The Information System: An Accountant's Perspective

Chapter 1
The
Information
System: An
Accountant’s
Perspective
James A. Hall, Accounting Information Systems, 10th Edition. © 2019

Cengage. All Rights Reserved. May not be scanned, copied or duplicated,
or posted to a publicly accessible website, in whole or in part.
Learning Objectives
• 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
nonfinancial 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 relate to accounting information
systems.
James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2
The Information Environment
• Accounting information systems (AIS) are specialized
subset of information systems that processes financial
transactions.
• Information flows are the flows of information into and
out of an organization.
• Trading partners is a category of external user, including
customer sales and billing information, purchase
information for suppliers, and inventory receipts
information.
• Stakeholders are entities either inside or outside an
organization that have a direct or indirect interest in the
firm.
The Information Environment
INFORMATION OBJECTIVES
• Three fundamental objectives that are common to all
organizations:
• To support the firm’s day-to-day operations.
• To support management decision making.
• To support the stewardship function of management
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 management information system (MIS) is a system that
processes nonfinancial transactions not normally processed by
traditional accounting information systems.
• 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 affects the
assets and equities of the organization, is measured in financial
terms, and is reflected in the accounts of the firm.
• Nonfinancial transactions are events that do not meet the
narrow definition of a financial transaction.
A Framework for Information Systems
Transactions Processed by the Information
Systems
AN INFORMATION SYSTEMS FRAMEWORK
(continued)
• The Accounting Information System

