CH 16 GENERAL LEDGER AND REPORTING SYSTEM

GENERAL LEDGER AND REPORTING

SYSTEM
Process
- centralized database must be organized in a
manner that facilitates meeting the varied
information needs of both internal and external
users.
- Managers need timely detailed information about
the results of operations in their particular area
of responsibility.
- Investors and creditors want periodic financial
statements and timely updates to help them assess
the organization’s performance.
- Various government agencies also mandate
specific information requirements.
- To satisfy these multiple needs, the general ledger
and reporting system not only produces periodic
reports but also supports online inquiries
Threats and Controls
(1) Inaccurate or invalid ledger data.
 result in misleading reports that cause managers to make erroneous decisions..
 errors in financial statements provided to creditors, investors, and government agencies can cause those
stakeholders to make wrong decisions
 errors in financial statements and reports provided to external stakeholders can also result in fines and
negative reactions from the capital markets.
 Control:
a) use the various processing integrity controls (CH10) to minimize the risk of data input errors.
b) restrict access to general ledger and configure the system so that only authorized employees can make
changes to master data
- multifactor authentication should be used to restrict access to the general ledger.
- authorization controls (an access control matrix and compatibility tests) should also be used to
limit the functions that each legitimate user may perform.
c) logs of all activities, important detective control is to regularly produce a report of all changes to master
data and review them to verify that the database remains accurate
(2) Unauthorized disclosure of financial information
 salary and performance evaluations for individual employees - disclosures can create morale problems if
employees learn that their pay differs significantly from co-workers
 unauthorized disclosure or reasons for firing an employee may subject the organization to lawsuits
 Control:
a) multifactor authentication and physical security controls to restrict access to HRM/payroll master data
to only those employees who need such access to perform their jobs
- configure the system to employ strong access controls that limit who can view such information
(limit employees’ ability to use the system’s built-in query capabilities to access only those
specific tables and fields
b) Encrypting the database - additional protection by making the information unintelligible to anyone who
succeeds in obtaining unauthorized access to the database.
- Encryption also prevents information technology (IT) employees who do not have access to the
ERP system from using operating system utilities to view sensitive information
(3) loss or destruction of master data.
  Control:
a) employ the backup and disaster recovery procedures (CH10).

UPDATE GENERAL LEDGER

Process
Updating consists of posting journal entries that originate from two sources:
1. Accounting subsystems - general ledger could be updated for each individual transaction.
- summary journal entries from the other AIS cycles
- In practice, various accounting subsystems usually update the general ledger by means of summary journal
entries that represent the results of all transactions that occurred during a given period of time (day, week, or
month).
- For example, the revenue cycle subsystem would generate a summary journal entry debiting accounts receivable
and cash and crediting sales for all sales made during the update period. Employees initiate changes in their
discretionary deductions (e.g., contributions to retirement plans).
2. Treasurer - treasurer’s office provides information for journal entries to update the general ledger for nonroutine
transactions such as the issuance or retirement of debt, the purchase or sale of investment securities, or the
acquisition of treasury stock.
- direct entries made by the treasurer.
- Journal entries made by the treasurer, however, are original data entry
journal voucher file - A file that stores ALL journal entries used to update the general ledger. company’s regular accounts to its
payroll account.
- contains the information that would be found in the general journal in a manual accounting system:
o the date of the journal entry,
o accounts debited and credited,
o the amounts.
- important part of the audit trail, providing evidence
that all authorized transactions have been
accurately and completely recorded
- journal voucher file is a by-product of, not an input
to, the posting process.

Threats and Controls

(4) inaccurate updating of general ledger
 fines for not remitting proper amounts of payroll taxes to the government
 Control:
a) use the various processing integrity controls (CH10) to minimize the risk of data input errors.
i. validity checks ensure that general ledger accounts exist for each account number referenced in
a journal entry
ii. Field (format) checks to ensure that the amount field in the journal entry contains only
numeric data.
iii. zero-balance check to verify that total debits equal total credits in a journal entry
iv. completeness test to ensure that all pertinent data are entered, especially the source of the
journal entry
v. Closed-loop verification matching account numbers with account descriptions, to ensure that
the correct general ledger account is being accessed
vi. sign check of the general ledger account balance, once updating is completed, to verify that the
balance is of the appropriate nature (debit or credit).
vii. Calculating run-to-run totals to verify the accuracy of journal voucher batch processing.
- (The computer calculates the new balance of the general ledger account, based on its
beginning balance and the total debits and credits applied to that account, then compares
that with the actual account balance in the updated general ledger. Any discrepancies
indicate a processing error that must be investigated
b) Reconciliations
c) maintenance of an adequate audit trail
(5) Unauthorized journal entries
 Control:
a) Strong access controls, including multifactor authentication and compatibility tests based on access
control matrices, reduce the risk of unauthorized journal entries
b) control reports
c) maintenance of an adequate audit trail

