Course Name: Advanced Accounting

Information System

Credit hr: 2

Target Students: MSc. In Accounting and

Finance

By:- Wondwossen Jerene (Ph.D)

Department of Accounting and Finance

Wolkite University, Wolkite, Ethiopia

May, 2021
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COURSE CONTENT

Chapter 1: The Role and Purpose of

Accounting Information System
Chapter 2: Transaction Process in AIS
Chapter 3: E-Commerce/E-Business
Chapter 4: Internal Control and AIS
Chapter 5: Information Systems Control for
System Reliability
Chapter 6: System Development Process
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 Chapter One
The Role and Purpose of Accounting Information System

Advanced Accounting Information System

By:- Wondwossen Jerene (Ph.D)
CONTENTS
Introduction
Definition of an accounting
information system (AIS)
Importance of AIS
The role of the AIS in the Value chain
The function of AIS
The structure of AIS
The basic strategies and strategic
positions of an organization
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INTRODUCTION
 Information technology (IT) refers to the
hardware, software, and related system components
that organizations use to create computerized
information systems.
 IT has been a major force in our current society and
now influences our lives in many personal ways.
 In this information age, for example, fewer workers
actually make products,
 And more of them produce, analyze, manipulate,
and distribute information about business
activities.
 These individuals are often called knowledge 5
workers.
6
 Companies found that their success or failure is often
dependent on the uses or misuses of the information
that knowledge workers manage.
 We begin the study of AIS with the recognition that
information is a business resource.
 Like the other business resources of raw materials,
capital, and labor, information is vital to the survival of
the contemporary business organization.
 The study of accounting information systems (AISs) is
the study of the application of information technology
(IT) to accounting systems.
 This information technology affects financial accounting,
managerial accounting, auditing, and taxation … etc.
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 Specifically,
business firms invest heavily in
information systems to achieve six strategic
business objectives:
 operational excellence;
 new products, services, and business
models;
 customer and supplier intimacy;
 improved decision making;
 competitive advantage; and
 survival
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 Every business day, vast quantities of information
flow to decision makers and other users to meet a
variety of internal needs.
 Information flows out/in from/to the organization
to external users, such as customers, suppliers,
and stakeholders who have an interest in the firm.

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SYSTEMS, DATA, AND
INFORMATION
 A system is:
 A set of interrelated components
 That interact
 To achieve a goal

 Most systems are composed of smaller

subsystems . . .

 Within the accounting profession, the term

‗‗systems‘‘ usually refers to ‗‗computer systems.‘‘ 12
 Financing Revenue

 Systems working
toward organizational
goals
Human
Expenditure
Resources

Production
SYSTEMS, DATA, AND INFORMATION
 Every organization has goals.
 The subsystems should be designed to
maximize achievement of the organization‘s
goals.
 Goal conflict occurs when the activity of a
subsystem is not consistent with another
subsystem or with the larger system.
 Goal congruence occurs when the subsystem‘s
goals are in line with the organization‘s goals.
 The larger and more complicated a system, the
more difficult it is to achieve goal congruence.

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SYSTEMS, DATA, AND INFORMATION

 The systems concept encourages

integration (i.e., minimizing the duplication
of recording, storing, reporting, and
processing).
 Data are facts that are collected, recorded,
stored, and processed by an information
system.
 Organizations collect data about:
 Events that occur
 Resources that are affected by those events
 Agents who participate in the events 15
SYSTEMS, DATA, AND INFORMATION
 Information is different from data.
 Information is data that have been organized and
processed to provide meaning to a user.
 Usually, more information and better information
translates into better decisions.
 However, when you get more information than you
can effectively assimilate, you suffer from
information overload.
 Example: Final exams week!
 When you‘ve reached the overload point, the quality of
decisions declines while the costs of producing the
information increases.
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 An information system can be defined technically as a
set of interrelated components that collect (or retrieve),
process, store, and distribute information to support
decision making and control in an organization.
 In addition to supporting decision making, coordination,
and control, information systems may also help managers
and workers analyze problems, visualize complex
subjects, and create new products.

