CH.

1 : Overview of AIS
1.The meaning of system,data,and info.
System : a set of interrelated components that interact to achieve a goal and the concept is
to encourage integration.
-Goal conflict: The activity of a subsystem is not consistent with another
(Large system,Subsystem)
-Goal congruence: Subsystem’s goals are in line with the organization’s goals.
(Larger,complicated=difficult to achieve GC)

Data : facts that are collected by an info. system.(Events,Resources,Agents)

Information : data that have been organized and provide to user (External and Internal)
Benefits of Info.
-Reduction of uncertainty
-Improved decisions
-Improved ability to plan and schedule activities

Cost of producing Info.(include time and resources)

-Collecting data
-Processing data
-Storing data
-Distributing info. to users

Characteristics that make info. useful

-Relevance (reduces uncertainty)
-Reliability (free from error/bias)
-Completeness
-Timeliness (get in on time)
-Understandability
-Verifiability (consensus notion)
-Accessibility (get to it when need it)

External users
-Mandatory Info. : required by a governmental entity
-Essential Info. : required to conduct business with third party

**The focus**
-Minimizing costs
-Meeting regulatory requirements
-Meeting minimum standards of reliability and usefulness

Internal users
-Discrationary Info.

**The focus**
-Ensuring that benefits exceed costs
2.What is an AIS
AIS : a system that collects,records,stores,and processes data to info. for decision makers.
*Technology is simply a tool to create/maintain/improve a system*

Design is affected by
-Occupational culture
-Strategy
-Info. tech.

Functions of an AIS
-Collect and store data
-Transform that data into info.
-Provide controls to ensure (Available, Accurate,Reliable)

3.Why is the AIS an important topic to study

-Fundamental to act.
-How data is collected and tranformed
-How the availability,reliability,accuracy of data is ensured
-The skills are critical to career success
-Auditors need to evaluate the accuracy and reliability
-Tax accountants
-Private industry and not for profits
-Management consulting
-AIS complements other systems courses
-Focus on accountability and control
-The topic tested on the new CPA exam
-The topic impact corporate strategy and culture

4.The role of the AIS in the value chain

The objective is to provide value to customers
Adding value: The value of the finished component greater than the sum of its parts

Value : provided by performing a series of activities

-Primary activities
-Inbound logistics (receiving,storing,distributing the inputs)
-Operations (transforming inputs to p/s)
-Outbound logistics (distributing p/s to customers)
-Marketing and sales
-Service (post-sale support)
-Support activities
-Firm infrastructure
-HR
-Technology (improve p/s)
-Purchasing (buying the resources)
**These activities are sometimes referred to as line and staff activities**
5.AIS provides Info. for decision making
Variation in the degree of structure used to make decision
-Structured decisions (Repetitive and routine)
-Non - structured decisions (Non-recurring and non-routine)
-Semistructured decisions (Incomplete rules)

Variation in the scope of a decision’s effect

-Occupational control decisions (Relate to performance of specific tasks)
-Management control decisions (Relate to utilize resources to achieve goal)
-Strategic planning decisions (Establishing organizational objectives)

6.The basis strategies and strategic positions an organization can pursue

-Product-differentiation strategy : setting product apart from competitors
-Low-cost strategy : make possible by operating more efficiently
**Sometimes a company can do both,but they normally have to choose**

Strategic position
-Variety-based strategic position (offer a subset of the industry’s p/s )
-Needs-based strategic position (serve all needs)
-Access-based strategic position (serve a subset of customers who differ from others)
**Not mutually exclusive and can overlap**
CH. 2 : Overview of business processes
1.The basic business activities in which an organization engages.
-The decisions must be made to undertake business activities
The business activities require different decisions and info.
-An effective AIS needs to be able to integrate info. of different types and different
sources
-AIS interacts with internal parties and external parties

2.The role does the data processing cycle play in organizing business
activities and providing it to users.
Business cycles
-Transaction : agreement between two entities/ other event that can be measured in
economic terms by an organization
-Transaction cycle : a process starts with capturing data about a transaction and providing
info. output (ex. F/S)
-relates to other cycles
-interfaces with the general ledger and reporting system

