The Information System: An Accountant’s

Perspective

Accounting Information System

o Well-defined body of knowledge

Sarbanes-Oxley Acts of 2002

o Established new corporate governance
regulations & standards for public companies
registered with the Securities and Exchange
Commissions (SEC).

Three Major Divisions of AIS

1. Explores the information system of the firm.
2. Impact of organizational structure on AIS.
3. Unique responsibility of accountants as
domain experts in the design of AIS and as Information Objectives
auditors of AIS. 1. To support the firm’s day-to-day
operations.
The Information Environment ➢ Use information to assist the effectivity
o Information is a business resource (Raw mat, & efficiency of their daily tasks.
capital and labor). 2. To support management decision
o Information making.
➢ vital to the survival of the ➢ Assist them in planning and control
contemporary business organization. decisions
➢ Flows out from the organization 3. To support the stewardship function of
external users. management.
o Three Management Tiers ➢ Properly manage the resources of the
1. Operation Management firm.
➢ Day-to-day operation *External users receive stewardship
2. Middle Management information through traditional financial statement.
➢ Short-term planning *managers receive stewardship information
➢ Accomplish objectives from various responsibility reports.
3. Top Management *Accrual-based financial statement info (for
➢ Long-term planning external users), unsuitable for most internal users.
➢ Setting of objectives
o Flow of Information Information Systems Framework
1. Horizontal Flow o Information systems
➢ Support operations-level ➢ Set of formal procedures by which data
tasks with highly detailed are collected, stored, processed into
information info, & distributed to users.
2. Vertical Flow ➢ Accept inputs (transaction)
➢ Distribute information o Two Broad Classes (system
downward (Sr. to Jr. Mgt.) decomposition)
3. Third flow ➢ Accounting Information System (AIS)
➢ Represents the organization ➢ Management Information System
and the external users. (MIS)
➢ External users o Transaction
• Trading partners ➢ Event that affects or is of interest to
(customer sales and the organization and is processed by
billing info- supplier) its information system as a unit of
• Stakeholders (direct and work.
indirect interest) ➢ Two types
1. Financial Transaction
• Economic event that is
reflected in the accounts.
 • Measured in monetary 3. Management Reporting System (MRS)
terms. • Provides that internal information
2. Nonfinancial Transaction needed to manage a business and
handles discretionary reporting.

Management Information System

o Often requires information that goes beyond
the domain of AIS.
o Process nonfinancial transaction that are
normally processed by traditional AIS.
o Examples:
o Finance
▪ Portfolio management system
▪ Capital budgeting system
o Marketing
▪ Market analysis
▪ New product development
▪ Product analysis
The Accounting Information System o Distribution
o Process financial and nonfinancial ▪ Warehouse organization and
transactions. scheduling
o Three Major Subsystems ▪ Delivery scheduling
1. Transaction Processing System ▪ Vehicle loading and allocation
(TPS) models
➢ Supports daily operation with o Personnel
numerous reports. ▪ Human resource
2. General Ledger/ Financial Reporting management system
System (GL/FRS) ➢ Job skill tracking system
➢ Produces traditional financial ➢ Employee benefits system
statements.
3. Management Reporting System
(MRS) The Need to Distinguish between AIS and MIS
➢ Provides internal management o SOX Legislation requires:
with special-purpose financial ➢ Corporate management design
reports & info needed for decision and implement internal controls
making. over the entire financial reporting
process.
o AIS Subsystems
➢ Process financial and nonfinancial
transaction that directly affect the
processing of financial
transactions.