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INFORMATION SYSTEMS ARE MORE THAN COMPUTERS

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 Information System components

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FUNCTIONS OF IS

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 BENEFITS OF INFORMATION
 Benefits of information may include:
• Reduction of uncertainty
• Improved decisions
• Improved ability to plan and schedule activities
 Cost of producing information
 Costs may include time and resources spent:
• Collecting data
• Processing data
• Storing data
• Distributing information to users
 Value of information
 Costs and benefits of information are often difficult to
quantify, but you need to try when you‘re making decisions
about whether to provide information. 22
CHARACTERISTICS THAT MAKE INFORMATION USEFUL:

 Relevance
 It reduces uncertainty by helping you predict what will
happen or confirm what already has happened.
 Reliability
 It‘s dependable, i.e., free from error or bias and faithfully
portrays events and activities.
 Completeness
 It doesn‘t leave out anything that‘s important.
 Timeliness
 Understandability
 Verifiability
 A consensus notion—the nature of the information is such
that different people would tend to produce the same result.
 Accessibility
 You can get to it when you need it and in a format you can
use. 23
 Information is provided to both:
 External users
 Internal users
 External users primarily use information that is either:
 MANDATORY INFORMATION—required by a governmental
entity, or
 ESSENTIAL INFORMATION—required to conduct business
with external parties, such as purchase orders.
 In providing mandatory or essential information, the focus
should be on:
 Minimizing costs.
 Meeting regulatory requirements.
 Meeting minimum standards of reliability and usefulness.
 Internal users primarily use discretionary information.
 The primary focus in producing this information is
ensuring that benefits exceed costs, i.e., the information
has positive value.
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 Internal External
Parties AIS Parties

 The interaction is typically two way, in that the AIS

sends information to and receives information from
these parties.
 WHAT IS AN AIS?
 An AIS is a system that collects, records, stores,
and processes data to produce information for
decision makers.
 It can:
 Use advanced technology; or
 Be a simple paper-and-pencil system; or
 Be something in between.
 Technology is simply a tool to create, maintain,
or improve a system.

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Accounting Information Systems (AISs)
are defined as ‗‗systems of people, data
records and activities that process data
and information in an organization.
They include the organization‘s manual
and automated processes aimed at
supporting managers.
Broadly speaking, AIS should support
the development and execution of
strategies at various management
levels. 27
 DEFINITION AND IMPORTANCE OF AIS

 An accounting
 To a diverse group of:
information system is
 Internal decision
a set of interrelated: makers
 Activities  External decision
 Documents makers
 Technologies
 In all kinds of
 Designed to: organizations
 Collect data
 Process it
 Report information
 Examples of activities
 Selling goods and
services
 Collecting cash
 Examples of
 Examples of
technologies
 General ledger
software
 Relational database

documents software
 Invoices Activities
 Purchase orders
Organizations Documents
AIS

Technologies
Decision makers
 COMPONENTS OF AIS
 An accounting information system (AIS) consists of:
 People
 Procedures
 Data
 Software
 IT infrastructure

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GENERAL MODEL FOR AIS

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 Accounting information systems (AISs) stand at the
crossroads of two disciplines: ‗‗accounting‘‘ and
‗‗information systems.‘‘
 Thus, the study of AISs is often viewed as the study of
computerized accounting systems.

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 Thus, you know that the accounting field includes
financial accounting, managerial accounting, and
taxation.
 Accounting information systems are used in all
these areas—for example:
- to perform tasks in such areas as payroll, accounts
receivable, accounts payable, inventory, and
budgeting.
 In addition, AISs help accountants maintain general
ledger information, create spreadsheets for strategic
planning, and distribute financial reports.

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 The functions of an AIS are to:
 Collect and store data about events,
resources, and agents.
 Transform that data into information
that management can use to make
decisions about events, resources, and
agents.
 Provide adequate controls to ensure
that the entity‘s resources (including
data) are:
Available when needed
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Accurate and reliable

GENERIC AIS STRUCTURE

Internal controls

Inputs Processes Outputs Storage

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GENERIC AIS STRUCTURE
 Inputs  Processes
 Raw data that enters  Steps in the
the AIS accounting cycle
 Source documents  Business processes
 Checks The things
 Sales invoices
organizations do to
create value for
stakeholders

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GENERIC AIS STRUCTURE
 Outputs  Storage
 Information used for  Master files
making decisions  Customers
 General purpose  Inventory
financial statements  Transaction files
 Tax returns
 Sales
 Other reports
 Purchases
 May be paper-based or  Junction files
electronic
 Sales / inventory
 Purchases / inventory

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GENERIC AIS STRUCTURE
 Internal control  Internal control
purposes examples
 Safeguard assets.  Adequate
 Ensure reliable documentation
financial reporting.  Separation of duties
 Promote operating  IT passwords
efficiency.  Physical controls
 Encourage compliance
with management
directives.

