MODULE 1 Advanced application software incl:

Introduction to Accounting information ➢ Multimedia – integrate video,

System music, voice, and graphics to
create interactive presentations.
➢ Web publishers – create
interactive multi-media Web
INFORMATION SYSTEM - is a collection of
pages
people, procedures, software hardware and
➢ Graphics programs – create
data which works together to provide
information essential to running an professional publications, draw,
edit and modify images
organization.
➢ Virtual reality –create realistic
three dimensional virtual or
simulated environments
What are parts of an Information System? ➢ Artificial intelligence –
1. PEOPLE – this are primarily the end users simulated human thought
working to increase their productivity. It processes and actions
usually uses hardware and software to solve ➢ Project managers – plan
information-related or decision making projects, schedule, people, and
problems. control resources

4. HARDWARE – this consist of input devices,

the system units, secondary storage, output
2. PROCEDURES – This are manuals and devices, and communication devices.
guidelines that instruct end users on how to
use the software and hardware. ▪ Input devices includes keyboard and
mouse
▪ System unit includes CPU or Central
3. SOFTWARE – this are programs that tell Processing Unit. This manipulates
the computer on how to process data. data to produce information
▪ Memory or Primary Storage- holds
data, program instructions and
processed data
Kinds of Software:
▪ Secondary Storage – store data and
System Software – this are background programs example are flash drive, hard
software that helps computer mange it’s disk Optical disk
internal resources. Example are Microsoft ▪ Output devices includes monitor
Windows, GNU/linux , macOS and Android. which display results and printer
which prints images on paper
▪ Communication devices –these send
and receive data and programs from
Application Software – it is a computer
computer to another. A device that
program designed to help people perform an
connects a microcomputer to a
activity.
telephone is modem.

Basic application software includes: 5. DATA - is a raw material for data

➢ Browsers – navigate, explore, processing. These consist of numbers, letters
find information on the Internet and symbols and relates to facts, events and
➢ Word processor – prepare transactions. Data describes something and
written documents is typically stored electronically in a file. A file
➢ Spreadsheet – analyze and is a collection of characters organized as a
summarize numerical data single unit.
➢ Database management
system – organize and manage
data and information Common types of files are:
➢ Presentation graphics –
communicate a message or ▪ Documents – Letters, research papers,
persuade other people and memoranda.
▪ Worksheet – budget analyses, sales
projections
▪ Database- structured and organized
data.
ACCOUNTING INFORMATION SYSTEM - It
is an information system which will generate
reliable financial information needed by the
users or decision makers in a timely manner.

Objectives of accounting information

system:
1. To process the information efficiently at the
least cost (cost benefit principle
2. To protect entity’s assets, to ensure that
data are reliable, and to minimize wastes and As defined earlier, internal controls are the
possibility of theft or fraud (control principle) set of procedures and policies adopted within
3. To be in harmony with the entity’s an organization to safeguard its assets, check
organizational and human factors the accuracy and reliability of its data,
(compatibility principle) promote operational efficiency, and
encourage adherence to prescribed
4. To be able to accommodate growth in the managerial practices.
volume of transactions and for organizational
changes (flexibility principle)
VENDOR - provides materials or operating
supplies to an organization.

IT – CHAPTER 1
SUPPLY CHAIN - is the entities, processes,
BUSINESS PROCESS - is a prescribed and information flows that involve the
sequence of work steps performed in order to movement of materials, funds, and related
produce a desired result for the organization. information through the full logistics process,
A business process is initiated by a particular from the acquisition of raw materials to the
kind of event, has a well-defined beginning delivery of finished products to the end user.
and end, and is usually completed in a The supply chain includes all vendors, service
relatively short period. providers, customers, and intermediaries.

INTERNAL CONTROL - are the set of SUPPLY CHAIN MANAGEMENT - is the

procedures and policies adopted within an organization and control of all materials,
organization to safeguard its assets, check funds, and related information in the logistics
the accuracy and reliability of its data, process, from the acquisition of raw materials
promote operational efficiency, and to the delivery of finished products to the end
encourage adherence to prescribed user (customer).
managerial practices.

