Accounting Information Systems

Presented by: Robert D. Rubin, CPA

Objectives for Chapter4
Tasks performed in the revenue cycle, regardless of the
technology used
Functional departments in the revenue cycle and the flow of
revenue transactions through the organization
Documents, journals, and accounts needed for audit trails,
records, decision making, and financial reporting
Risks associated with the revenue cycle and the controls
that reduce these risks
The operational and control implications of technology used
to automate and reengineer the revenue cycle
 Sales Order
1
Credit / Customer
Service REVENUE CYCLE
2 (SUBSYSTEM )
Cash Receipts/C
ollections
6

Shipping
3

Billing /A ccounts
Rec eiv able
4 /5
DFD of Sales OrderProcess
Manual Sales Order Process
Manual Sales Order Process
Sales Order Processing
Begins with a customer placing an order
The sales department captures the essential details on a
sales order form.

The transaction is authorized by obtaining credit

approval by the credit department.

Sales information is released to:

Billing
Warehouse (stock release or picking ticket)
Shipping (packing slip and shipping notice)
Manual Sales Order Processing
The merchandise is picked from the Warehouse and
sent to Shipping.
Stock records are adjusted.
The merchandise, packing slip, and bill of lading are
prepared by Shipping and sent to the customer.
Shipping reconciles the merchandise received from the
Warehouse with the sales information on the packing slip.
Shipping information is sent to Billing. Billing compiles
and reconciles the relevant facts and issues an invoice to
the customer and updates the sales journal. Information
is transferred to:
Accounts Receivable (A/R)
Inventory Control
BILL OF LADING EXAMPLE
 Manual Sales Order Processing
A/R records the information in the customer’s account in
the accounts receivable subsidiary ledger.
Inventory Control adjusts the inventory subsidiary ledger.
Billing, A/R, and Inventory Control submits summary
information to the General Ledger dept., which then
reconciles this data and posts to the control accounts in
the G/L.
Journal Vouchers/Entries
Billing Department prepares a journal voucher:
Accounts Receivable DR
Sales CR
Inventory Control Dept. prepares a journal
voucher:
Cost of Goods Sold DR
Invent ory CR
Cash Receipts prepares a journal voucher:
Cash DR
Accounts Receivable CR
DFD of SalesReturns
Sales Returns Flowchart
Sales Return Journal Entry
G/L posts the following to control accounts:

Inventory—Control DR
Sales Returns and Allowances DR
Cost of Goods Sold CR
Accounts Receivable—Control CR
DFD of Cash ReceiptsProcesses
Cash Receipts Flowchart
Manual Cash Receipts Processes
Customer checks and remittance advices are received in the
Mail Room.
A mail room clerk prepares a cash prelist and sends the
prelist and the checks to Cash Receipts.
The cash prelist is also sent to A/R and the Controller.
Cash Receipts:
verifies the accuracy and completeness of the checks
updates the cash receipts journal
prepares a deposit slip
prepares a journal voucher to send to G/L
Manual Cash Receipts Processes
A/R posts from the remittance advices to the
accounts receivable subsidiary ledger.
Periodically, a summary of the postings is sent to
G/L.
G/L department:
reconciles the journal voucher from Cash Receipts
with the summaries fromA/R
updates the general ledger control accounts
The Controller reconciles the bank accounts.
Summary of Internal Controls
Authorization Controls
Proper authorization of transactions (documentation)
should occur so that only valid transactions get
processed.
Within the revenue cycle, authorization should take place
when:
a sale is made on credit (authorization)
a cash refund is requested (authorization)
posting a cash payment received to a customer’s account
(cash pre-list)
Segregation of Functions
Three Rules
1. Transaction authorization should be separate
from transaction processing.
2. Asset custody should be separate from asset record-
keeping.
3. The organization should be so structured that the
perpetration of a fraud requires collusion between
two or more individuals.
Segregation of Functions
Sales Order Processing
credit authorization separate from SO processing
inventory control separate from warehouse
accounts receivable sub-ledger separate from general
ledger control account
Cash Receipts Processing
cash receipts separate from accounting records
accounts receivable sub-ledger separate from general
ledger
Supervision

