Chapter 1

The
Information
System:
An
Accountants
Perspective
Accounting Information
Systems 9e
James A. Hall

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whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
 Objectives for Chapter 1
Recognize the primary information flows within the business
environment.
Understand the difference between accounting information systems
and management information systems.
Understand the difference between financial transactions and non-
financial transactions.
Know the principal features of the general model for information
systems.
Understand the organizational structure and functional areas of a
business.
Be able to distinguish between external auditing, internal auditing,
and advisory services as they related to accounting information
systems.

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 The Information Environment
Information is a business resource.

Operations management directly responsible for controlling

day-to-day operations.
Middle management accountable for short-term planning and
coordinating activities to accomplish organizational
objectives.
Top management responsible for longer-term planning and
setting organizational objectives.
Two groups of external users: trading partners and
stakeholders.

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The Information Environment

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 Information Objectives
The goal of an information system is to support:

The firms day to day operations.

Management decision making.

The stewardship function of management.

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 An Information Systems Framework
The information system is the set of formal procedures by
which data are collected, processed into information, and
distributed to users.
A transaction is an event that affects or is of interest to the
organization and is processed by its information system as a
unit of work.
A financial transaction is an economic event that affect the
assets and equities of the organization, is reflected in its
accounts and is measured in monetary terms.
A nonfinancial transaction is an event that doesnt meet the
definition of a financial transaction.

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An Information Systems Framework

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An Information Systems Framework

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 An Information Systems Framework
Accounting information system (AIS) processes financial and
some nonfinancial transactions. Three subsections:
The transaction processing system (TPS) which supports
daily business operations.
The general ledger/financial reporting system (GL/FRS)
which produces reports.
The management reporting system (MRS) which provides
information for decision making.
Management information system (MIS) processes nonfinancial
transactions not processed by the AIS.

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An Information Systems Framework

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 AIS Subsystems
The transaction processing system (TPS) :
Converts economic events into financial transactions.
Records financial transactions in the accounting records.
Distributes essential financial information to support operations.
The general ledger/financial reporting system (GL/FRS)
takes information from the TPS and other input and:
Updates general ledger control accounts.
Handles nondiscretionary reporting requirements.
The management reporting system (MRS) provides the
internal information needed to manage a business and handles
discretionary reporting.

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A General Model for AIS

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 A General Model for AIS
End users fall into two groups :
External users include creditors, stockholders, government
agencies, suppliers and customers.
Internal users include management and operations personnel.
Distributes essential financial information to support operations.
Data are facts which may or may not be processed and have
no direct effect on a users actions.
Information causes a user to take an action that would
otherwise not have been taken.
Data sources are financial transactions that enter the
information system for internal or external sources.

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 A General Model for AIS
Data collection is the first operational stage in the
information system:
Objective is to ensure data are valid, complete and free from
material errors.
Only relevant data should be captured.
Efficient collection procedures designed to collect data only once.
Data processing tasks range from simple to complex.
The organizations database is its physical repository for
financial and nonfinancial data.
Term could apply to a filing cabinet or computer disk.

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 A General Model for AIS
The levels in the data hierarchy:
The data attribute is the most elemental piece of potentially
useful data in the database.
A record is a complete set of attributes for a single occurrence
within an entity class.
A file (or table) is a complete set of records of an identical
class.
Database management involves three fundamental tasks:
storage, retrieval and deletion.

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 A General Model for AIS

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 A General Model for AIS
Information generation is the process of compiling,
arranging, formatting, and presenting information to users.
Regardless of physical form, useful information has:
Relevance: Content must serve a purpose.

Timeliness: No older than time frame of supported action.

Timeliness: No older than time frame of supported action.

Accuracy: Free from material errors.

Completeness: All essential information is present.

Summarization: Aggregated for the users needs.

Feedback is a form of output sent back to the system as a source of data.

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 Functional Segmentation
Materials Management
purchasing, receiving and stores
Production
production planning, quality control, and maintenance
Marketing
Distribution
Personnel
Finance

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 Functional Segmentation

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Functional Segmentation

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 The Accounting Function
Accounting manages the financial resource of the firm:
Captures and records transactions.
Distributes transaction information to operations personnel.
Value of information is determined by its reliability.
Relevance, accuracy, completeness, summarization and
timeliness.
Unreliable information has no value.
Information reliability requires accounting independence.
Accounting activities must be separate and independent of the
functional areas maintaining custody of resources.
Accounting supports these functions with information but does
not participate in the physical activities.

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 Information Technology
Many organization employ a combination of centralized
and distributed processing.
Centralized Data Processing:
All data processing performed by large computer(s) in a common
data center that serves users throughout the organization.
Lends itself to intra-organization communication and data
sharing.
Distributed Data Processing (DDP):
Users process transactions locally with each user segment
possessing IT needs to support their operations.
Users function independently and tend not to share data and
information.

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Information Technology

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Information Technology

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 Information Technology
Systems development is the process organizations use to
acquire information systems.
Can be purchased or built from scratch.
Commercial software available for general accounting and
industry specific applications. Sometimes called turnkey
systems because can be implemented with little modification.
Custom software is developed through a formal process called
the system development life cycle. Requires an in-house team
of qualified individuals.
Systems maintenance may be trivial or significant.
Between 80% - 90% of systems total cost may be incurred
because of maintenance activities.

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 Information Technology
Centrally organized companies with shared data use
database administration to ensure security and integrity.
A network is a collection of computers and communication
devices that allow users to communicate, access data and
applications, and share information and resources.
Network administration responsible for effective functioning of
hardware and software.
Due to the highly technical, dynamically changing and
expense of IT, many executives look to IT outsourcing.
Organization sells IT resources and leases back IT services.
With cloud computing data centers deliver hosted IT services
over the Internet: Software as a service (SaaS), infrastructure
as a service (IaaS) and platform as a service (PaaS).
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 The Role of Accountants in AIS
Accounts play a prominent role on system development
teams as domain experts, responsible for many aspects of
the conceptual system including specifying rules, reporting
requirements and internal control objectives.
IT professionals determine the most economical and effective
technologies for the physical system, including data storage.
Accountants perform audits which typically involve the AIS.
External audit is an independent attestation and opinion (audit
report) regarding financial statement presentation.
Requires auditors (independent CPAs) to test internal controls and
perform substantive tests of data.
Critical element is auditor independence, which means the auditor is free
from factors that might influence the audit report.

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 The Role of Accountants in AIS
Prior to SOX, accounting firms were permitted to provide
both advisory and attest services to clients.
SOX legislation restricts non-audit services that auditors may
provide and prohibits auditors from providing these services:
Other accounting services including bookkeeping, financial
information systems design and implementation, appraisal or
valuation, actuarial, and internal audit outsourcing.
Management or human resources, broker or dealer,
investment adviser, or investment banking services.
Legal services and expert services unrelated to the audit.
Any other service that the Board determines, by regulation, is
impermissible.

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 The Role of Accountants in AIS
Internal auditing is an independent appraisal function
within an organization to examine and evaluate activities.
External auditors represent outsiders and internal auditors
represent the interests of the organization.
Fraud audits have increased in popularity as a corporate
governance tool.
May be initiated by managers to investigate employees or the
board to investigate management.
Audit committees serves an independent check and
balance for internal audit functions and a liaison with
external auditors.
Usually three people, one of which must be a financial expert.

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