Chapter 1.

Reasons why we need to learn AIS

Reason #1
The most obvious reason.
 It is a graduation requirement.

Reason #2
Its fundamental
 Accounting is an information-providing activity, so accountants need to
understand:
- How the system provides that information is designed, implemented and
used.

Reason #3
The skill are critical to success.
 Auditors need to evaluate the accuracy and reliability of information produced by
the AIS.
 Tax accountants must understand the clients AIS adequately to be confident that
it is providing complete and accurate information for tax planning and
compliance work.
 In private industry and not-for-profit systems work is considered the most
important activity performed by accountants.
 In management consulting, the design, selection, and implementation of
accounting systems is a rapid growth area.

Reason #4
The AIS course complements other systems courses.

- Other systems courses focus on design and implementation of information systems,

databases, expert systems, and telecommunications.
- AIS control focus on accountability and control.

In Addition, a large number of specialized employment opportunities are available to

those students who possess a deeper understanding of computer subjects and can
bring advance computer skills to accounting jobs.

Lesson proper:
Accounting Information System

Question: What do the following have in common?

1. A shoebox filled with lawyer’s expense receipt.
2. The monthly payroll spreadsheet in the computer of an auto-repair shop.
3. The Peachtree accounting system for small chain of dry cleaning stores.
4. The ERP (Enterprise Resource Planning) system of a large manufacturer.
--- ERP system are integrated system.

They are all examples of accounting information systems.

This is the essence of what AIS’s are:
- collection of raw stored data (that together typically serve as inputs)
- processing methods usually called “procedure”, and
- information (outputs) that serve useful accounting purposes.

Facts about examples:

AIS (or any IS in particular) can:
- use advance technology
- be a simple paper and pen system
- be something in between

To define AIS
Accounting information systems exists at the intersection of two important disciplines:
Accounting and Information Systems.

 Thus, the study of AIS is often viewed as the study of computerized accounting
systems.
 But because we cannot define an AIS by its size; it is better to define it by what it
does.

Functions of AIS
- It collects and stores data about activities and transactions.
- It processes data into information that is useful for making decisions.
- It provides adequate controls to safeguard the organization’s assets.

Accounting
- Accounting information systems are used in almost all areas of accounting (Payroll
computation, inventory maintenance, budgeting)
- AIS help accountants maintain general ledger information, create spreadsheets for
strategic planning, and distribute financial reports.

The real challenge for accountants:

- How best to provide information;
- The quality of information they provide.
 AIS don’t just support accounting and finance business processes. They often create
information that is useful to non-accountants e.g. people working in marketing,
production, or human relations.
Org Unit - Information provided by AIS
Finance - Cash forecasts and actual payment and receipt information.
Marketing - Sales, summary analyses, cost information, and sales forecasts.
Human Resources - Payroll analyses, and projections of future personnel costs.
Production - Inventory summaries and product cost analyses.

Information concepts;
Data: the critical element
Data - Facts, figures, symbols, events, measurements, opinions, etc.
-- Data collection is the first and most crucial part of the processing cycle.
-- GIGO (garbage in, garbage out) -- it is the principle applied to data collection.
-- relevant data is needed for the processing while irrelevant data is not.

Information - A collection of facts organized in such a way that they have additional
value beyond the value of the individual facts.
Process - turning data into information is a process .
- Process is a set of logically related task performed to achieve a defined
outcome.
- the process of defining relationships among data create useful information
requires knowledge.
Knowledge - is the awareness and understanding of a set of information and the ways
that information can be made useful to support a specific task or reach a decision.
Information Concept - Therefore, you can also think of information as data made
more useful through the application of knowledge.
- people organize or process data mentally or manually.
- other uses a tool such as computer
‘When the data comes from or how it is processed is less important than whether the
data is transformed into results that are useful and valuable.

Stages in information processing -- PPT/ The transformation process

Information Systems is:

- a set of interrelated elements or components that collect (inputs),
manipulate (process), store and disseminate (output) data and information; and
- provide a corrective reaction (feedback mechanism) to meet an objective.
Additional to information generation process ;
- transforming or converting data into useful outputs.
- processing can involve making calculations, comparing data and taking alternative actions.
- processing data into useful information is also critical in business settings.
- outputs can include paychecks for employees, reports for managers, and information supplied to
banks, government agencies, and other groups.
- in some cases, output from one system can become input for another.

Information Generation Process

- AIS harness information technology to perform the necessary task in each step of the
process.

Transactions: The Data Source

Financial transaction - is an economic event that affects the assets and equities of
the organization, is reflected in its accounts, and is measured in monetary terms
Non-financial transactions – other transactions that does not qualify as financial
transactions. (adding a new supplier or potential customer. Until there is an order, it
is not a financial transaction)

Processing: the second phase.

