CHAPTER 1: THE INFORMATION SYSTEM: AN  A subsystem is considered a system when it is

ACCOUNTANT’S PERSPECTIVE the focus of attention.

INTERNAL INFORMATION FLOWS SYSTEM DECOMPOSITION VERSUS SYSTEM

INTERDEPENDENCY
System Decomposition
 the process of dividing the system into smaller
subsystem parts
System Interdependency
 distinct parts are not self-contained
 they are reliant upon the functioning of the
other parts of the system
 all distinct parts must be functioning or the
system will fail

WHAT IS AN INFORMATION SYSTEM?

 Horizontal flows of information used primarily
 An information system is the set of formal
at the operations level to capture transaction
procedures by which data are collected,
and operations data
processed into information, and distributed to
 Vertical flows of information
users.
downward flows — instructions, quotas, and
budgets
TRANSACTIONS
upward flows — aggregated transaction and
 A transaction is a business event.
operations data
Financial transactions
 economic events that affect the assets and
INFORMATION REQUIREMENTS
equities of the organization
 Each user group has unique information
 e.g., purchase of an airline ticket
requirements.
Nonfinancial transactions
 The higher the level of the organization, the
 all other events processed by the organization’s
greater the need for more aggregated
information system
information and less need for detail.
 e.g., an airline reservation — no commitment
by the customer
INFORMATION IN BUSINESS
Information is a business resource that:
 needs to be appropriately managed
 is vital to the survival of contemporary
businesses

WHAT IS A SYSTEM?
WHAT IS ACCOUNTING INFORMATION SYSTEMS?
A group of interrelated multiple components or
Accounting is an information system.
subsystems that serve a common purpose
 It identifies, collects, processes, and
SYSTEM OR SUBSYSTEM? communicates economic information about a
firm using a wide variety of technologies.
 A system is called a subsystem when it is viewed
 It captures and records the financial effects of
as a component of a larger system.
the firm’s transactions.
  It distributes transaction information to TRANSFORMING THE DATA INTO INFORMATION
operations personnel to coordinate many key Functions for transforming data into information
tasks. according to the general AIS model:
1. Data Collection
AIS VERSUS MIS  Capturing transaction data
Accounting Information Systems (AIS) process financial  Recording data onto forms
transactions; e.g., sale of goods and nonfinancial  Validating and editing the data
transactions that directly affect the processing of 2. Data Processing
financial transactions; e.g., addition of newly approved  Classifying
vendors  Transcribing
Management Information Systems (MIS) process  Sorting
nonfinancial transactions that are not normally  Batching
processed by traditional AIS; e.g., tracking customer  Merging
complaints  Calculating
 Summarizing
 Comparing
3. Data Management
 Storing
 Retrieving
 Deleting
AIS SUBSYSTEMS
4. Information Generation
Transaction processing system (TPS) supports daily
 Compiling
business operations
 Arranging
General Ledger/ Financial Reporting System (GL/FRS)
 Formatting
produces financial statements and reports
 Presenting
Management Reporting System (MRS) produces
special-purpose reports for internal use
CHARACTERISTICS OF USEFUL INFORMATION
Regardless of physical form or technology, useful
DATA SOURCES
information has the following characteristics:
Data sources are financial transactions that enter the
1. Relevance: serves a purpose
information system from internal and external sources.
2. Timeliness: no older than the time period of the
External financial transactions are the most common
action it supports
source of data for most organizations.
3. Accuracy: free from material errors
E.g., sale of goods and services, purchase of
4. Completeness: all information essential to a
inventory, receipt of cash, and disbursement of
decision or task is present
cash (including payroll).
5. Summarization: aggregated in accordance with
Internal financial transactions involve the exchange or
the user’s needs
movement of resources within the organization.
E.g., movement of raw materials into work-in-
INFORMATION SYSTEM OBJECTIVES IN A BUSINESS
process (WIP), application of labor and
CONTEXT
overhead to WIP, transfer of WIP into finished
The goal of an information system is to support
goods inventory, and depreciation of
 the stewardship function of management
equipment.
 management decision making
 the firm’s day-to-day operations
ORGANIZATIONAL STRUCTURE POTENTIAL ADVANTAGES OF DDP
The structure of an organization helps to allocate  Cost reductions in hardware and data entry
 responsibility tasks
 authority  Improved cost control responsibility
 accountability  Improved user satisfaction since control is
Segmenting by business function is a very common closer to the user level
method of organizing.  Backup of data can be improved through the
use of multiple data storage sites
FUNCTIONAL AREAS
 Inventory/Materials Management (purchasing, POTENTIAL DISADVANTAGES OF DDP
receiving and stores)  Loss of control
 Production (production planning, quality  Mismanagement of company resources
control, and maintenance)  Hardware and software incompatibility
 Marketing  Redundant tasks and data
 Distribution  Consolidating tasks usually segregated
 Personnel  Difficulty attracting qualified personnel
 Finance  Lack of standards
 Accounting
 Computer Services MANUAL PROCESS MODEL
 Transaction processing, information processing,
ACCOUNTING INDEPENDENCE and accounting are physically performed by
Information reliability requires accounting people, usually using paper documents.
independence.  Useful to study because:
 Accounting activities must be separate and o helps link AIS courses to other
independent of the functional areas accounting courses
maintaining resources. o often easier to understand business
 Accounting supports these functions with processes when not shrouded in
information but does not actively participate. technology
 Decisions makers in these functions require that o facilitates understanding internal
such vital information be supplied by an controls
independent source to ensure its integrity.
THE EVOLUTION OF IS MODELS: THE FLAT-FILE MODEL
THE COMPUTER SERVICES FUNCTION
DATA REDUNDANCY PROBLEMS
1. Data Storage - excessive storage costs of paper
documents and/or magnetic form
2. Data Updating - changes or additions must be
performed multiple times
3. Currency of Information - potential problem of
failing to update all affected files
4. Task-Data Dependency - user’s inability to
obtain additional information as needs change
5. Data Integration - separate files are difficult to
integrate across multiple users
THE EVOLUTION OF IS MODELS: THE DATABASE
MODEL
ACCOUNTANTS AS SYSTEM DESIGNERS
 The accounting function is responsible for the
conceptual system, while the computer
function is responsible for the physical system.
 The conceptual system determines the nature
of the information required, its sources, its
destination, and the accounting rules that must
be applied.
ACCOUNTANTS AS SYSTEM AUDITORS
1. External Auditors
attest to fairness of financial statements
assurance service: broader in scope than
traditional attestation audit
2. IT Auditors
evaluate IT, often as part of external audit
3. Internal Auditors
in-house IS and IT appraisal services

REA MODEL
The REA model is an accounting framework for
modeling an organization’s
 economic resources; e.g., assets
 economic events; i.e., affect changes in
resources
 economic agents; i.e., individuals and
departments that participate in an economic
event
 Interrelationships among resources, events and
agents
Entity-relationship diagrams (ERD) are often used to
model these relationships.

ACCOUNTANTS AS INFORMATION SYSTEM USERS

 Accountants must be able to clearly convey
their needs to the systems professionals who
design the system.
 The accountant should actively participate
in systems development projects to ensure
appropriate systems design.