 Often used when unable

to enact appropriate
segregation of duties.
 Supervision of employees serves
as a deterrent to dishonest acts
and is particularly important in the
mailroom.
Accounting Records
With a properly maintained audit trail, it is
possible to track transactions through the systems
and to find where and when errors were made:
pre-numbered source documents
special journals
subsidiary ledgers
general ledger
files
Access Controls
 Access to assets and information
(accounting records) should be
limited.
 Within the revenue cycle, the assets to
protect are cash and inventories and access
to records such as the accounts receivable
subsidiary ledger and cash journal should
be restricted.
 Independent Verification
 Physical procedures as well as record-keeping should be
independently reviewed at various points in the system to
check for accuracy and completeness:
 shipping verifies the goods sent from the warehouse are
correct in type and quantity
 warehouse reconciles the stock release document (picking
slip) and packing slip
 billing reconciles the shipping notice with the sales
invoice
 general ledger reconciles journal vouchers from billing,
inventory control, cash receipts, and accounts receivable
Computer-Based Accounting Systems
 CBAS technology can be viewed as a continuum
with two extremes:
 automation - use technology to improve
efficiency and effectiveness
 reengineering – use technology to restructure
business processes and firm organization
 Revenue Cycle Databases
Master files  Other Files
customer master file  shipping and price data
accounts receivable master reference file
file  credit reference file (may not
merchandise inventory master be needed)
file  salesperson file (may be a
master file)
Transaction and Open  Sales history file
Document Files  cash receipts history file
sales order transaction file  accounts receivable reports
open sales order transaction file
file
sales invoice transaction file
cash receipts transaction file
Automating the RevenueCycle
Authorizations and data access can be performed
through computer screens.
There is a decrease in the amount of paper.
The manual journals and ledgers are changed to
disk or tape transaction and master files.
Input is still typically from a hard copy document
and goes through one or more computerized
processes.
Processes store data in electronic files (the tape or
disk) or prepare data in the form of a hardcopy
report.
Automating the RevenueCycle
Revenue cycle programs can include:
formatted screens for collecting data
edit checks on the data entered
instructions for processing and storing the data
security procedures (passwords or user IDs)
steps for generating and displaying output
To understand files, you must consider the record design
and layout.
The documents and the files used as input sources must
contain the data necessary to generate the output reports.
Example: Automated Batch Sales
Reengineering Sales Order Processing Using
Real-Time Technology

Manual procedures and physical documents are replaced

by interactive computer terminals.
Real time input and output occurs, with some master
files still being updated using batches.
Real-time - entry of customer order, printout of stock
release, packing slip and bill of lading; update of credit
file, inventory file, and open sales orders file
Batch - printout of invoice, update of closed sales
order (journal), accounts receivable and general ledger
control account
Real-time Sales Order
 Advantages of Real-Time
Processing
Shortens the cash cycle of the firm by reducing the time
between the order date and billing date
Better inventory management which can lead to a
competitive advantage
Fewer clerical errors, reducing incorrect items being
shipped and bill discrepancies
Reduces the amount of expensive paper documents and
their storage costs
Automated CashReceipts
Reengineered Cash Receipts
The mail room is a frequent target for reengineering.
Companies send their customers preprinted envelopes
and remittance advices.
Upon receipt, these envelopes are scanned to provides
a control procedure against theft.
Machines will open the envelopes, scan remittance
advices and checks, and separate the checks.
Artificial intelligence may be used to read handwriting,
such as remittance amounts and signatures.
Point-of-Sale Systems
Point of sale systems are used extensively in retail
establishments.
Customers pick the inventory from the shelves and take
them to a cashier.
The clerk scans the universal product code (UPC). The POS
system is connected to an inventory file, where the price and
description are retrieved.
The inventory levels are updated and reorder needs can
immediately be detected.
 Point-of-Sale Systems
The system computes the amount due.
Payment is either cash, check, ATM or credit card in most
cases.
No accounts receivables
If checks, ATM or credit cards are used, an on-line link to
receive approval isnecessary.
At the end of the day or a cashier’s shift, the money and
receipts in the drawer are reconciled to the internal cash
register tape or a printout from the computer’s database.
Cash over and under must be recorded
Computerized POS
Reengineering Using EDI
EDI helps to expedite transactions.
The customer’s computer:
determines that inventory is needed
selects a supplier with whom the business has a formal
business agreement
dials the supplier’s computer and places the order
The exchange is completely automated.
No human intervention or management
 EDI System
Company A Company B
Application Purchases Sales Order Application
Software System System Software

EDI EDI
Translation Translation
Software Software
Direct Connection
Communications Communications
Software Software

Other
Mailbox

Company VAN Company

A’s mailbox B’s mailbox

Other
Mailbox
Reengineering Using the
Internet
Typically, no formal business agreements exist as they
do in EDI.
Most orders are made with credit cards.
Mainly done with e-mail systems, and thus a
turnaround time is necessary
Intelligent agents are needed to eliminate this time lag.
Security and control over data is a concern with
Internet transactions.
CBASControl Considerations
Authorization - in real-time systems, authorizations
are automated
Programmed decision rules must be closely monitored.
Segregation of Functions - consolidation of tasks by
the computer is common
Protect the computer programs
Coding, processing, and maintenance should be
separated.
CBASControl Considerations
Supervision - in POS systems, the cash register’s internal
tape or database is an added form of supervision

Access Control - magnetic records are vulnerable to both

authorized and unauthorized exposure and should be
protected
Must have limited file accessibility
Must safeguard and monitor computer programs
CBASControl Considerations
Accounting Records - rest on reliabilityand security
of stored digitalized data
Accountants should be skeptical about the accuracy of
hard-copy printouts.
Backups - the system needs to ensure that backups of
all files are continuously kept
Independent Verification – consolidating accounting
tasks under one computer program can remove
traditional independent verification controls. To
counter this problem:
perform batch control balancing after each run
produce management reports and summaries for end
users to review
PC-BasedAccounting Systems
Used by small firms and some large decentralized firms
Allow one or few individuals to perform entire
accounting function
Most systems are divided into modules controlled by a
menu-driven program:
general ledger
inventory control
payroll
cash disbursements
purchases and accounts payable
cash receipts
sales order
THANK YOU!