Reconciliations and Control Reports

- detect whether any errors were made during the process of updating the general ledger.
- reconciliation methods
o trial balance - A report listing the balances of all general ledger accounts.
 - reflects if all activities have been properly recorded, the total of all debit balances in various accounts should
EQUAL the total of all credit balances; if not, a posting error has occurred.

o comparing the general ledger control account balances to the total balance in the corresponding subsidiary
ledger
- If two totals do not agree, the difference must be investigated and corrected.
- examine all transactions occurring near the end of an accounting period to verify that they are recorded
in the proper time period
o At the end of a fiscal period, verify that any temporary “suspense” or “clearing” accounts have zero balances.
- Clearing and suspense accounts provide a means to ensure that the general ledger is always in balance
document that records the employee’s arrival and departure times for each work shift
- Control reports
o Listing journal vouchers by general account number facilitates identifying the cause of errors affecting a
specific general ledger account.
- Listing the journal vouchers by numerical sequence, date, and account number can indicate the absence
of any journal entry postings.
- reports often include totals to show whether total debits and credits posted to the general ledger were
equal.

Reconciliations and Control Reports

Audit Trail - A path that allows a transaction to be traced hrough a data processing system from point of origin to output or
backwards from output to point of origin.
A properly designed audit trail provides the ability to perform the following tasks:
1. Trace any transaction from its original source document (whether paper or electronic) to the journal entry that
updated the general ledger and to any report or other document using that data.
- provides a means to verify that ALL AUTHORIZED TRANSACTIONS were recorded.
2. Trace any item appearing in a report back through the general ledger to its original source document (whether
paper or electronic).
- provides a means to verify that ALL RECORDED TRANSACTIONS were indeed authorized and that they
were recorded correctly
- usefulness of the audit trail depends on its integrity.
o periodically make backups of all audit trail components and to control access to them to ensure that they cannot
be altered.
- access to the audit trail is typically restricted to managers.
- ERP systems provide built-in tools to ensure the integrity of the audit trail. SAP, for example, creates prenumbered
records (called documents) for every action that is performed.
o These documents cannot be deleted; thus, enabling this built-in feature ensures that SAP creates and maintains
a secure audit trail.

POST ADJUSTING ENTRIES

Process
Adjusting entries originate from the controller’s office, after the initial trial balance has been prepared. Adjusting entries fall into
five basic categories:
1. Accruals - reflect events that have occurred but for which cash has not yet been received or disbursed.
2. Deferrals - to reflect the exchange of cash prior to performance of the related event.
3. Estimates - reflect a portion of expenses expected to occur over a number of accounting periods.
- Examples include depreciation and bad-debt expenses.
4. Revaluations - reflect either differences between the actual and recorded value of an asset or a change in accounting
principle.
- Examples include a change in the method used to value inventory, reducing the value of inventory to
reflect obsolescence, or adjusting inventory records to reflect the results noted during a physical count of
inventory.
5. Corrections are entries made to counteract the effects of errors found in the general ledger.

- information about these adjusting entries is also stored in the journal voucher file.
- After all adjusting entries have been posted, an adjusted trial balance is prepared.
+ adjusted trial balance serves as the input the preparation of financial statements.

Threats and Controls

(6) inaccurate adjusting entries
 produce erroneous financial statements that lead to poor decisions
 Control:
a) use the various processing integrity controls (CH10) to minimize the risk of data input errors to
adjusting journal entries made by the controller
b) employ the various spreadsheet error protection controls (CH 10) to minimize the risk of mistakes.
c) Additional control is provided by creating a standard adjusting entry file
 - standard adjusting entry file improves input accuracy by eliminating the need to repeatedly key in
the same types of journal entries.
- It also reduces the risk of forgetting to make a recurring adjusting entry, thereby ensuring input
completeness
d) periodic reconciliations
e) audit trails provide a means to detect unauthorized or inaccurate adjusting entries.
(7) unauthorized adjusting entries
 produce erroneous financial statements that lead to poor decisions
 Control:
a) Strong access controls reduce the risk of unauthorized adjusting entries.
b) periodic reconciliations
c) audit trails provide a means to detect unauthorized or inaccurate adjusting entries.

