into finished products.
2. Product Support Activities – ensure that
ORGANIZATIONAL STRUCTURE primary manufacturing activities operate
efficiently and effectively. These include, but are
Organizational Structure – reflects the distribution of
not limited to, the following types of activities:
responsibility, authority, and accountability throughout the
organization. Production Planning – involves scheduling the flow of
materials, labor, and machinery to efficiently meet
BUSINESS SEGMENTS production needs. This requires information about the
Segments – functional units which make up a business status of sales orders, raw materials inventory, finished
organization. Firms organize into segments to promote goods inventory, and machine and labor availability.
internal efficiencies through the specialization of labor and
cost-effective resource allocations. Three of the most Quality Control – monitors the manufacturing process at
common approaches include segmentation by: various points to ensure that the finished products meet the
firm’s quality standards.
1. Geographic Location. Many organizations
disperse across the country and around the world Maintenance – keeps the firm’s machinery and other
to gain access to resources, markets, or lines of manufacturing facilities in running order. The
distribution. manufacturing process relies on its plant and equipment
2. Product Line. and cannot tolerate breakdowns during peak production
3. Business Function. Functional segmentation periods. Therefore, the key to maintenance is prevention –
divides the organization into areas of specialized the scheduled removal of equipment from operations for
responsibility based on tasks. cleaning, servicing, and repairs.

Some firms use more than one method of segmentation. MARKETING

For instance, an international conglomerate may segment Marketing deals with the strategic problems of product
its operations first geographically, then by product within promotion, advertising, and market research.
each geographic region, and then functionally within each
product segment. DISTRIBUTION
Distribution is the activity of getting the product to the
FUNCTIONAL SEGMENTATION customer after the sale. Ultimately, success depends on
Segmentation by business function is the most common filling orders accurately in the warehouse, packaging
method of organizing. goods correctly, and shipping them quickly to the
customer.
MATERIALS MANAGEMENT
The objective of materials management is to plan and PERSONNEL
control the materials inventory of the company. A The objective of the personnel function is to effectively
manufacturing firm must have sufficient inventories on manage an organization’s employees. A well-developed
hand to meet its production needs and yet avoid excessive personnel function includes recruiting, training,
inventory levels. The three sub-functions of materials continuing education, counselling, evaluating, labor
management are: relations, and compensation administration.

1. Purchasing is responsible for ordering inventory FINANCE

from vendors when inventory levels fall to their The finance function manages the financial resources of
reorder points. the firm through banking and treasury activities, portfolio
2. Receiving is the task of accepting the inventory management, credit evaluation, cash disbursements, and
previously ordered by purchasing. Tasks include cash receipts. Financial planners often seek lucrative
counting and checking the physical condition of investments in stocks and other assets and low-cost lines
these items. of credit from banks. The finance function also administers
3. Stores take physical custody of the inventory the daily flow of cash in and out of the firm.
received and releases these resources into the
production process as needed. THE ACCOUNTING FUNCTION
The accounting function manages the financial
PRODUCTION information resource of the firm. In this regard, it plays
Production activities occur in the conversion cycle in two important roles in transaction processing. First,
which raw materials, labor, and plant assets are used to accounting captures and records the financial effects of the
create finished goods. The specific activities are firm’s transactions. These include events such as the
determined by the nature of the products being movement of raw materials from the warehouse into
manufactured. In general, they fall into two broad classes: production, shipments of the finished products to
customers, cash flows into the firm and deposits in the
bank, the acquisition of inventory, and the discharge of central computer, which is managed by
financial obligations. the computer operations group.
 Computer Operations
Second, the accounting function distributes transaction
 Data Library – room often adjacent to
information to operations personnel to coordinate many of
the computer center that provides safe
their key tasks. Accounting activities that contribute
storage for the off-line data files, such as
directly to business operations include inventory control,
magnetic tapes and removable disk
cost accounting, payroll, accounts payable, accounts
packs.
receivable, billing, fixed asset accounting, and the general
ledger. Systems Development and Maintenance
The information needs of users are met by two related
THE VALUE OF INFORMATION functions: systems development and systems maintenance.
Reliability – determined the value of information to a user.
When the five important characteristics/attributes of Systems Development – responsible for analysing user
information are consistently present, information has needs and for designing new systems to satisfy those
reliability and provides value to the user. needs. Participants include system professionals, end
users, and stakeholders.
ACCOUNTING INDEPENDENCE
Accounting reliability is where information reliability Systems Professionals – include system analysts,
heavily rests on. Simply stated, accounting activities must database designers, and programmers who design and
be separate and independent of the functional areas that build the system. These people gather facts about the
maintain custody of physical resources. user’s problem, analyse the facts, and formulate a solution.
The product of their efforts is a new information system.
THE INFORMATION TECHNOLOGY FUNCTION
End Users – are those for whom the system is
Like accounting, the IT function is associated with the
built. They are the managers who receive reports from the
information resource. Its activities can be organized in a
system and the operations personnel who work directly
number of different ways. One extreme structure is the
with the system as part of their daily responsibilities.
centralized data processing approach; at the other extreme
is the distributed data processing approach. Most Stakeholders – individuals inside or outside the
organizational structures fall somewhere between these firm who have an interest in the system but are not end
extremes and embody elements of both. users. They include management, internal auditors, and
consultants who oversee systems development.
CENTRALIZED DATA PROCESSING
Centralized Data Processing – all data processing is Once a new system has been designed and implemented,
performed by one or more large computers housed at a the systems maintenance group assumes responsibility for
central site that serve users throughout the organization. keeping it current with user needs.