Three Major Subsystems

1. Transaction Processing System (TPS)
• Converts economic events into
financial transactions.
• Records financial transaction in
the accounting records.
• Distributes essential financial
information to support operations.
2. General Ledger/ Financial Reporting
System (GL/FRS)
• Updates general control account
• Handles nondiscretionary
reporting requirements.
AIS Subsystems
Transaction Processing System
o Central to the overall function of the
information system.
o Deals with business events that occur
frequently.
o To deal efficiency: similar types of
transaction are grouped into transaction
cycle.
Transaction Processing System
o Three Transaction Cycle
1. Revenue Cycle
2. Expenditure Cycle
3. Conversion Cycle
General Ledger/Financial Reporting Systems
o Two closely related subsystems (generally
viewed as a single integrated systems)
o Bulk of input to the GL
➢ Comes from transaction cycle
subsystems.
o Summaries of transaction
➢ Processed by the GLS to update
the GL control accounts.
o Nondiscretionary Reporting
➢ Organization has a few or no
choices in the information it
provides.
*FRS measure the stage of financial
resources and the changes in those resources.
Management Reporting Systems
o Provides internal financial instruments
needed to manage a business.
o Typical reports: budget & variance reports
o Discretionary reporting
➢ Organization can choose what
information to report and how to
present it.
General Model for AIS
o Applies to all AIS (regardless of underlying
technologies).
o Depicts relationship between the key
elements that constitute AIS application
➢ End users
➢ Data Source
➢ Data Collection
➢ Data Processing
➢ Data Management
➢ Information Gathering
➢ Feedback
End Users
o Two General Groups
1. Internal (management at all levels of
organizations)
2. External (creditors, stockholders,
suppliers, etc.)
o Internal Reporting
➢ Characterized by frequent changes in
the information needs of internal
users.
o Volatility (challenge, balance)
* insert general model for AIS
Data vs. Information
o Data
➢ Facts, which may or may not be
processed.
➢ No direct effect in user’s action.
o Information
➢ Causes the user to take an action
➢ Determined by the effect it has on the
user, not by physical form.
*one person’s information is another
person’s data.
*If output from information system fails to
cause to act, serves no purpose.
Data Sources
o Either internal or external
o External Financial Transactions
➢ Most common type of data
➢ Economic exchanges with other
business entities and individuals
outside the firm.
o Internal Financial Transactions
➢ Involve the exchange or movement of
resources within the organization.
➢ DM to WIP to FG.
Data Collection 3. File (or table)
o First operational stage in the information ➢ Complete set of records of an
system. identical class.
o Objective: ensure that event data entering ➢ Organization’s database is
the system are valid, complete, and free from the entire collection of such
material error. files.
o Two-rules:
1. Efficiency Data Management Tasks
2. Relevance o Three Fundamental Tasks
1. Storage
Data Processing ➢ Assigns keys to new records and
o Range from simple to complex stores them in their proper location in
➢ Mathematical Algorithms the database.
(Production) 2. Retrieval
➢ Statistical Techniques (Sales) ➢ Tasks of allocating and extracting an
➢ Recording & Summarizing existing record from the database.
(Accounting application) 3. Deletion
➢ Task of permanently removing the
obsolete or redundant record.

Information Generation
o Process of compiling, arranging, formatting,
and presenting information to users.
o Characteristics:
1. Summarization
➢ Information should be aggregated I
accordance with the user’s needs.
➢ Lower-level managers (Highly
detailed)
*Information flows upward through the
organizations to top management, it becomes more
summarized.
2. Completeness
➢ No piece of information essential to a
decision or task should be missing.
3. Accuracy
o Organization Database ➢ Must be free from material errors.
➢ Physical repository for financial and • Exist when the
nonfinancial data. amount of inaccuracy
➢ Business data are organized in a in information causes
logical hierarchy. the user to make poor
decisions or to fail to
Information Generation
Database Management make necessary
o Levels in Data Hierarchy decisions.
1. Data Attribute 4. Relevance
➢ Most elemental piece of ➢ Report, content, or document must
potentially useful data in the serve a purpose.
database. 5. Timeliness
➢ Logical & relevant ➢ Age of information is a critical factor
characteristics of an entity in determining its usefulness.
about which firm captures
data.
2. Record
➢ Complete set of attributes
➢ Primary Key
• Unique identifier.
Organizational Structure and AIS

2. Production
Functional Segmentation
o Occur in the conversion cycle.
o Common method of organizing a business
Raw materials, labor, & plant assets
entity.
Production
o Derive from the flow of resources through the
➢ Determined by the nature of the
firm.
products being manufactured.
*segments and the function within them will
o Two Broad Classes
vary among the organizations, depending on their
1. Primary Manufacturing
size and lines of business.
Activities
➢ Shape and assemble raw
1. Materials Management
materials into finished
o Objective: To plan and control the materials
products.
of the company.
2. Production Support Activities
o Idle Inventory
➢ Ensure that primary
➢ Can become obsolete, lost, or stolen.
manufacturing activities
o Three sub-functions (Materials
operate efficiently and
Management)
effectively.
1. Purchasing
o Types of Activities
➢ Ordering inventory form
1. Production Planning
vendors when inventory
➢ Scheduling the flow of
levels fail to their reorder
materials, labor, & machine.
points.
2. Quality Control
➢ Requires no more than
➢ Monitor the manufacturing
sending a purchase order.
process at various point.
2. Receiving
➢ Effective Quality Control
➢ Task of accepting the
• Detects problems
inventory previously ordered
early to facilitate
by purchasing.
corrective action.
3. Stores
3. Maintenance
➢ Physical custody of the
➢ Keep the firm’s machinery
inventory received and
and other manufacturing
releases these resources into
facilities in running order.
the production process as
➢ Key to maintenance is
needed.
prevention
*every dollar invested in inventory is a dollar
➢ Need extensive information
that is not earning a return.
about the equipment’s history
*most organizations maintain safety stocks to
of usage and future
carry them through the lead time between placing
the order for inventory and its arrival. scheduled production.