PREPARE FINANCIAL STATEMENTS

Process
1. organizations “close the books” to produce financial statements both monthly and annually.
closing journal entry zeroes out all revenue and expense accounts in the adjusted trial balance and transfers the net income
(or loss) to retained earnings.
2. income statement summarizes performance for a PERIOD of time (usually either a month or a year).
3. balance sheet presents information about the organization’s assets, liabilities, and equity at a POINT in time.
4. statement of cash flows provides information about how the
5. organization’s operating, investing, and financing activities affected its CASH BALANCE.

two important recent regulatory and technological developments that are likely to significantly affect the process of preparing
financial statements:
1. TRANSITION FROM GAAP TO IFRS
o SEC maintains that it is committed to requiring American companies to switch from U.S.-based GAAP to IFRS
as the basis for preparing financial statements
o IFRS differs from GAAP in several ways that affect the design of a company’s general ledger and reporting system
 accounting for fixed assets
 GAAP - most major fixed assets are recorded and depreciated on a composite basis
 IFRS generally requires componentization of fixed assets, to recognize the fact that different
elements (components) may have different economic lives.
 accounting for research and development (R&D) costs
 IFRS permits capitalization of development costs at an earlier stage of the process than does
GAAP.
 IFRS does not permit use of the last-in first-out (LIFO) method of accounting for inventory
2. MANDATORY USE OF XBRL TO SUBMIT REPORTS TO THE SEC.
o XBRL - eXtensible Business Reporting Language is a variant
of XML (eXtensible Markup Language) specifically designed for
use in communicating the content of financial data.
 WITHOUT XBRL
 preparers had to manually create reports in
various formats for different users.
o Although those reports were then sent
electronically to users, the recipients
then had to reenter the data into
their own systems in order to
manipulate it.
o The entire process was inefficient
and prone to error.
 electronic documents, regardless of format
(text, HTML, PDF, etc.) were essentially just
digital versions of paper reports
o Humans could read the data, but
computers could not automatically
process it until the recipient
manually entered it in the
appropriate format.
 XBRL improves the reporting process.
 Preparers encode the data and transmit it electronically in various formats to users, who can
directly analyze it.
o XBRL saves time and reduces the chances for data entry errors.
 XBRL changes that by encoding information about what a particular data item means so that
other computer programs can understand what to do with it.
XBRL PROCESS AND TERMINOLOGY

1) The XBRL file containing the tagged data that is delivered to users is called an instance document
o instance document - An XBRL file that contains tagged data.
- contains facts about specific financial statement line items, including their values and
contextual information such as the measurement unit (dollars, euros, yuans, etc.) and
whether the value is for a specific point in time (e.g., a balance sheet item) or a period of time
(e.g., an income statement item)
2) An element’s specific value is displayed in an instance document between tags. Angle brackets are used to identify tags
o element - A specific data item in an XBRL instance document, such as a financial statement line item
3) Two tags are used for each element.
a. First tag - element name inside a pair of angle brackets;
b. second tag - uses a pair of angle brackets but precedes the element name with a slash.
4) An instance document is created by applying a taxonomy to a set of data.
o taxonomy - A set of XBRL files that defines elements and the relationships among them.
o schema – XBRL file that defines every element that appears in a specific instance document
- a part of taxonomy
- following are some of the basic attributes used to define each element:
+ A unique identifying name used by the software
+ A description that can be used to correctly interpret the element
+ The element’s data type (monetary unit, text, date, etc.)
+ The element’s normal balance type (debit or credit)
+ The element’s period type (one point in time, called an instant, or a period of time, called a
duration)
5) The taxonomy also includes a set of files called linkbases,
o Linkbases - One or more XBRL files that define the relationships among elements
found in a specific instance document
o Important linkbases include the following:
 Calculation linkbase specifies how to combine elements (e.g., that
“Current Assets” equals the sum of Cash, Accounts Receivable, and
Inventory).
 Definition linkbase indicates hierarchical relationships among elements
(e.g., that “Current Assets” is a subset of “Assets”).
 Presentation linkbase describes how to group elements (e.g., Assets,
Liabilities, and Equities).
 Label linkbase associates human-readable labels with elements
6) information in an XBRL taxonomy is used to tag the data and create an instance
document.
a. same taxonomy is usually used to create a set of separate instance documents, one for each reporting year.
 Instance documents, however, contain only the data values
 style sheet - An XBRL file that provides instructions on how to display (render) an instance document
on either a computer screen or printed report
 benefits of XBRL are not limited to its use for external reporting.
o Internal reporting will also benefit because data can be exported from the basic ERP system in a format that
managers can import directly into a variety of applications, saving time and eliminating the errors arising from
having to manually reenter data