Processing
- The conversion of input data into information output.
- Problems associated with processing using IT:
 Problem: The ability to output vast amounts of information quickly.
 Possible solution: It is up to the accounting profession to determine the nature
and timing of the outputs created and distributed by AIS to its end users.
 Problem: Computers do not automatically catch the simple input errors that
humans make.
 Problem: Computers make audit trails more difficult to follow. This is because
the path that data follow through computerized systems is electronic, not recorded
on paper.
 Possible solution: a well-designed AIS can still document its audit trail with
listings of transactions and account balances both before and after the transactions
update the accounts.

!Again, we stress that many of the “end users” of the information of an AIS are not
accountants, but include customers, investors, suppliers, financial analysts, and
government agencies. !
Output: the last phase.
This is the phase where information are made available to users or decision makers.

The Information Environment

 The pyramid depicts strata of information users within the business organization
and the flow of information among those users
 Information flow within the organization; and to and from the organization.
 Information flow within the organization can be either horizontal or vertical.
 Horizontal flow of information is at the operations level. These information is
more detailed and operations oriented.
 Vertical flow of information are in downward and upward directions. These
summarized and condensed information.
 The diagram also shows that the information flows to and from the organizations
stakeholders and trading partners.
 Each user group in the pyramid has unique information requirements.
 The higher the level of the organization, the greater the need for more aggregated
information and less need for details.

System
 A system can be broadly defined as an integrated set of elements that
accomplish a defined objective.

One big misconception for the term systems: System relate only to computers and
programmers.

 Systems truth:
 The term system has a broader applicability;
 There are natural systems and artificial or man-made systems
 Natural systems:
 Atoms - a system of electrons, protons, and neutrons.
 Universe - a system of galaxies, planets, and stars.
 Artificial/ Man-made systems
 Clock
 Social system
 Information system
 Other Definition
 A system is a set of interrelated components that interact to achieve a goal.
 A group of two or more interrelated components or subsystems that serve a
common purpose.

Elements of a System
 Multiple components – A system must have two or more parts of subsystems.
 Relatedness – The common purpose relates to the multiple parts of the systems.
 System and Subsystem – system if it’s the focus of attention; subsystems if it is
considered as part of the whole system. Systems and subsystem can be used
interchangeably.
 Purpose – The system must have at least one purpose
 System Decomposition – In order for the system to function effectively, it is
divided into smaller parts or subsystems.
 Subsystem Interdependency – the achievement of the overall goal of the system is
dependent on the success of its subsystems.
Example;

-- the achievement of overall goal is dependent on the achievement of each sub

systems.

Very important!
 All system designers need to recognize the consequences of subsystems failure.
 An appropriate level of control should be provided for this risk.
 Information systems designers need to identify critical subsystems, anticipate the
risk of failure, and design cost-effective control procedures to mitigate the risk.

-- In summary, it is convenient to conceptualize an accounting information system as

a set of components that collect accounting data, store it for future uses, and process it
for end users.
--- Additional

Elements of a System
1. People – who operates the systems and performs various functions in the
organization
2. Procedures – the process of data collection, processing, and storage of
organization’s activities
3. Data – the data in the organization’s business process
4. Software – the software use to process organization’s data
5. Information technology infrastructure – the hardware and network
communication devices used in the system.
AIS Subsystems
TPS - Transaction Processing System for Daily operations
GL/FRS - General ledger/Financial reporting system
- takes and summarizes the data in the TPS to update the general ledger
accounts and to create reports that are for both internal and external users.
MRS - Management reporting systems
- provides the internal financial information needed by management
- management need this information to plan, execute and control their
operations (e.g., budgets, variances, price lists, etc.)

 Software - the software use to process organizations data

 In formation technology infrastructure - the hardware and network
communication devices used in the system.
 Internal control and security measures - safeguard the AIS data.

Elements of the General Model

 Data sources
 End Users
 Information Systems
 Data collection
 Data processing
 Information generation
 Feedback

General Model of AIS

 External sources of financial transaction are those involving other legal entities;
sales, purchase, payments, etc.
 Internal source of data usually involve the movement of resources within a
business; moving materials into production, adding labor cost to inventory, etc.
 External users include creditors, investors, government, agencies, etc. The reports
forwarded to them are very structured in format. (Non-discretionary reports)
 Internal users include both operational employees and management. The structure
of these reports is more flexible and typically more difficult to design.
(Discretionary reports)

REMINDER FOR ACCOUNTANTS - when designing an AIS for the internal users,
the accountant must be concerned with both the internal users need and adequate
control security, accountability, and information production cost.

 The first and the most crucial phase of the IS cycle. Remember GIGO?
Rules Governing Data Collection:
 Relevance - data should contribute to users information needs.
 Irrelevant data that are not needed to produce required information is a waste of
resources of the organization.
 Efficiency of data collection - data should be collected only once and made
available to variety of users.
 Redundancy in data collection can lead to inconsistencies
 !!!!!