INFORMATION TECHNOLOGY - is defined

ACCOUNTING INFORMATION SYSTEM - as the computers, ancillary equipment,
comprises the processes, procedures, and software, services, and related resources as
Systems that capture accounting data from applied to support business processes.
business processes; record the Accounting
data in the appropriate records; process the
detailed accounting data By classifying,
BUSINESS PROCESS REENGINEERING
summarizing, and consolidating; and report
(BPR) - is the purposeful and organized
the summarized Accounting data to internal
changing of business processes to make them
and external users.
more efficient.

BINARY DIGIT (bit) - is the smallest unit of

information in a computer system. A bit can
have only one of two values: zero or one.
BYTE - is a unit of storage that represents one RANDOM ACCESS FILES - (sometimes called
character. In most computer systems, a byte direct access files) are not written or read in
is made up of eight bits. For example, the sequential order. The records are stored in
character “A” would be represented in a random order on a disk media.
computer system by a set of eight bits. Every
character, including letters, numbers, and
symbols, are represented by a byte. INDEXED SEQUENTIAL ACCESS METHOD
(ISAM) – ISAM files are stored sequentially,
but can also be accessed randomly because
an index allows random access to specific
records.
FIELD – is one item within a record. For
example, last name is a field in a payroll BATCH PROCESSING - requires that all
record, and description is a field in an similar transactions be grouped together for a
inventory record. specified time; then this group of transactions
is processed as a batch.

RECORD - is a set of related fields for the

same entity. All fields for a given employee ONLINE PROCESSING - is the opposite of
form a payroll record. Such fields would be batch processing. Transactions are not
employee number, last name, first name, grouped into batches, but each transaction is
Social Security number, pay rate, and year- entered and processed one at a time.
to-date gross pay.

REAL-TIME PROCESSING SYSTEM -

FILE - The entire set of related records form a meaning that the transaction is processed
file. immediately, and in real time, so that the
output is available immediately.

DATABASE - is a collection of data stored on

the computer in a form that allows the data to DATA WAREHOUSE - is an integrated
be easily accessed, retrieved, manipulated, collection of enterprise-wide data that
and stored. The term database usually includes five to ten fiscal years of nonvolatile
implies a shared database within the data, used to support management in
organization. decision making and planning.

RELATIONAL DATABASE - stores data in OPERATIONAL DATABASE - contains the

several small two-dimensional tables that can data that are continually updated as
be joined together in many varying ways to transactions are processed.
represent many different kinds of
relationships among the data.
DATA MINING - is the process of searching
data within the data warehouse for
MASTER FILE - are the relatively permanent identifiable patterns that can be used to
files that maintain the detailed data for each predict future behavior.
major process.

NETWORK - is two or more computers linked

TRANSACTION FILE - is the set of relatively together to share information and/or
temporary records that will be processed to resources.
update the master file.

LAN - is a computer network that spans a

SEQUENTIAL ACCESS FILES - store records relatively small area. Most LANs are confined
in sequence, with one record stored to a single building or group of buildings and
immediately after another. The sequence is are intended to connect computers within an
usually based on a key field such as employee organization. However, one LAN can be
number or customer number.
connected to other LANs over any distance via E-PAYABLES AND ELECTRONIC INVOICE
other network connections. PRESENTMENT AND PAYMENT (EIPP) - are
both terms that refer to Web-enabled receipt
and payment of vendor invoices. EIPP enables
WAN - a system of LANs connected in this way a vendor to present an invoice to its trading
is called a WAN, or wide area network. partner via the Internet, eliminating the
paper, printing, and postage costs of
traditional paper invoicing.
INTERNET - is the global computer network,
or “information super-highway.” The Internet
is the network that serves as the backbone for
the World Wide Web (WWW). ENTERPRISE RESOURCE PLANNING
INTRANET - is a company’s private network SYSTEMS (ERP) - is a multi-module software
accessible only to the employees of that system designed to manage all aspects of an
company. enterprise.