The Accountant’s Role

- Accountants can, and should, play a major role in all phases of producing XBRL reports, beginning with the selection of
an appropriate taxonomy.
- reports produced by different organizations, standard taxonomies have been developed for many different countries and
industries.
o Accountants use their knowledge of the organization’s business practices plus general accounting principles to
select the standard taxonomy that best fits the organization.
- They then map each data item in the organization’s accounting system to its corresponding element in the taxonomy.
o standard taxonomies cannot cover every possible situation.
- Sometimes, an organization needs to record financial information in a different manner or level of detail to reflect its
unique way of doing business.
o In such cases, accountants can create new tags to more accurately present information about the organization’s
business activities. These new tags create what is called an extension taxonomy.
o extension taxonomy - A set of custom XBRL tags to define elements unique to the reporting organization that
are not part of the standard generally accepted taxonomies for that industry
o This ability to modify XBRL is why it is referred to as an extensible language.
 - Accountants are also likely to use software to apply the taxonomy (and any extensions) to tag their organization’s data,
create instance documents, and then validate those instance documents before they are submitted.
- Accountants will also typically participate in creating style sheets to ensure that information is displayed appropriately.
- Not only do accountants use XBRL; the accounting profession played a major role in its creation.

Threats and Controls

(8) creation of inaccurate financial statements
 Control:
a) data processing integrity controls for journal entries combined with the use of packaged software
- because both IFRS and XBRL require numerous judgments about how to classify information, there
is a risk that financial statements may not accurately represent the results of operations. use of
packaged software of the payroll register and other reports serves as a detective control to identify
payroll processing errors.
b) Training and experience will likely reduce the risk of making such mistakes
c) independent external audit
(9) Fraudulent financial reporting
 often involves journal entries by upper-level management that cause the organization’s financial statements to
either overstate revenues or understate liabilities
 difficult to prevent such journal entries because upper-level management inherently has the ability to override
most internal controls
 Control:
a) independent review (audit) of all special journal entries to the general ledge
- Statement of Auditing Standards number 99 requires external auditors
- to “test the appropriateness of journal entries recorded in the general ledger and other
- adjustments,” internal auditors should also regularly review all adjustments to the general
- ledger.
- To be effective, testing requires proper configuration of the accounting system, so that every
change to general ledger accounts is captured and recorded as part of the audit trail.

PRODUCE MANAGERIAL REPORTS

Process
ERP systems can produce a number of budgets to help managers plan and evaluate performance
- operating budget depicts planned revenues and expenditures for each organizational unit.
- capital expenditures budget shows planned cash inflows and outflows for each capital project.
- Cash flow budgets compare estimated cash inflows from operations with planned expenditures and are used to
determine borrowing needs.
The inquiry processing capabilities of ERP systems enable managers to easily create an almost unlimited number of
performance reports.
- For example, sales can be broken down by products, by salesperson, and by customer.
- Displaying the data in graphs can help managers quickly identify important trends and relationships, as well as areas in
need of more detailed analysis. Accountants should understand how to use the flexible reporting and graphing
capabilities of ERP systems so that they can add value by suggesting alternative ways to organize and analyze data about
business processes
Threats and Controls
(10) Poorly designed reports and graphs
 result cause managers to make biased or erroneous decisions
 Control:
a) use of responsibility accounting and flexible budgets to
design performance reports
b) balanced scorecard
c) understanding the principles of proper graph design

Responsibility Accounting and Flexible Budgeting

responsibility accounting - A system of reporting financial results on the basis of
managerial responsibilities within an organization
- each report shows actual costs and variances from budget for the current month
and the year to date, but only for those items that the manager of that subunit
controls.
- hierarchical nature of the reports: The total cost of each individual subunit is
displayed as a single line item on the next-higher-level report.
design the budget so that its content matches the nature of the unit being evaluated.
- Consequently, their performance reports should compare actual to forecasted
sales, broken down by appropriate product and geographic categories.
method used to calculate the budget standard is crucial.
- easiest approach is to establish fixed targets for each unit, store those figures
in the database, and compare actual performance with those preset values.
 - A major drawback to this approach is that the budget number is static and does not reflect unforeseen changes in the
operating environment.
- individual managers may be penalized or rewarded for factors beyond their control.
flexible budget - A budget in which the amounts are stated in terms of formulas based upon actual level of activity
- mitigates such problems
- flexible budgeting would entail dividing the budget for each line item in the general superintendent’s department into its
fixed and variable cost components.
- budget standards would be automatically adjusted for any unplanned increases (or decreases) in production.