The basic exchanges divided into five major transaction cycles(Give-get exchanges)
-Revenue cycle (Interactions with customers)
-Expenditure cycle (Interactions with suppliers)
-Production cycle (transformed into finished goods)
-HR/payroll cycle (Interactions with employees)
-Financing cycle (Interactions with investors and creditors)

*Not every company needed all of this and some need extra*

Transaction processing:The data processing cycle

Important function of AIS is to efficiently and effectively process the data about a company’s
transactions
-Manual systems (Paper journals and ledgers)
-Computer-based system (Operations performed on data is referred to data processing
cycle

The data processing cycle

1.Data input : capture the data(Event,Resources,Agents)
-Turnaround documents
-Source data automation (capture data with minimal human intervention)
-Well designed source doc. and data entry screens
(How it improve the accuracy and efficiency of data input)
-Pre-numbered doc./The system automatically assigns sequential no. to trans.
(What if doc. no. is missing)
-Verify trans.
2.Data storage
-Ledger (store cumulative info. about resources and agents)
-General ledger (summary level info. for all accounts)
-Subsidiary ledger *The related G/L called Control account*
(contain the detail accounts associated with the related G/L account)
-Coding techniques
(method of systematically assigning no./letters to data items to help organize)
-Sequence codes (ex. checks/invoices)
-ensure that all items are accounted for
-no duplicated no.
-Block codes (ex. 001-003)
-reserved for a particular category
-Group codes (ex. Digits 1-2 Bank no.)
- used to code an item
-Group coding schemes
-used in assigning general ledger account numbers
-Chart of accounts
-First section (major account categories)
-Second section (primary sud-account)
-Third section (specific account)
-Fourth section (subsidiary account)
-Journals
-General journal (record non-routine trans.)
-Summaries of routine
-Adjusting entries
-Closing entries
-Special journal (record routine trans.)
-Cash receipts
-Cash disbursements
-Credit sales
-Credit purchases
-Audit trail

Computer-based storage concepts

-Entity : Sth. about which info. is stored
-Attribute : Characteristics of interest with respect (ex. Student ID)
-Record : The set of attributes stored for a particular instance of an entity
-Data value : The intersection of the row and column
-Field : The physical space where an attribute is stored
-File : A group of related records
-Master file : A file that stores cumulative info. about an organization’s entities
(Permanent,Exist across fiscal periods,Changes made the flie reflect the effects of new
trans.)
-Transaction file : A file that contains records of individual transaction that occur during a
fiscal period
(Temporary,Maintained for one fiscal period)
-Database : A set of interrelated,centrally-coordinated files
3.Data processing
-Updating data (to record the occurrence of an event)
-Batch processing : documents are groped into batches and control totals are
calculated (stored in a temporary file)
-On-line Batch processing (stored in a temporary file)
-On-line Real-time processing : The master file is immediately updated
**Updating can be done through these**
-Changing data (ex. Customer address)
-Adding data (ex. New customer)
-Deleting data (removing an old customer)

4.Info. output
-Documents (records of trans./other co. data)
The doc. generated at the end of the trans. are known as Operational documents
-Reports (used by employees to control operational activities and decision making)
They may be produced on :
-Regular basis
-Exception basis
- Demand
-Queries (user requests for specific pieces of info.)
-Periodically
-One time
They can be displayed on:
-Monitor (Soft copy)
-Screen (Hard copy)

The output serve a variety of purposes

-For planning purposes (Budgets and Sales forecasts)
-For management of day-to-day operations (Delivery schedules)
-For control purposes (Performance reports)
-For evaluation purposes (Surveys of customer satisfaction and reports on employee error
rates)
-

3.The role of the information system and enterprise resource planning in

modern organizations
The traditional AIS captured financial data
-ERP systems : designed to integrate all aspects of a company’s operations
(Financial and Non-financial info.)
CH. 10 : The revenue cycle : Sales and cash collections
-The revenue cycle : A recurring set of business activities and related info. processing
operations

Objective
-Provide the right product in the right place at the right time for the right price

Info. flow to other accounting cycles

-The expenditure and production cycles (Info. about sales trans.)
-The HR/payroll cycle (Info. to calculate commissions)
-The general ledger and reporting fuct. ( Info. produced by the revenue cycle to prepare F/S)

Three basic AIS funt.