• The transaction processing system (TPS) is an activity
composed of three major subsystems—the revenue cycle, the
expenditure cycle, and the conversion cycle.
• The general ledger/financial reporting system (GL/FRS) is
a system that produces traditional financial statements, such
as income statements, balance sheets, statements of cash
flows, tax returns, and other reports required by law.
• The management reporting system (MRS) is a system that
provides the internal financial information needed to manage a
business.
• The Management Information System
• The Need to Distinguish between AIS and MIS
Examples of MIS Applications in Functional
Areas
AIS SUBSYSTEMS
• Transaction Processing System
• General Ledger/Financial Reporting Systems
• Nondiscretionary reporting is a type of reporting in which the
organization has few or no choices in the information it
provides. Much of this information consists of traditional
financial statements, tax returns, and other legal documents.
• Management Reporting System
• Discretionary reporting is a type of reporting in which the
organization can choose what information to report and how to
present it.
A GENERAL MODEL FOR AIS
• The general model for AIS is a model that describes all
information systems, regardless of their technological
architecture.
• End Users
• End users are users for whom the system is built.
• External users include creditors, stockholders, potential
investors, regulatory agencies, tax authorities, suppliers, and
customers.
• Internal users include management at all levels of the
organization as well as operations personnel.
• DATA VERSUS INFORMATION: Data are facts, which may or
may not be processed (edited, summarized, or refined) and
which have no direct effect on the user. Information causes
the user to take an action that he or she otherwise could not, or
would not, have taken.
General Model for Accounting Information
Systems
A GENERAL MODEL FOR AIS (continued)
• Data Sources
• Data sources are financial transactions that enter the
information system from either internal or external sources.
• Data Collection
• Data collection is the first operational stage in the information
system.
• Data Processing
• Data processing is a group that manages the computer
resources used to perform the day-to-day processing of
transactions.
• Database Management
• Database is a physical repository for financial data.
• DATA ATTRIBUTE
• RECORD
• FILE
• DATABASE MANAGEMENT TASKS: Database management
is a special software system that is programmed to know which
data elements each user is authorized to access.
The Data Hierarchy
• Information Generation
• Information generation is the process of compiling,
arranging, formatting, and presenting information to users.
• RELEVANCE
• TIMELINESS
• ACCURACY
• COMPLETENESS
• SUMMARIZATION
• Feedback
• Feedback is a form of output that is sent back to the system as
a source of data.
Organizational Structure and AIS
• Physical AIS comprise technologies of various types and
configurations as well as people and tasks from across
the organization.
• The sales processing system, which is a subsystem of the
revenue cycle, includes the following organization
functions: sales, credit, inventory control, warehousing,
shipping, billing, accounts receivable, general ledger, and
data processing.
FUNCTIONAL SEGMENTATION
• Segments are functional units of a business organization.
• Materials Management
• Purchasing
• Receiving
• Stores
• Production
• Production planning involves scheduling the flow of materials,
labor, and machinery to efficiently meet production needs.
• Quality control monitors the manufacturing process at various
points to ensure that the finished products meet the firm’s
quality standards.
• Maintenance keeps the firm’s machinery and other
manufacturing facilities in running order.
•
FUNCTIONAL SEGMENTATION (continued)
• Marketing
• Distribution
• Personnel
• Finance
Functional Areas of a Firm
Functions From Resources
THE ACCOUNTING FUNCTION
• The Value of Information
• Reliability is the property of information that makes it useful to
users.
• Accounting Independence
• Independence is the separation of the record-keeping function
of accounting from the functional areas that have custody of
physical resources.
INFORMATION TECHNOLOGY
• Data Processing
• Centralized data processing is a model under which all data
processing is performed by one or more large computers, housed
at a central site, that serve users throughout the organization.
• Distributed data processing (DDP) is reorganizing the IT
function into small information processing units (IPUs) that are
distributed to end users and placed under their control.
• Systems Development and Maintenance
• SYSTEMS DEVELOPMENT: Commercial software is pre-coded
software that a user purchases from a software vendor.
Commercial software packages are sometimes called turnkey
systems because they often can be implemented by the user with
little or no modification.
Centralized Data Processing Model
Distributed Data Processing Model
INFORMATION TECHNOLOGY (continued)
• Systems Development and Maintenance (continued)
• SYSTEMS DEVELOPMENT (continued): Turnkey systems are
completely finished and tested systems that are ready for
implementation. Custom software is software built to
individual specifications. Custom systems are more expensive
than commercial packages. Systems development life cycle
is the software development process. Enterprise resource
planning (ERP) is a system assembled of prefabricated
software components.
• SYSTEMS MAINTENANCE
• Database Administration
• Network Administration
• A network is a collection of interconnected computers and
communications devices that allows users to communicate,
access data and applications, and share information and
resources.
• Network administration is being responsible for the effective
functioning of the software and hardware that constitute the
organization’s network. This involves configuring,
implementing, and maintaining network equipment.
• Outsourcing the IT Function
• IT outsourcing is contracting with a third-party vendor to take
over the costs, risks, and responsibilities associated with
maintaining an effective corporate IT function, including
management of IT assets and staff and delivery of IT services
such as data entry, data center operations, applications
development, applications maintenance, and network
management.
• Cloud computing is a location-independent computing variant
of IT outsourcing whereby shared data centers deliver hosted
IT services over the Internet. These services fall into three
categories: software as a service (SaaS), infrastructure as a
service (IaaS), and platform as a service (PaaS).
• Software as a service (SaaS) is a software distribution model
in which service providers host applications for client
organizations over a private network or the Internet.
• Outsourcing the IT Function (continued)
• Infrastructure as a service (IaaS) is the provision of
computing power and disk space to client firms who access it
from desktop PCs. The client firm can configure the
infrastructure for storage, networks, and other computing
needs, including running operating systems and data
processing applications.
• Platform as a service (PaaS) enables client firms to develop
and deploy onto the cloud infrastructure consumer-generated
applications using facilities provided by the PaaS vendor.
The Role of Accountants in AIS
• Accountants are involved in both the design and the audit
of AIS.
• Accountants play a prominent role on systems
development teams as domain experts.
• The IT professionals on the team are responsible for the
physical system.
ACCOUNTANTS AS SYSTEM DESIGNERS
• Conceptual system is the production of several

alternative designs for a new system.
• Physical system is the medium and method for capturing
and presenting the information.
• Data storage is an efficient information system that
captures and stores data only once and makes this single
source available to all users who need it.
ACCOUNTANTS AS SYSTEM AUDITORS
• Auditor is an expert who expresses an opinion about the

fairness of a company’s financial statements.
• Attest function is an independent auditor’s responsibility to
opine as to the fair presentation of a client firm’s financial
statement.
• Substantive tests are tests that determine whether
database contents fairly reflect the organization’s
transactions.
• Attest Service versus Advisory Services
• Tests of controls are tests that establish whether internal
controls are functioning properly.
• IT auditing is the review of the computer-based components
of an organization. The audit is often performed as part of a
broader financial audit.
ACCOUNTANTS AS SYSTEM AUDITORS
(continued)
• Internal Audits
• Internal auditing is the appraisal function housed within the
organization.
• External versus Internal Auditors
• Fraud Audits
• The Role of the Audit Committee
• Designer/Auditor Duality

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Chapter 1

James A. Hall, Accounting Information Systems, 10th Edition. © 2019

• The information system is the set of formal procedures by

• The Accounting Information System

• Conceptual system is the production of several

• Auditor is an expert who expresses an opinion about the

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