Database Administration DISTRIBUTED DATA PROCESSING

Database Administration – a special independent group Distributed Data Processing – alternative to the
headed by the database administrator, who is responsible centralized model. It involves the reorganizing the IT
for the security and integrity of the database. function into small information processing units (IPUs)
that are distributed to end users and placed under their
Database Processing control.
Database Processing – manages the computer resources
used to perform the day-to-day processing of transactions. Disadvantages of Distributed Data Processing
It may consist of the following functions: data control, Disadvantages of DDP might also be described as the
data conversion, computer operations, and the data advantages of a centralized approach.
library.
 The loss of control
 Data Control – have all but disappeared  Inefficient use of resources
from modern organizations.  The destruction of audit trails
Traditionally, this function was  Inadequate segregation of duties
responsible for receiving batches of  Increased potential for programming errors and
transaction documents for processing systems failures
from end users and then distributing  Lack of standards
computer output (documents and reports)
back to the users.
 Data Conversion – transcribes
o Mismanagement of organization-wide resources
transaction data from source (paper)
o Hardware and software incompatibility
documents to digital media (tape or disk)
o Redundant tasks
suitable for computer processing by the
 o Consolidating incompatible activities 3. Currency of Information – If update
o Hiring qualified professionals information is not properly disseminated, the
o Lack of standards change will not be reflected in some users’ data,
resulting in decisions based on outdated
Advantages of Distributed Data Processing information.
o Cost reductions
o Improved cost control responsibility TASK-DATA DEPENDENCY
o Improved user satisfaction Task-Data Dependency – another problem with the flat-
o Backup file approach in regards to the user’s inability to obtain
additional information as his or her needs change. The
THE NEED FOR CAREFUL ANALYSIS user’s information is set constrained by the data that he or
Some DDP initiatives have proven ineffective, and even she possesses and controls. New information needs tend to
counter-productive, because decision makers saw in these be satisfied by procuring new data files.
systems virtues that were more symbolic than real.
Accountants have an opportunity and an obligation to play FLAT FILES LIMIT DATA INTEGRATION
an important role in this analysis. The flat-file approach is a single-view model. Files are
made to suit the specific needs of the owner or primary
THE EVOLUTION OF INFORMATION user of the data. This, however, may exclude data
attributes that are useful to others, thus preventing
SYSTEM MODELS successful integration of data across the organization.
THE MANUAL PROCESS MODEL In spite of several inherent limitations, many large
Manual Process Model – oldest and most traditional form organizations still use flat files for their general ledges and
of accounting systems. Manual systems constitute the other financial systems.
physical events, resources, and personnel that characterize
many business processes. This includes such tasks as THE DATABASE MODEL
order-taking, warehousing materials, manufacturing goods Database Model – by the implementation of this model,
for sale, shipping goods to customers, and placing orders an organization can overcome the problems associated
with vendors. Traditionally, this model also includes the with flat files.
physical task of record keeping.
Database Management System (DBMS) – Controls
The merits of studying the manual process model include: access to the data resource. The DBMS is a special
software system that is programmed to know which data
First, learning manual systems helps establish an important
elements each user is authorized to access.
link between the AIS course and other accounting courses.
The most striking difference between the database model
Second, the logic of a business process is more easily
and the flat-file model is the pooling of data into a common
understood when it is not shrouded by technology.
database that all organizational users share. With access to
Finally, manual procedures facilitate understanding the full domain of entity data, changes in user information
internal control activities, including segregation of needs can be satisfied without obtaining additional private
functions, supervision, independent verification, audit data sets. Users are constrained only by the limitations of
trails, and access controls. the data available to the entity and the legitimacy of their
need to access it.
THE FLAT-FILE MODEL
Through data sharing, the following traditional problems
Flat File Model or Approach – most often associated
associated with the flat-file approach may be overcome:
with so-called legacy systems. These are large mainframe
systems that were implemented in the late 1960s through  Elimination of data redundancy. Each data
the 1980s. The flat-file model describes an environment in element is stored only once, thereby eliminating
which individual data files are not related to other files. data redundancy and reducing data collection and
End users in this environment own their data files rather storage costs.
than share them with other users.  Single update. Because each data element exists
The three significant problems in the flat-file environment in only one place, it requires only a single update
include: procedure. This reduces the time and cost of
keeping the database current.
1. Data Storage – an efficient information system  Current values. A single change to a database
captures and stores data only once and makes this attribute is automatically made available to all
single source available to all users who need it. users of the attribute.
2. Data Updating – an efficient information system
captures and stores data only once and makes this Traditional Systems – the organization’s information
single source available to all users who need it. systems applications function independently of each other
rather than as an integrated whole. The flat-file and early REA is a conceptual model, not a physical system. Many
database systems are also called traditional systems. of its tenets, however, are found within advanced database
systems.
Another factor that limited integration was the structured
database models of the era. These models were inflexible ENTERPRISE RESOURCE PLANNING SYSTEMS
and did not permit the degree of data sharing that is found Enterprise Resource Planning (ERP) – information
in modern database systems. Whereas some degree of system model that enables an organization to automate and
integration was achieved with this type of database, the integrate its key business processes. ERP breaks down
primary and immediate advantage to the organization was traditional functional barriers by facilitating data sharing,
the reduction in data redundancy. information flows, and the introduction of common
Relational Database Model – made possible true business practices among all organizational users. The
integration in regards to data sharing. It is a flexible implementation of an ERP system can span several years.
database approach which permits the design of integrated Virtually all ERPs are commercial products.
systems applications capable of supporting the information ERP packages are sold to client organizations in modules
needs of multiple users from a common set of integrated that support standard processes. Some common ERP
database tables. modules include:
THE REA MODEL Asset Management
REA – is an accounting framework for modelling an
organization’s critical resources, events, and agents (REA) Financial Accounting
and the relationships between them. User views can be Human Resources
constructed that meet the needs of all users in the
organization. The availability of multiple views allows Industry-specific Solutions
flexible use of transaction data and permits the
Plant Maintenance
development of AIS that promote, rather than inhibit,
integration. Production Planning
The REA model was proposed in 1982 as a theoretical Quality Management
model for accounting. Advances have focused renewed
attention on REA as a practical alternative to the classic Sales and Distribution
accounting framework. Inventory Management
The following summarizes the key elements of the REA
models: THE ROLE OF THE ACCOUNTANT
Accountants are primarily involved in three ways: as
RESOURCES
system users, designers, and auditors.
Economic Resources – assets of the organization. They
are defined as objects that are both scarce and under the ACCOUNTANTS AS USERS
control of the enterprise. In most organizations, the accounting function is the single
largest user of IT. All systems that process financial
EVENTS
transactions impact the accounting function in some way.
Economic Events – phenomena that affect changes in
As end users, accountants must provide a clear picture of
resources. Economic events are the critical information
their needs to the professionals who design their systems.
elements of the accounting system and should be captured
in a highly detailed form to provide a rich database. ACCOUNTANTS AS SYSTEM DESIGNERS
AGENTS An appreciation of the accountant’s responsibility for
Economic Agents – individuals and departments that system design requires a historic perspective that predates
participate in an economic event. They are parties both the computer as a business information tool.
inside and outside the organization with discretionary In the mid-1970s, the accounting profession began to
power to use or dispose of economic resources. reassess the accountant’s professional and legal
In flat-file or non-REA database systems, events are responsibilities for computer-based systems.
summarized to accommodate the account structure. The accounting function is responsible for the conceptual
However, the details of the transactions are not captured system, whereas the IT function is responsible for the
under this approach. physical system.
An REA accounting system would capture these Conceptual System – its design involves specifying the
transactions in a series of relational database tables that criteria for identifying delinquent customers and the
emphasize events rather than accounts. information that needs to be reported. The accountant
determines the nature of the information required, its
sources, its destination, and the accounting rules that need
to be applied.
Physical System – medium and method for capturing and
presenting the information. The computer professionals
determine the most economical and effective technology
for accomplishing the task. Hence, system design should
be a collaborative effort.