---
Characteristics of Useful Information
• Relevance – if it serves its purpose
• Reliability – free from error or bias
• Completeness – no relevant data is missing
• Timeliness – provided when needed
• Understandability – provided in a manner understood by the user
• Summarization – aggregated according to what the users needs
• Accessibility – available when needed.
---
Feedback is decision related to a system output that is sent back to the system as a source of
data. Feedback may be internal or external.
AIS Facts:
• F1: Information technology (IT) is use by organizations to create computerized
information systems.
• F2: IT has been a major force in our current society and also influences our lives in
many personal ways.
• F3: Computer technology has also had profound influences on commerce.
• In this information age, fewer workers actually make products.
• More of them produce, analyze, manipulate, and distribute information about
business activities.
• These individuals are often called knowledge workers.
• Companies find that their success or failure is often dependent on the uses or
misuses of the information that knowledge workers manage.
• The information age has important implications for accounting because that is
what accountants are: knowledge workers.
• In fact, accountants have always been in the ‘‘information business’’ because
their role has been, in part, to communicate accurate and relevant financial
information.

Whats new ?
How data and information provided by AIS are being used.

1. Suspicious Activity Reporting (SAR)

A number of suspicious activity reporting (SAR) laws now require accountants to
report questionable financial transactions to the U.S. Treasury Department. Examples of
such transactions are ones suggestive of money laundering, bribes, or wire transfers to
terrorist organizations

Suspicious activity reporting impacts AISs in several ways:

• Because so much of the information within AISs is financial, these systems are often
used to launder money or conduct criminal activities.
• AISs document financial activities in the course of daily transaction processing, and
therefore become important sources of SAR evidence and subsequent legal action.
• Finally, SAR can act as a deterrent to criminal or terrorist activities—and therefore an
important control for AISs

2. Countering Terrorism
• Although countering terrorism might seem like a governmental matter, accounting can
be used to counter these acts.
• One example of the use of accounting information systems for this purpose is using
banking systems to trace the flow of funds across international borders.
• Other examples include:
• identifying and denying financial aid to terrorist groups and their sympathizers,
• tracing arms and chemical orders to their final destinations, thereby identifying
the ultimate purchasers,
• using security measures to control cyber terrorism, and
• Installing new internal controls to help detect money laundering and illegal fund
transfers.

Information Technology and Accounting

• Information technology strongly influences the way most accountants work.

• Instant access to the Internet via mobile communication devices enables
managerial accountants to complete important work tasks while traveling in the
field.
• Auditors can communicate with each other from remote job sites when they are
auditing the same client;
• Staff accountants can send text message to one another from alternate locations,
and:
• Tax experts can download information on tax rulings that are even more current
than their latest CDs.

Impact of IT in the General Fields of Accounting

Financial Accounting
 The major objective of financial accounting information systems is to provide
relevant information to individuals and groups outside an organization’s
boundaries—e.g., investors, tax agencies, and creditors.
 Accountants achieve these informational objectives by preparing such financial
statements as income statements, balance sheets, and cash flow statements.
 Of course, many managers within a company can also use financial reports for
planning, decision-making, and control activities.
--
Real-Time Reporting
• Another impact of IT on financial accounting concerns the timing of inputs,
processing, and outputs.
• With advances in IT, transactions can be captured immediately therefore
allowing the production of FS in real-time.

Interactive Data and XBRL

• A problem that accountants, investors, auditors, and other financial managers
have often faced is that data used in one application are not easily transferable to
another.
• This means that accountants may spend hours preparing spreadsheets and
reports that require them to enter the same data in different formats over and over.
• Interactive data are data that can be reused and carried seamlessly among a
variety of applications or reports.
• With interactive data, the data are captured once and applied everywhere needed.
• Interactive data require a language for standardization that ‘‘tags’’ the data at its
most basic level.
• Extensible business reporting language (XBRL) is emerging as the language
of choice for this purpose.
• Many companies, software programs, and industries are beginning to
incorporate XBRL for creating, transforming, and communicating financial
information.

Managerial Accounting
 The principal objective of managerial accounting is to provide relevant
information to organizational managers.
 The next list summarizes some of the most important features of this accounting area.
 focuses on providing accounting information for internal parties, such as
management, rather than for external investors and creditors.
 information is mostly forward-looking.
 information is not regulated by generally accepted accounting principles,
 nor is it mandatory to prepare it.
 reports include both non-monetary and financial data.
  is influenced by many business and non-business disciplines, such as economics,
behavioral science, and quantitative methods.
 information is flexible and frequently involves non-routine reporting.

Components of Managerial Accounting

 Cost Accounting
 Budgeting

Cost Accounting

 The cost accounting part of managerial accounting

• assists management in measuring and controlling the costs associated with an
organization’s various activities (acquisition, processing, distribution, and selling
activities)
• these tasks focus on the value added by an organization to its goods or services.

AIS in Cost Accounting

• Activity Based Costing (ABC)

– Identifying activities and assigning costs directly related to the activity. Easier
assignment of overhead costs.
• Corporate Performance Measurement (CPM)
• Use in Responsibility Accounting System.
• Trace unfavorable performance to responsible department or individuals
• Immediate corrective action by managers
• Examples of tools used in CPM
• Balance Score Card
• Electronic Dashboards

Budgeting