ACCOUNTING INFORMATION SYSTEM CHAPTER 1

THE INFORMATION ENVIRONMENT • Nonfinancial transactions are events that do

• Accounting information systems (AIS) are not meet the narrow definition of a financial
specialized subset of information systems that transaction.
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

TRANSACTIONS PROCESSED BY THE

INFORMATION SYSTEMS

INFORMATION OBJECTIVES
• Three fundamental objectives that are common to
all organizations:
o To support the firm’s day-to-day operations.
o To support management decision making.
o To support the stewardship function
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.
AN INFORMATION SYSTEMS FRAMEWORK
• The Accounting Information System
• The transaction processing system (TPS)
is an activity composed of three major
of 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

• 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.
 ACCOUNTING INFORMATION SYSTEM CHAPTER 1
EXAMPLES OF MIS APPLICATIONS IN
FUNCTIONAL AREAS

A GENERAL MODEL FOR AIS

• Data Sources
AIS SUBSYSTEMS • Data sources are financial transactions that
• Transaction Processing System enter the information system from either
internal or external sources.
• General Ledger/Financial Reporting Systems
• Nondiscretionary reporting is a type of • Data Collection
reporting in which the organization has few or • Data collection is the first operational stage in
no choices in the information it provides. Much the information system.
of this information consists of traditional
financial statements, tax returns, and other
legal documents. • Data Processing
• Data processing is a group that manages the
• Management Reporting System computer resources used to perform the day-
to-day processing of transactions.
• Discretionary reporting is a type of reporting • Database Management
in which the organization can choose what
information to report and how to present it. • Database is a physical repository for financial
data.
A GENERAL MODEL FOR AIS
• The general model for AIS is a model that • DATA ATTRIBUTE
describes all information systems, regardless of • RECORD
their technological architecture.
• FILE
• End Users • DATABASE MANAGEMENT TASKS:
Database management is a special software
• End users are users for whom the system is system that is programmed to know which data
built. elements each user is authorized to access.
• External users include creditors, stockholders,
THE DATA HIERARCHY
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.
 ACCOUNTING INFORMATION SYSTEM CHAPTER 1
A GENERAL MODEL FOR AIS
• Information Generation FUNCTIONAL AREAS OF A FIRM
• 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 FUNCTIONS FROM RESOURCES
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.
• Marketing
• Distribution
• Personnel
• Finance
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
 ACCOUNTING INFORMATION SYSTEM CHAPTER 1
implemented by the user with little or no
modification.
DISTRIBUTED DATA PRICESSING MODEL
INFORMATION TECHNOLOGY
• 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.
 ACCOUNTING INFORMATION SYSTEM CHAPTER 1
• 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.
• 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