ACCOUNTANTS AS SYSTEM AUDITORS

Auditing – form of independent attestation performed by
an expert – the auditor – who expressed an opinion about
the fairness of a company’s financial statements.
Attest Function – a service provided by an independent
expert auditor wherein they reinforce public confidence in
the reliability of internally produced financial statements.

Auditors form their opinions based on a systematic

process. Both internal and external auditors conduct
audits.

EXTERNAL AUDITING
External Auditing- often called independent auditing
because independent CPA firms perform them. They
represent the interests of third-party stakeholders in the
organization, such as stockholders, creditors, and
government agencies.
The external accountant’s responsibility as a systems
auditor has expanded over the recent years to a broader
concept of assurance.

Assurance
Assurance Services – professional services, including the
attest function, that are designed to improve the quality of
information, both financial and nonfinancial, used by
decision makers.

IT Auditing
IT Auditing – usually performed as a part of a broader
financial audit. The organizational unit responsible for
conducting IT audits may fall under the assurance services
group or be independent.

INTERNAL AUDITING
Internal Auditing – appraisal function housed within the
organization. These people perform a wide range of
activities on behalf of the organization, including
conducting financial statement audits, examining an
operation’s compliance with organization policies,
reviewing the organization’s compliance with legal
obligations, evaluating operational efficiency, detecting
and pursuing fraud within the firm, and conducting IT
audits.