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 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
 It’s fundamental to accounting.
• Accounting is an information-providing activity, so
accountants need to understand:
– How the system that provides that information is
designed, implemented, and used.
– How financial information is reported.
– How information is used to make decisions.
• Other accounting courses focus on how the information
is provided and used.
• An AIS course places greater emphasis on:
– How the data is collected and transformed.
– How the availability, reliability, and accuracy of the
data is ensured. 39
 The skills are critical to career success
 Auditors need to evaluate the accuracy and reliability
of information produced by the AIS.
 Tax accountants must understand the client‘s AIS
adequately to be confident that it is providing complete
and accurate information for tax planning and
compliance work.
 The AIS course complements other systems
courses.
• Other systems courses focus on design and
implementation of information systems, databases,
expert systems, and telecommunications.
• AIS courses focus on accountability and control.
 AIS topics impact corporate strategy and
culture.
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 AIS AND THE REST OF ACCOUNTING
 Linksbetween AIS and other accounting
courses
 FASB Conceptual Framework (financial)

 Structure of AIS (auditing)

 Transaction processing (financial)
 Business processes (financial, cost, tax,
audit)
 Information technology (financial, cost, tax,
audit) 41
WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Occupational
Culture Strategy

AIS design is
affected by
information
AIS
technology, the
organization‘s
strategy, and the
organization‘s
culture. Information
Technology
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WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Occupational
Culture Strategy

Although culture affects

the design of the AIS,
AIS
it‘s also true that the
AIS affects culture by
altering the dispersion
and availability of
information. Information
Technology
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AIS AND CORPORATE STRATEGY

Organizations have limited IT

resources, thus investments Developments

to AIS should have greatest

impact on ROI.
Organizations need to
understand:
IT developments AIS
Business strategy
Organizational Business

Organizational culture
Culture Strategy

Will effect and be effected by

new AIS
CONNECTION BETWEEN THE FIRM, IT INFRASTRUCTURE, AND BUSINESS CAPABILITIES

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ROLE OF THE AIS IN THE VALUE CHAIN
 The objective of most organizations is to provide
value to their customers.
 What does it mean to deliver value?
 Although ―adding value‖ is a commonly used
buzzword, in its genuine sense, it means making
the value of the finished component greater than
the sum of its parts.
 It may mean:
 Making it faster
 Making it more reliable
 Providing better service or advice
 Providing something in limited supply (like O-
negative blood or rare gems)
 Providing enhanced features 46

 Customizing it
 Value is provided by performing a series of
activities referred to as the value chain.
These include:
 Primary activities
 Support activities
 These activities are sometimes referred to as
―line‖ and ―staff‖ activities respectively.

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 Primary activities include:
 Inbound logistics
 Receiving, storing, and distributing the materials that
are inputs to the organization‘s product or service.
 For a pharmaceutical company, this activity might
involve handling incoming chemicals and elements that
will be used to make their drugs.
 Operations
 Transforming those inputs into products or services.
 For the pharmaceutical company, this step involves
combining the raw chemicals and elements with the
work of people and equipment to produce the finished
drug product that will be sold to customers.

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 Outbound logistics
 Distributing products or services to
customers.
 For the pharmaceutical company, this
step involves packaging and shipping the
goods to drug stores, doctors, and
hospitals.
 Marketing and sales
 Helping customers to buy the
organization‘s products or services.
 A pharmacy rep may visit with drug
stores, doctors, etc. to inform them about
their products and take orders. 49
 Service
 Post-sale support provided to customers such as repair
and maintenance function.
 A pharmaceutical firm will typically not be repairing it‘s
product (though the product may be periodically
reformulated). The pharmaceutical company is more
likely to be providing advisory services to pharmacists,
etc.
 Support activities include:
 Firm infrastructure
 Accountants, lawyers, and administration. Includes the
company‘s accounting information system.
 Human resources
 Involves recruiting and hiring new employees, training
employees, paying employees, and handling employee
benefits. 50
 VALUE CHAIN—PRIMARY ACTIVITIES

Outbound
Inbound Logistics Operations Marketing/Sales Service
Logistics
 Technology
 Activities to improve the products or services (e.g., R&D,
Web site development).
 For the pharmaceutical company, these activities would
include research and development to create new drugs
and modify existing ones.
 Purchasing
 Buying the resources (e.g., materials, inventory, fixed
assets) needed to carry out the entity‘s primary
activities.
 In the pharmaceutical company, the purchasing folks are
trying to get the best combination of cost and quality in
buying chemicals, supplies, and other assets the
company needs to run its operations.
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VALUE CHAIN—SUPPORT ACTIVITIES