EXTRANET - is similar to an intranet except ENTERPRISE RISK MANAGEMENT (ERM) –

that it offers access to selected outsiders, is a process, effected by an entity’s board of
such as buyers, suppliers, distributors, and directors, management and other personnel,
wholesalers in the supply chain. applied in strategy setting and across the
enterprise, designed to identify potential
events that may affect the entity, and manage
risk to be within its risk appetite, to provide
E-BUSINESS - is the use of electronic means reasonable assurance regarding the
to enhance business processes. E-business achievement of entity objectives.
encompasses all forms of online electronic
trading — consumer-based e-commerce and
business-to-business transactions, as well as
the use of IT for process integration inside
organizations. IT – CHAPTER 2
TYPES OF ACCOUNTING INFORMATION
EXAMPLES OF IT ENABLEMENT SYSTEMS

ELECTRONIC DATA INTERCHANGE (EDI) - MANUAL SYSTEMS - Certainly, most large or

is the intercompany, computer-to-computer medium-size organizations use computerized
transfer of business documents in a standard accounting systems rather than manual
business format. record-keeping systems. However, there are
many small organizations that use manual
systems, in whole or in part, to maintain
accounting records.
POINT OF SALE SYSTEM (POS) - is a system
of hardware and software that captures retail
sales transactions by standard bar coding.
SOURCE DOCUMENTS - is a record that
captures the key data of a transaction.
AUTOMATED MATCHING - is a computer
hardware and software system in which the
software matches an invoice to its related TURNAROUND DOCUMENT - is an output of
purchase order and receiving report. the accounting system that can be used as an
input in a different part of the accounting
system.
EVALUATED RECEIPT SETTLEMENT (ERS)
- is an invoice-less system in which computer
hardware and software complete an invoice- GENERAL LEDGER - provides details for the
less match comparing the purchase order entire set of accounts used in the
with the goods received. organization’s accounting systems.
GENERAL JOURNAL - is the place of original PLATFORM AS A SERVICE (PaaS) -
entry for any transactions that are not Sometimes the database is combined with an
recorded in special journals. operating system, and it is referred to as
Platform as a Service.

SPECIAL JOURNAL - are established to

record specific types of transactions. INFRASTRUCTURE AS A SERVICE (IaaS) –
the computer infrastructure in the cloud.
Infrastructure is the actual computer servers,
SUBSIDIARY LEDGER - maintain detailed drives on which data are stored, and the
information regarding routine transactions, networking components.
with an account established for each entity.
LEGACY SYSTEMS - is an existing system in SERVICE LEVEL AGREEMENT (SLA) – a
operation within an organization. company that wishes to buy cloud computing
services enters into an agreement with a
cloud computing provider. This agreement, or
SCREEN SCRAPERS - or frontware, which contract, is called a Service Level Agreement.
add modern, user friendly screen interfaces to
legacy systems. There are limitations to this
approach, because mainframe systems are SCALABILITY - as a company grows, it can
not efficient as newer technology at handling easily purchase new capacity from the cloud
data entry by multiple, simultaneous users. provider.

ENTERPRISE APPLICATION INTEGRATION EXPANDED ACCESS - once the software and

(EAI) - is a set of processes, software and data are stored in the cloud, it can be
hardware tools, methodologies and accessed by multiple devices from many
technologies to integrate software systems. different locations.

MODERN, INTEGRATED SYSTEMS - In INFRASTRUCTURE IS REDUCED - The

today’s AIS environment, numerous company has a reduced need for servers and
accounting software systems are available for data storage, since most of these resources
purchase that integrate many or all of the are provided by the cloud provider. This also
business processes within an organization. means that the cloud provider provides data
security and backup of data.