-Capturing and processing data
-Storing and organizing the data for decision
-Providing controls to safeguard resources

1.The basic business activities and data processing operations that are
performed in the revenue cycle
-Sales order entry : performed by the sales department
Steps in the process
-Take the customer’s order (order data are received)
**The objective of AIS is to ensure the accuracy and reliability of the data collected**
-Check the credit
-General authorization (Existing customers)
-Specific authorization (New,Past-due,Exceeding credit limit) done by the
credit manager
-Check inventory (order has been received)
-Respond to customer inquiries : may done by customer service/sales order entry

-Shipping : filling customer order and shipping

There are two steps
1. Warehouse picks the order
-Bar code scanners
-Conveyer belts
-Wireless tech.
-RFID
2. Shipping department packs and ships the order
These process
-Updates the quantity on hand field in inventory master file
-Produces a packing slip (list of quantity and description)
-Produces multiple copies of the bill of lading (a legal contract that defines
responsibility for goods in transit)

-Billing : info. processing activity that repackages and summarizes info. from the sales order
-Invoicing
 -Updating A/R
Two basic ways to maintain A/R
-Open-invoice method (Customer pay according to each invoice)
-Balance forward method (Customer pay according to amount on their monthly statement)

-Cycle billing : commonly used with the balance forward method

-Cash collection
-Turnaround doc. forwarded to A/R (Remittance advices,Photocopies,Remittance list
prepared)
-Lockbox arrangements (Customer remit payment to bank and bank send the above)
-Electronic lockboxes (Bank send electronic notification including customer account
number,Amount remitted)
-Electronic funds transfer (Customer remit payment electronic to the co.’s bank)
-Financial electronic data interchange (Remittance data and fund transfer instructions
are sent simultaneously by the customer)
-Accept credit cards/procurement cards from customers (Speeds collection)
-Electronic bill payment

Partial organization chart for units involved in revenue cycle

VP of marketing
-Sales order : take customer order,authorizes credit,check the inventory
-Customer service : respond to inquiries

VP of manufacturing
-Warehouse : picks the order
-Shipping : packs and ships

CFO
Controller
-Billing depart. : invoice the customer
-A/R : maintained customer account (increases C/A when sales are made and decrease
when collected cash)

Treasurer
-Credit manager : approves and authorizes credits
-Cashier : deposits cash received from customers

2. Decisions need to be made in the revenue cycle

-Trans. are properly authorized
-Trans. are recorded accurately
-Recorded trans. are valid
-Valid and authorized trans. are recorded
-Assets are safeguarded
-Business activities are performed efficiently and effectively
-The co. comply with law and regulation
-All disclosure are full and fair
Revenue cycle info. needed for operational tasks
-Responding to customer inquiries
-Deciding on extending credit to a customer
-Determining inventory availability
-Selecting merchandise delivery methods

Revenue cycle info. needed for strategics decisions

-Setting prices for P/S
-Establishing policies on returns and warranties
-Deciding on credit terms
-Determining short-term borrowing needs
-Planning new marketing campaigns

3.The major threats in the revenue cycle and the controls related to those
Action that co. can reduce threats
- using a simple doc. with clear instructions (Accuracy and Reliability)
- using appropriate application controls (Accuracy and Reliability)
- providing space on forms to record (Proper authorizations and Accountability)
- pre-numbering doc. (Validity)
- restricting access to blank doc. (Reduce risk of unauthorized trans.)

Threats in sales order entry

1.Incomplete/Inaccurate customer orders
2.Sales to customers with poor credit
3.Orders that are not legitimate
4.Stockouts,carrying costs and markdowns

Threats in shipping
1.Shipping errors
2.Theft of inventory

Threats in billing
1.Failure to bill customers
2.Billing errors
3.Errors in maintaining customer accounts

Threats in cash collection

1.Theft of cash

General control issues

1.Loss,alteration/unauthorized disclosure of data
2.Poor performance
CH. 11 : The Expenditure cycle : Purchasing and Cash disbursements
-The primary external exchange = vendors
-Inf. flows to/from expenditure cycle

The objective of the expenditure

-minimize the total cost of acquiring and maintaining inv.,supplies and services

1.The basic business activities and data processing operations that are
performed in the expenditure cycle