The Balanced Scorecard

balanced scorecard - A management report that measures four dimensions of performance:
 financial, internal operations, innovation and learning, and customer perspectives of the organization
- Attempts to solve reports too narrowly focus on just one dimension of performance: that reflected in the financial
statements
The financial section contains lagging indicators of PAST performance, whereas the other three sections provide leading
indicators about likely FUTURE performance.
- For each dimension, the balanced scorecard shows the organization’s goals and specific measures that reflect performance
in attaining those goals.
Both the choice of key metrics and the setting of target values are important management decisions.
- Many organizations make the mistake of setting targets that reflect industry benchmark values.
o Problem: the organization’s aspirations and its performance are limited by its competitors’ performance.
Although industry
- benchmarks - provide a useful reference point, management should set targets that take into consideration the
organization’s unique strengths and weaknesses.
customers are the key to achieving financial goals.
- the customer perspective of AOE’s balanced scorecard contains two key goals: Improve customer satisfaction and
become the preferred supplier for key customers.
- requires efficiently and effectively performing internal business processes.
internal operations perspective portion of AOE’s balanced scorecard focuses on those activities most likely to directly affect
customer perceptions: service quality, speed of delivery, and process efficiency.
- Finally, AOE’s top management acknowledged the importance of developing new products and training its workforce to
continuously improve service and results.
measures of those the importance of developing new products and training are included in the innovation and learning
perspective of AOE’s balanced scorecard.
the measures in the innovation and learning, internal operations, and customer perspective portions of the balanced scorecard
can be thought of as leading indicators of financial measures of the organization’s strategy.
 Analyzing trends in the actual measures allows AOE’s management to test the validity of those hypotheses. If
improvements in one perspective do not generate expected improvements in other areas in subsequent time periods, top
management must reevaluate and probably revise hypotheses about the determinants of organizational success.
 Accountants and systems professionals should participate in the development of a balanced scorecard.
- help management choose the most appropriate measures for tracking achievement of goals.
 Top management’s role is to specify the goals to be pursued in each dimension. Accountants and information systems
professionals can then
 balanced scorecard was initially developed as a strategic management tool, it can also be used as a vehicle to better
manage enterprise risk by incorporating appropriate risk-based goals and measures in the various dimensions.

Principles of Proper Graph Design

Well-designed graphs - easy to identify and understand trends and relationships.
Poorly designed graph - impair decision making by misdirecting attention, hiding important changes in the data, or causing
erroneous initial impressions.
 bar charts are the most common type used to display trends in financial data.
following principles of good graph design:
1. Use a title that summarizes the basic message.
2. Include data values with each element to facilitate mental calculations and analyses.
3. Use 2-D, instead of 3-D, bars because that makes it easier to accurately assess the magnitude of changes and trends.
The following two principles are essential for properly designing bar charts of financial data so that they are accurately interpreted
1. Begin the vertical axis at zero. ensures that the depicted magnitude of change in the data accurately reflects the actual
change in the data.
- Exception: Beginning the vertical axis at a value other than zero may be useful if there is a need to monitor minor
fluctuations in the data. For example, stock prices.
2. For graphs that depict time-series data, order the x-axis chronologically from left to right.. Otherwise, the viewer may
form an erroneous initial impression of the nature of the change in the data
- The rules for proper graph design are simple, but they are easy to violate.
- Sometimes, such violations are created automatically by the software program used to create the graph.
- Other times, violations occur because of deliberate choices made by the graph designer.
- Regardless of the reason, violating the principles of proper graph design can result in graphs that mislead viewers.

- labor-force planning data

+ Human capital management, Human resources self-service systems, Human resource management,
employee/payroll master data, electronic time management system.
+ payroll service bureau.
+ Gelinas/Dull, Accounting Information Systems 7e, Chapter 15 Integrated Production Process
+ pull manufacturing.
+ push manufacturing.
+ throughput time.
+ planning
+ Activity based costing
+ bill of materials
+ Business Reporting
+ general ledger process.
+ business reporting process
+ financial reporting officer
+ general ledger master data
+ Sarbanes-Oxley Act.
+ reporting language.
+ balanced scorecard.
+ business intelligence