CLIENT-SERVER COMPUTING - means that

there are two types of computers networked COST SAVINGS - because of the detailed
together to accomplish the application advantages, there are usually significant cost
processing. savings recognized from cloud computing.

CLOUD COMPUTING - a more centralized BAR CODE - is a printed code consisting of a

approach to IT. Because of its many series of vertical, machine-readable,
applications, there may be no single, accepted rectangular bars and spaces that vary in
definition of cloud computing. width and are arranged in a specific way to
represent letters, numbers, and other
human-readable symbols.
SOFTWARE AS A SERVICE (SaaS) -
software that resides in the cloud.
E-COMMERCE - whereas e-commerce is a
type of e-business that is specific to consumer
DATABASE AS A SERVICE (Daas) - online buying and selling. A major difference
databases that reside in the cloud. between EDI and e-business (including e-
commerce) is that EDI uses dedicated
networks, while e-business uses the Internet.
TRADING PARTNER DOCUMENTS - such as
checks, invoices, and statements.

INTERNAL DOCUMENTS - are another form

of output from an accounting information
system. Examples of internal documents
include credit memorandums, receiving
reports, production routing documents, and
production scheduling documents. These
documents may be printed paper forms, or
they may be in the form of screen outputs
viewed on the user’s computer.

DATA FLOW DIAGRAMS (DFD) - is used by

EXTERNAL REPORT - are usually financial systems professionals to show the logical
statements that include a balance sheet, design of a system. The advantage of DFDs is
income statement, and statement of cash that they use only four symbols and are
flows. simple to read and understand.

INTERNAL REPORTS - provide feedback to

managers to assist them in running the
business processes under their control.

PROCESS MAPS - are pictorial

representations of business processes in
which the actual flow and sequence of events
in the process are presented in diagram
form—the start of a process, the steps within
the process, and a finish of the process.

DOCUMENT FLOWCHARTS - shows the flow

of documents and information among
departments or units within an organization.
Document flowcharts are usually divided into
columns, each representing a department or
unit of the organization

SYSTEM FLOWCHARTS - is intended to

depict the entire system, including inputs,
manual and computerized processes, and
outputs. System flowcharts do not
necessarily show details of each process, but
display the overall sequence of processes and
the media used for processing and storage.
ENTITY RELATIONSHIP DIAGRAMS - or ER ▪ Effectiveness and efficiency of
diagrams, are pictorial representations of the operations
logical structure of databases. An ER diagram ▪ Reliability of financial reporting
identifies the entities, the attributes of ▪ Compliance with applicable laws and
entities, and the relationship between entities regulations
ENTITIES - can be thought of as the nouns
that represent items in the accounting FRAUD - can be defined as the theft,
system. concealment, and conversion to personal gain
of another’s money, physical assets, or
information.
ATTRIBUTES - or characteristics of the
entity. For example, employees have
attributes such as last name, first name, pay MISAPPROPRIATION OF ASSETS - involves
rate, and number of withholdings. theft of any item of value. It is sometimes
referred to as a defalcation, or internal theft,
and the most common examples are theft of
cash or inventory.
CARDINALITY - refers to how many
instances of an entity relate to each instance
of another entity.
MISSTATEMENT OF FINANCIAL RECORDS
- involves the falsification of accounting
reports. This is often referred to as earnings
management, or fraudulent financial
reporting.

FRAUD TRIANGLE:
▪ Incentive to commit the fraud. Some
kind of incentive or pressure typically
leads fraudsters to their deceptive acts.
Financial pressures, market
pressures, job-related failures, or
addictive behaviors may create the
incentive to commit fraud.
▪ Opportunity to commit the fraud.
Circumstances may provide access to
them assets or records that are the
objects of fraudulent activity. Only
those persons having access can pull
off the fraud. Ineffective oversight is
IT – CHAPTER 3 often a contributing factor.
▪ Rationalization of the fraudulent
STEWARDSHIP - is the careful and action. Fraudsters typically justify
responsible oversight and use of the assets their actions because of their lack of
entrusted to management. moral character. They may intend to
repay or make up for their dishonest
actions in the future, or they may
CODE OF ETHICS – To fulfill these believe that the company owes them as
obligations, management must maintain a result of unfair expectations or an
internal controls and enforce a code of ethics. inadequate pay raise.