Three basic activities performed in the expenditure cycle (mirror the revenue cycle)
1.Ordering (Goods,supplies, and services)
- identifying what,when,and how much to purchase and from whom
- the inventory control method is used
Alternate inventory control methods
- Economic order quantity (EOQ) : managing inv.,maintain enough stock
Optimal order size is calculated by minimizing the sum of these:
-Ordering costs
-Carrying costs
-Stockout costs

-Materials requirements planning (MRP) : reduce inv. levels by improving the accuracy of
forecasting techniques and scheduling production and purchasing around the forecast

-Just in time inventory (JIT) : minimize inv. by purchasing or producing only in response to
actual sales

Similarities and differences btw. MRP and JIT

MRP JIT

Scheduling production and - meet estimated sals - response to actual sales

inv. accumulation

Nature of products -suited for product that have -suited for products with
predictable demand relatively short life

Cost and effciency -reduce costs and improve efficiency

Too much/too little -quickly accelerate production (if there is unanticipated

demand)
-quickly stop production (if too much inv.)

- Purchase requisition : received by a buyer

- Purchase order : a doc./electronic form that requests a supplier to sell and deliver product
- Blanket order : a commitment to buy specified items at specified prices from a particular
supplier for a set time period
IT can help improve purchasing function
-Using EDI to transmit purchase orders
-Using vendor-managed inv. systems
-Reverse auctions
-Pre-award audits
-Procurement cards for small purchases

2. Receiving and storing

-Receiving report : The primary doc. used in this process

IT can help improve receiving activity

-Bar-coding
-RFID
-EDI and satellite tech. (track the exact location)
-Audits (ensure)

3.Paying
Two basic sub-processes
-Approval of vendor invoices (done by A/P department)
-Non-voucher system
: stored in an open file and when check is written,invoice is marked “PAID”
-Voucher system : a disbursement voucher is prepared
-Outstanding invoices for the supplier
-Net amount to be paid after discounts and allowances

-Actual payment of the invoices (done by cashier) : consist of the vendor invoice and
supporting doc. and this is processing can be improved :
-Requiring suppliers to submit invoices by EDI
-Having the system automatically match invoices to PO and receiving reports
-Eliminating vendor invoices
-Using procurement cards for non-inv. purchases
-Using co. credit cards and electronic forms for travel expenses
-Preparing careful cash budgets to take advantage of early-payment discounts
-Using FEDI to pay suppliers

Partial organization chart for units involved in expenditure cycle

VP of manufacturing
-Purchasing : selects suitable suppliers and issues PO
-Receiving : accept deliveries,counts and inspects it
-Inv. stores : stores goods

CFO
- Controller
-A/P : approves invoices for payment
- Treasurer
-Cashier : issues payment to vendors
2.The decisions need to be made in the expenditure cycle
(Same as revenue cycle and the ways to reduce threats is also the same)

3.The major threats in the expenditure cycle and the controls related
-Corruption : occupational fraud and abuse

Fraud examiner’s manual

-Bribery : The vendor offering a kickback(Sth. of value) to buyer to buy inflated,unneeded
-Conflict of interest
-Economic extortion : The vendor making an offer of sth. of value to the purchasing agent
-Illegal gratuities : Gift that are given to the purchasing agent by a vendor and impact
future decision

Threats in ordering
1.Stockouts/Excess Inv.
2.Ordering unnecessary items
3.Purchasing goods at inflated prices
4.Purchasing goods at inferior quality
5.Purchasing from unauthorized suppliers
6.Kickbacks

Threats in receiving and storing

1.Receiving unordered goods
2.Errors in counting received goods
3.Theft of Inv.

Threats in paying
1.Failure to errors in vendor invoices
2.Paying for goods not received
3.Failing to take available purchase discounts
4.Paying the same invoice twice
5.Recording and posting errors to accounts payable
6.Misappropriating cash,checks,EFT

General control issues

1.Loss,alteration/unauthorized disclosure of data
2.Poor performance

Expenditure cycle info. needed for operational tasks

-Deciding when and how much inventory to order
-Deciding on appropriate suppliers
-Determining if vendor invoices are accurate
-Deciding whether to take purchase discounts
-Determining whether adequate cash is available to meet current obligations

(The strategic decision is same as the revenue cycle)