MIDTERMS GUIDE

October 17, 2022 8:19 AM

Accounting System
• Definition: An AIS system collects, records and processes data to produce information for
external and internal users.
• An AIS can be:
○ Computer based
○ Manual e.g. Paper and pencil system
○ A combination of technology and manual
• Procedures and instructions ensure the relevant data is gathered in a complete and timely
manner.
• Internal controls and security are extremely important to safeguard the data and other assets
associated with the AIS.
Six Components of AIS
1. People who use and operate the system.
2. Procedures and instructions both manual and automated.
3. The organisations data.
4. Software to process the data.
5. The information technology infrastructure to support the software.
6. Internal controls and security to protect the data in the AIS.

- The business data can be from financial transactions or other sources.

- For example production times, delivery times or any other business related areas.
- People involved in the AIS will include those that collect and enter the data as well as the users
who use the AIS information to make decisions.
- Many AIS are automated using computer software and hardware to process, store, and report
on the information.
- The data gathering can also be automated e.g. with scanners, RFIDS etc.

Purpose
• Accounting is an information-providing activity, so accountants need to understand:
○ How the system that provides that information is designed, implemented and used.
○ How financial information is reported.
○ How information is used to make decisions.
○ How the integrity of the information is promoted and protected.
• Skills in AIS are critical to Accounting Careers.
○ Auditors need to evaluate the accuracy and reliability of information produced by the
AIS (i.e. controls).
○ Systems are essential to business- if accountants with to remain relevant they must
understand systems.
○ In consulting, the design, selection, and implementation of accounting systems is a rapid
growth area.
• The importance of AIS is increasing:
○ The growing pervasiveness of Information Technology in all facets of business.
○ The increasing reliance of business on IT based systems.
○ The very large ongoing investment and cost of IT systems infrastructure.
○ The increasing demand for corporate governance, which includes IT governance.
• Accounting is the language of business
• Business is systems based
• Very good career opportunities for accountants to specialise in:
○ External & internal Auditing
○ IS Audit
○ Systems design and consultation
Forensic accounting

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 ○ Forensic accounting
• All of these are systems based careers.

Cost-Benefit Approach - Under this concept, the cost of putting up a system must be measured
against the benefits to be received from the system.

Characteristics of Special Journal

Special journals
• Journals or books of original entry other than the general journal that are designed for
recording specific types of transactions of a similar nature.
• The use of these special journals provides the following advantages, among other:
○ division of labor is facilitated as one special journal may be assigned to one employee
○ reduces recording time and need no routine explanations for each entry.
○ saving are realized in terms of time in posting from journals to ledgers..
○ special columns headings are used, accounts titles need not be repeated unlike in the
general journal.
• Special journals should be designed to fit the business for which they are used. If a certain
account appear repeatedly in sundry column of a journal, then it is advisable to add a column
for hose account when a new page of special journal is prepared.
• Most business entities use the following:
○ Special journals:
 Sales Journal – used to record sales on account.
 Purchases Journal – used to record purchases of goods or inventory on account.
 Cash receipts journal – used to record all transactions involving cash receipts
 Cash disbursement journal – used to record all transactions involving payment of
cash.
○ General Journal – all other transactions that cannot be recorded in the special journals
are recorded in the in the 2 columns general journal
• A special journal (also known as a specialized journal) is useful in manual accounting or
bookkeeping system to reduce the tedious task of recording both the debit and credit general
ledger account names and amounts in a general journal.

A point of sale (POS) is a place where a customer executes the payment for goods or services and
where sales taxes may become payable. NOTE: POS are online realtime - meaning timely info

Batch Processing
- Input multiple source document at once in a group
- This is where all the data is stored up and then processed together in a batch, maybe each
night or at the end of the week / month.

Examples:
1. Payroll - allows you to have multiple payroll runs in progress at the same time. Therefore, you
can simultaneously process payroll for groups of employees who are assigned to different pay
cycles.
2. Tax

Remember, the use of standard cost/forecasting/budgeting is to compare actual performance with

their expectations

Internal Control
Definition - Internal control is a system of integrated elements - people, structure, processes, &
procedures -acting together to provide reasonable assurance that business process goals are
achieved.
Process Goals Include
- Assets (including data) are safeguarded.
- Records are maintained in sufficient detail to accurately and fairly reflect company assets.
- Accurate and reliable information is provided.
- There is reasonable assurance that financial reports are prepared in accordance with GAAP.

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 - There is reasonable assurance that financial reports are prepared in accordance with GAAP.
- Operational efficiency is promoted and improved.
- Adherence to prescribed managerial policies is encouraged.
- The organization complies with applicable laws and regulations.