MANAGEMENT FRAUD - conducted by

INTERNAL CONTROL – The COSO report one or more top-level managers within the
defines internal control as follows: A process, company, is usually in the form of
affected by an entity’s board of directors, fraudulent financial reporting.
management, and other personnel, designed
to provide reasonable assurance regarding
the achievement of objectives in the following
categories:
 MANAGEMENT OVERRIDE - involves top CREDIT CARD FRAUD & CHECK FRAUD -
management’s circumvention of the involve the customer’s use of stolen or
systems or internal controls that are in fraudulent credit cards and checks.
place.

REFUND FRAUD - occurs when a customer

EMPLOYEE FRAUD – is conducted by tries to return stolen goods to collect a cash
non-management employees. refund.

MOST COMMON KIND OF EF: VENDOR FRAUD - occurs when vendors

obtain payments to which they are not
1. Inventory theft. Inventory can be entitled. Vendor fraud may also be
stolen or misdirected. This could be perpetrated through collusion.
merchandise, raw materials, supplies, or
finished goods inventory.
2. Cash receipts theft. This occurs when VENDOR AUDIT - involve the examination of
an employee steals cash from the vendor records in support of amounts
company. An example would be the theft charged to the company.
of checks collected from customers.
3. Accounts payable fraud. Here, the
INDUSTRIAL ESPIONAGE - the theft of
employee may submit a false invoice,
create a fictitious vendor, or collect proprietary company information, by digging
through the trash of the intended target
kickbacks from a vendor. A kickback is a
cash payment that the vendor gives the company.
employee in exchange for the sale; it is like
a business bribe.
SOFTWARE PRIVACY – the unlawful copying
4. Payroll fraud. This occurs when an of software programs.
employee submits a false or inflated time
card.
5. Expense account fraud. This occurs INTERNAL COMPUTER FRAUD - when an
when an employee submits false travel or employee of an organization attempts to
entertainment expenses, or charges an conduct fraud through the misuse of a
expense ledger account to cover the theft computer-based system.
of cash.
Cash receipts theft is the most common
ICF concerns each of the following
type of employee fraud.
activities:
1. Input manipulation. Usually involves
SKIMMING - where the organization’s cash is
altering data that is input into the computer.
stolen before it is entered into the accounting
records. 2. Program manipulation. occurs when a
program is altered in some fashion to commit
a fraud. Examples of program manipulation
LARCENY - steal the company’s cash after it include:
has been recorded in the accounting records.
▪ Salami technique - alter a program to
slice a small amount from several
accounts and then credit those small
COLLUSION - occurs when two or more amounts to the perpetrator’s benefit.
people work together to commit a fraud. ▪ Trojan horse program - is a small,
unauthorized program within a larger,
legitimate program, used to
CUSTOMER FRAUD - occurs when a manipulate the computer system to
customer improperly obtains cash or property conduct a fraud.
from a company, or avoids a liability through ▪ Trap door alteration - is a valid
deception. programming tool that is misused to
commit fraud.
 The objectives of an internal control
system are as follows:
EXTERNAL COMPUTER FRAUD - are
conducted by someone outside the company 1. Safeguard assets (from fraud or errors).
who has gained unauthorized access to the
computer. These fraudsters are commonly 2. Maintain the accuracy and integrity of the
known as hackers. accounting data.
3. Promote operational efficiency.