Firm
Infrastructure Technology

Human Purchasing
Resources
VALUE CHAIN
ROLE OF THE AIS IN THE VALUE
CHAIN
Smith Supply Co. The linking of these separate value chains creates
Inbound Logistics a larger system known as a supply chain.
Operations
Outbound Logistics
Marketing & Sales Pharmaceuticals,
Inc.
Service
Inbound Logistics
Operations
Outbound Logistics Customer Pharmacy
Information technology
can facilitate synergistic Marketing & Sales Inbound Logistics
linkages that improve Service Operations
the performance of each Outbound Logistics
company‘s value chain. Marketing & Sales
Service
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 AIS IMPROVES DECISION MAKING

Identifysituations that require action.

Provide alternative choices.
Reduce uncertainty.
Provide feedback on previous decisions.
Provide accurate and timely
information.
 There is variation in the degree of structure used to make
decisions:
 Structured decisions
• Repetitive and routine.
• Can be delegated to lower-level employees.
• EXAMPLE: Deciding whether to write an auto insurance
policy for a customer with a clean driving history.
 Semi-structured decisions
• Incomplete rules.
• Require subjective assessments.
• EXAMPLE: Deciding whether to sell auto insurance to a
customer with a tainted driving history.
• Unstructured decisions
• Non-recurring and non-routine.
• Require a great deal of subjective assessment.
• EXAMPLE: Deciding whether to begin selling a new type of
insurance policy. 57
 There is also variation in the scope of a
decision‘s effect:
 Occupational control decisions
• Relate to performance of specific tasks

• Often of a day-to-day nature.

• EXAMPLE: Deciding whether to order

inventory.
 Management control decisions

• Relate to utilizing resources to

accomplish organizational objectives.
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• EXAMPLE: Budgeting.
 Strategic planning decisions
• The ―what do we want to be when we grow up‖
types of questions.
• Involves establishing:
– Organizational objectives
– Policies to achieve those objectives
• EXAMPLE: Deciding whether to diversify the
company into other product lines.
 In general, the higher a manager is in the
organization, the more likely he/she is to be
engaging in:
 Less structured decisions
 Broader scope (i.e., strategic planning)
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decisions
 THE AIS AND CORPORATE STRATEGY
 Corporations have:
 Unlimited opportunities to invest in
technology.
 Limited resources to invest in technology.
 Consequently, they must identify the
improvements likely to yield the highest return.
 This decision requires an understanding of the
entity‘s overall business strategy.
 Michael Porter suggests that there are two
basic business strategies companies can follow:
 Product-differentiation strategy
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 Low-cost strategy
 THE AIS AND CORPORATE STRATEGY
A product-differentiation strategy involves
setting your product apart from those of your
competitors by offering one that‘s faster, has
enhanced features, etc.
 A low-cost strategy involves offering a cheaper
product than your competitors.
 The low cost is made possible by operating more
efficiently.
 Sometimes a company can do both, but they
normally have to choose.
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 Porter also argues that companies must choose a
strategic position among three choices:
 Variety-based strategic position
• Offer a subset of the industry‘s products or services.
• EXAMPLE: An insurance company that only offers life
insurance as opposed to life, health, property-casualty,
etc.
 Needs-based strategic position
• Serve most or all of the needs of a particular group of
customers in a target market.
• EXAMPLE: The original Farm Bureau-based insurance
companies provided a portfolio of insurance and
financial services tailored to the specific needs of
farmers.
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 Access-based strategic position
• Serve a subset of customers who differ from others in terms
of factors such as geographic location or size.
• EXAMPLE: Satellite Internet services are intended
primarily for customers in rural areas who cannot get DSL
or cable services.
• These strategic positions are not mutually exclusive
and can overlap.
 Choosing a strategic position is important because
it helps a company focus its efforts as opposed to
trying to be everything to everybody.
 EXAMPLE: A radio station that tries to play all types of
music will probably fail.
 It‘s critical to design the organization‘s activities so
they reinforce one another in achieving the selected
strategic position. The result is synergy, which is
difficult for competitors to imitate. 63
THE AIS AND CORPORATE STRATEGY
 The growth of the Internet has profoundly
affected the way value chain activities are
performed:
 Inbound and outbound logistics can be streamlined
for products that can be digitized, like books and
music.
 The Internet allows companies to cut costs, which
impacts strategy and strategic position.
 Because the Internet is available to everyone, intense
price competition can result.
 The outcome may be that many companies shift from
low-cost to product-differentiation strategies.
 The Internet may impede access-based strategic
positions.
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……… END…………..

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