3. Marketing
o Marketplace need to know about & access to
firm’s product
o Operational level: Sales order entry
4. Distribution
o Getting the product to the customer after the
sale.
o Critical step: nothing can go wrong before
the customer takes possession of the
product.

5. Finance
o More on bank services
o More on financial capital

6. Personnel
o More on human resource management ➢ Distributed Data Processing
o Managing more on labor • Users process their transaction
locally.
7. Accounting • Users: function independently and
o Only part of finance, more on other financial tend not to share data & information.
transaction particularly in business
operation.
o Accounting manages the financial resource
of the firm:
o Captures and records transactions.
o Distributes transaction information to
operations personnel.
o Value of information is determined by its
reliability.
o Relevance, accuracy, completeness,
summarization, and timeliness.
o Unreliable information has no value.
o Information reliability requires accounting
independence.
o Accounting activities must be *Both centralized and distributed data
separate and independent of the processing models have their respective benefits,
functional areas maintaining custody risks, & internal control implications.
of resources.
o Accounting supports these functions 2. Systems Development & maintenance
with information but does not ➢ Two Related Functions
participate in the physical activities. 1. Systems Development
• Process by which
organizations acquire
8. Information Technology information process.
o Four Information Technology • Acquire information system
1. Data Processing in two ways:
➢ Support user information needs 1. Commercial (Turnkey)
through transaction processing and Software
information reporting. ✓ Available for both
➢ Configurations vary among different general accounting and
types of business entities. industry-specific
➢ Centralized Data Processing applications
• All data processing is performed by 2. Custom Software
one or more large computers housed ✓ Formal process: System
in a common data center. Development Life Cycle
✓ Larger size with unique
information (Enterprise
Resource Planning)
 ✓ More expensive 3. Platform as a
compared to Service (PaaS)
commercial software.
2. Systems Maintenance Software as a service (SaaS)
• Responsible for making ▪ is a distinct form of cloud computing in which
changes to existing systems users access a complete software solution
to accommodate changes in from an internet-connected device? Unlike
user needs. traditional software, where a customer pays
• Modified many times as user once for a perpetual license plus, often, fees
needs change & evolve. for maintenance and updates, SaaS users
• 80-90% of total cost maybe pay on a subscription basis for the right to
incurred because of access the software.
maintenance activities.
3. Database Administration Infrastructure as a Service (IaaS)
• Data resources in a central ▪ The most straightforward way to migrate an
location that is shared by all application to the cloud is to take that lift-and-
authorized end users. shift approach, where a customer moves an
• Database Administrator on-premises workload largely as is to the
✓ Responsible for IaaS provider’s infrastructure.
security and integrity ▪ Instead of owning the servers and storage
of the database. hardware, the workloads now run in the IaaS
4. Network Administration vendor’s data centers, and the customer
• Network pays for the compute, network, and storage
✓ Collection of capacity it consumes.
interconnected
computers and Platform as a Service (PaaS)
communications ▪ While IaaS offers the fastest migration from
devices that allows on-premises to cloud, it is effectively moving
users to communicate. software designed to run on local servers to
• Network Administration geographically dispersed ones that support
✓ Responsible for the more-modern management and automation.
effective functioning of That can be extremely inefficient.
the software and ▪ In response, newer software programming
hardware. models that deliver cloud-native applications
✓ Responsible for have given rise to PaaS, or platform as a
monitoring network service. These applications are more
activity efficient and interoperable and are designed
o Outsourcing the IT Function to operate well in the cloud. PaaS is also
➢ IT outsourcing appealing to organizations that lack the
desire to build and manage an application on
• Organization sells its IT
premises or to use IaaS.
resources to a third-party
outsourcing vendor.
While all three cloud service types are
• Outsourcing organization
distinct, they are also dependent on one another. At
then leases back IT services
the base level, IaaS provides the cloud compute,
from the vendor for a contract
storage and network infrastructure that hosts the
period of typically 5-10 yrs.
database and application development platform. In
➢ Cloud Computing
turn, developers build their SaaS solutions within the
• Location-independent PaaS environment.
computing, hosted IT services
over the net.
• Three Categories
1. Software as a
Service (SaaS)
2. Infrastructure as a
Service (IaaS)
 client organization being
audited.
➢ Audit Objective
• Assure the fair presentation of
corporate financial
statements.
➢ Substantive Tests
• Reside in the system’s