Definitions of (this 3 documents are used to check for possible error in recording also called 3 way
matching)
- Receiving Report is the primary document used in this process:
○ It documents the date goods received, shipper, supplier, and PO number
○ Shows item number, description, unit of measure, and quantity for each item
○ Provides space for signature and comments by the person who received and inspected

Program documentation purpose

• Examples of:
- Input controls
○ “Garbage-in Garbage-out - nonsense input data produces nonsense output.
○ Form Design
 All forms should be sequentially numbered - Verify missing documents
 Use of turnaround documents - Eliminate input errors
○ Data Entry Checks
 ¤ Field check - Characters proper type? Text, integer, date, and so on
 Sign check - Proper arithmetic sign?
 Limit check - Input checked against fixed value?
 Range check - Input within low and high range value?
 Size check - Input fit within field?
 Completeness check - Have all required data been entered?
 Validity check- Input compared with master data to confirm existence
 Reasonableness check - Logical comparisons
 Check digit verification - Computed from input value to catch typo errors
 Prompting ¤ Input requested by system
 Close-loop verification - Uses input data to retrieve and display related data
- Output controls
○ User Review - Verify reasonableness, completeness, and routed to intended individual
○ Reconciliation
○ Data Transmission Controls
 Check sums - Hash of file transmitted, comparison made of hash before and after
transmission
 Parity checking - Bit added to each character transmitted, the characters can then
be verified for accuracy
• Distributed data processing
- Advantages
○ Inexpensive
○ Easy to replace remote computers
○ Optimized processing
○ Easy to expand
○ Parallel processing
○ Better performance
○ Backup of data
○ Local data synchronization
○ Data recovery
- Disadvantages
○ Complexity
○ Planning data synchronization is difficult
○ Data security

• Systems development team - consists of stakeholders, users, managers, systems development

specialists, and various support personnel.

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specialists, and various support personnel.
• Definition
- Information resource management
- Integrated information system
- System security management
• When studying volume of transactions you should consider
- Actual count
- Distribution within various periods
• Definitions
- Reliability - The information is free from error or bias.
- Relevance - The information will reduce uncertainty by assisting in predicting what will happen
or confirming what has happened.
- Verifiability - Independent people would tend to produce the same information under the
same circumstances.
- Timeliness - The information is received in time to make your decision.
- Predictive value
• Definition o
- Credit memorandum -
○ A credit note or credit memo is a commercial document issued by a seller to a buyer.
Credit notes act as a source document for the sales return journal.
- Turnaround documents -
○ a computer-generated form that is sent to a third party, who is supposed to fill in the
document and return it to the issuer. The information on the form is then used as the
basis for data entry back into the computer system.
- Source documents -
○ A source document is the original document that contains the details of a business
transaction. A source document captures the key information about a transaction, such
as the names of the parties involved, amounts paid (if any), the date, and the substance
of the transaction.
• Advantages of using computer based accounting systems
• Definition
- Picking ticket
○ A picking ticket is a list used to gather items to be shipped from a warehouse.
○ The ticket contains the item number and item description, as well as the location code
for the bin in which it is stored, the quantity to be picked, and the customer order
number.
- Packing slip
○ A packing slip is a document that describes the contents of a shipment to a customer.
○ The packing slip contains a separate line item for each item shipped.
○ Each line item states the product number, product description, and unit quantity
shipped.
- Bill of lading
○ A bill of lading is a document issued by a carrier to acknowledge receipt of cargo for
shipment.
• Purpose of
- Passwords - example of an access control
- Internal file labels - generally refer to labels that are expressed in a machine-readable
language. They provide identity to information or data in a storage medium.
• Types of software programs
- EDI systems
○ An EDI system is a set of components that send and receive electronic data from one
computer system to another and then map that data to and from internal applications
or systems.
- POS systems
○ A POS system allows your business to accept payments from customers and keep track
of sales.
- CRM systems
A CRM system helps you keep your customer's contact details up to date, track every

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 ○ A CRM system helps you keep your customer's contact details up to date, track every
interaction they have with your business, and manage their accounts.
• Steps in revenue cycle
- Checking Order
- Checking credit limit
- Approval of credit manager if above credit (routine approval is usually granted for regular
customers)
- Checking inventory availability
- Deliver inventory (if not available, back order is sent to production department)
• Examples of
- Validity check
- Completeness test
- Reasonableness test
- Field check
• Primary objectives of
- Revenue cycle - Provide the right product in the right place at the right time for the right price.
- Expenditure cycle - to minimize the total cost of acquiring and maintaining inventories,
supplies, and the various services necessary for the organization to function.
- Conversion cycle - to transform raw materials into finished goods
• Reconciliation is effective for errors such as
- Incorrect amount recorded
- Missing invoice
• Controls for cash
- Separation of cash handling function from accounts receivable and credit functions
- Regular reconciliation of bank account with recorded amounts by someone independent of
cash collections procedures
- Use of EFT, FEDI, and lockboxes to minimize handling of customer payments by employees
- Prompt, restrictive endorsement of all customer checks
- Having two people open all mail likely to contain customer payments
- Use of cash registers
- Daily deposit of all cash receipts
- Lockbox arrangements, EFT, or credit cards
- Discounts for prompt payment by customers
- Cash flow budgets
• Definition o
- Inherent risk -
○ Risk that exists before any plans are made to control it
○ How susceptible the area would be to threats if there were no controls.
- Control risk
○ The risk that a material misstatement will get through the internal control structure and
into the financial statements.
○ Inversely related to the strength of the company’s internal controls, i.e., stronger
controls means lower control risk.
○ Can be determined by: Reviewing the control environment; Considering control
weaknesses identified in prior audits and evaluating how they have been rectified.
- Detection risk
○ The risk that auditors and their procedures will miss a material error or misstatement.
- Residual - Remaining risk after controls are in place to reduce it
• Independent check samples
- Bank reconciliation
- Periodic comparison of subsidiary ledger totals to control totals
• Definition:
- Identification
- Authorization
○ Determines what a person can access
- Authentication
○ verifies who a person is

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