HACKING - is the term commonly used for 4. Ensure compliance with management
directives.
computer network break-ins. A particular
kind of hacking: denial of service attack
(DoS) is intended to overwhelm an intended
target computer system with so much bogus PREVENTIVE CONTROLS - are designed to
network traffic that the system is unable to avoid errors, fraud, or events not authorized
respond to valid network traffic. by management.

SPOOFING - occurs when a person, through DETECTIVE CONTROLS - must be included

a computer system, pretends to be someone in an internal control system. Detective
else. controls help employees to uncover or
discover errors, fraud, or unauthorized
events.
Two kinds of spoofing:
▪ Internet spoofing - is the most CORRECTIVE CONTROLS - are those steps
dangerous to the accounting and undertaken to correct an error or problem
control systems, because a spoofer uncovered via detective controls.
fools a computer into thinking that the
network traffic arriving is from a
trusted source. CONTROL ENVIRONMENT - sets the tone of
▪ E-mail spoofing - is not typically as an organization and influences the control
problematic as Internet spoofing is to consciousness of its employees.
the direct financial interests of most
business organizations, it is
nevertheless a source of irritation and
inconvenience at the workplace. RISK ASSESSMENT - whereby it considers
existing threats and the potential for
additional risks and stands ready to respond
should these events occur.
Following are three critical actions that an
organization can undertake to assist in the
prevention or detection of fraud and
errors: CONTROL ACTIVITIES - as the policies and
procedures that help ensure that
1. Maintain and enforce a code of ethics management directives are carried out and
that management objectives are achieved.
2. Maintain a system of accounting internal
controls
3. Maintain a system of information These activities can be divided into the
technology controls following categories:
▪ Authorization of Transactions -
In response to the many fraudulent financial refers to an approval, or endorsement,
reports generated in 2001, the United States from a responsible person or
department in the organization that
Congress passed the Sarbanes–Oxley Act of
has been sanctioned by top
2002.
management.
General authorization is a set of
guidelines that allows transactions to
be completed as long as they fall within
established parameters.
 Specific authorization means that TRUST SERVICES PRINCIPLES - are
explicit approval is needed for that designed to be the written guidance for CPAs
single transaction to be completed. who provide assurance services for
organizations.
▪ Segregation of Duties - When
management delegates authority and
develops guidelines as to the use of Risk and controls in IT are divided into
that authority, it must assure that the five categories in the Trust Services
authorization is separated from other Principles, as follows:
duties. This separation of related
duties is called segregation of duties. 1. Security. The risk related to security
Compensating control that lessens is unauthorized access, which may be
the risk of negative effects when other both physical access and logical
controls are lacking. access.
▪ Adequate Records and Documents - 2. Availability. The risk related to
When management is conscientious availability is system or subsystem
and thorough about preparing and failure due to hardware or software
retaining documentation in support of problems.
its accounting transactions, internal 3. Processing integrity. The risk related
controls are strengthened. to processing integrity could be
inaccurate, incomplete, or improperly
▪ Security of Assets and Documents - authorized information.
Organizations should establish control 4. Online privacy. The risk in this area
activities to safeguard their assets, is that personal information about
documents, and records. customers may be used
inappropriately or accessed by those
▪ Independent Checks and either inside or outside the company.
Reconciliation - Independent checks 5. Confidentiality. The risk related to
on performance are an important confidentiality is that confidential
aspect of control activities. information about the company or its
Independent checks serve as a business partners may be subject to
method to confirm the accuracy and unauthorized access during its
completeness of data in the accounting transmission or storage in the IT
system. Reconciliation is a procedure system.
that compares records from different
sources.

BATCH TOTAL - which is merely a

summation of key items in the batch (such as
hours worked), and compare this batch total
along various stages of processing.

MONITORING - involves the ongoing review

and evaluation of the system.

REASONABLE ASSURANCE - means that the

controls achieve a sensible balance of
reducing risk when compared with the cost of
the control.

CONTROL OBJECTIVES for INFORMATION

TECHNOLOGY (COBIT) - is extremely
important guidance for those who design or
audit IT systems.