databases.
➢ Independence
• Auditor is free from factors
that might influence the
auditor’s report regarding the
SFP of the client firm.
The Role of Accountants in AIS
2. Internal (Operational) Audits
o Involved in both the design and the audit of
➢ Independent appraisal function
AIS.
established within an organization to
examine & evaluate its activities.
Accountants as System Designers/User
➢ Perform wide range of activities
o Domain experts
➢ Conducted by Auditors who work for
➢ Responsible for many aspects of the
the organizations. (CIA/CISA)
conceptual system.
➢ Internal Auditors (IIA) and Information
o Designs of the Conceptual System
Systems Audit and Control
➢ Involves specifying the criteria for
Association (ISACA)
identifying delinquent customers and
3. Fraud Audits
the information that needs to be
➢ Increased in popularity as a corporate
reported.
governance tool.
➢ Objectivity of a Fraud Audit
Accountants as System Designers/User
o Physical System • Investigate anomalies and
➢ Includes the data storage medium to gather evidence of fraud that
be used and the method for capturing may lead to criminal
and presenting the information. conviction.
*accountant’s involvement in systems design ➢ Certified Fraud Examiner (CFE) and
is essential and pervasive throughout the Association of Certified Fraud
development process. Examiners (ACFE)
*Must be able to clearly convey their needs
to the systems professionals who design the ▪ Audit committees serves an independent
system. “check and balance” for internal audit
functions and a liaison with external auditors.
▪ Usually three people, one of which
Accountants as System Auditors must be a “financial expert”.
o Most Common Audits
1. External (Attestation) Audits or Advisory Services vs. Attest Services
Financial Audit o Advisory Services
➢ Independent attestation performed by ➢ Professional services offered by public
an expert. accounting firms to improve the client
➢ Auditor organizations’ operational efficiency
and effectivity.
• Expresses an opinion in the
➢ Domain
form of formal audit report
regarding the presentation of • Unbounded so that it does not
the FS. inhibit the growth of future
➢ Attest Function services that are currently
foreseen.
• Performed by CPAs who work
o IT advisory units of public accounting
for public accounting firms
firms
that are independent of the
 ➢ All engaged in tasks generally known
as risk management.
o IT-related tests of controls/ IT Auditing
➢ Part of attestation function
*see External vs. Internal
The Role of the Audit Committee
o Usually composed of three people who
should be outsiders
o At least one member should be an ‘financial
expert’
Designer/Auditor Duality
o Cannot effectively conduct audit if he does
not understand the principle of systems
designs.
o Cannot properly design a system without
thorough understanding of audit issues and
concerns.
Information failure
▪ Information failure is a type of market failure
where individuals or firms have a lack of
information about economic decisions.
There are different types of information failure:
1. Information asymmetries
o where one party has access to
information that another party
doesn’t.
For example, the seller of a car may know it has
some problem, but the buyer may not be aware.
2. Failure to disclose information.
o In many economic transactions,
agents may not make full disclosure.
For example, when applying for health
insurance, you may fail to inform the insurer about
genetic traits or your current ill health.
When purchasing financial assets, the buyer
may not be aware of the risk involved. This was an
issue in the period before the credit crunch. This
leads to information asymmetries
3. Difficulty in estimating costs and
benefits.
o It is often difficult to be aware of social
costs of goods. Accounting costs are
relatively easy to know. But, when it
comes to knowing more intangible
external costs, it becomes difficult to
put an accurate figure.
4. Lack of education/awareness.
o Merit and demerit goods have
degrees of information failure with
consumers unaware of the true
personal cost/benefit.
For example, if we take tobacco, there was a
time when many people were not aware of the ill-
effects of tobacco on health. Recently, there has
been increasing concern about the health costs of
sugar consumption.
5. Framing issues.
o When making decisions over whether
to purchase a good, consumers will
be influenced by how the good is
portrayed.
6. Moral Hazard.
o This occurs when individuals alter
their behavior because of certain
guarantees.
7. Irrelevant information / misinformation.
o If you are applying for a job, a firm
may search on the internet and find a
Facebook post from several years
ago. The employer may use this and
avoid giving job – even though it is no
longer relevant to who you are now.
o Alternatively, there may be false
information/slander circulated which
is hard to deny.
8. Information bias.
o The government has set up
regulators to deal with natural
monopolies, e.g., gas and electricity.
o The regulator aims to set fair prices
for industry and consumers.
However, if they rely on information
from the firm, they may become
sympathetic to the firm and allow
price rises.
This is known as regulatory capture – where
regulators act in a favorable way to the firm they are
regulating.