AIS REVIEWER

TRANSACTION PROCESSING SYSTEM

 TPS applications process financial transactions.

Expenditure Cycle

 Incurs expenditures in exchange for resources.

 Are based on a credit relationship between the trading parties.
 A physical component (the acquisition of the goods)
 A financial component (the cash disbursement to the supplier)
Conversion Cycle

 Provides value added through its products or services.

 The production system involves the planning, scheduling, and control of the physical
product through the manufacturing process.
 The cost accounting system monitors the flow of cost information related to the
production.
Revenue Cycle

 Receives revenue from outside sources.

 Also have physical and a financial component, which are processed separately.

ACCOUNTING RECORDS (MANUAL SYSTEMS)

Documents

 Source documents – used to capture and formalize transaction data that the transaction
cycle needs for processing.
 Product documents – the result of transaction processing rather than the triggering
mechanism for the process.
 Turnaround documents – product documents of one system that become source
documents for another system.
Journals

 A record of chronological entry.

 Special journals – used to record specific classes of transactions that occur in high
volume.
 The term “register” is often used to denote certain types of special journals.
 General journal – record nonrecurring, infrequent and dissimilar transactions.

Ledgers

 Book of accounts that reflects the financial effects of the firm’s transactions after they are
posted from the various journals.
 Indicates the increases, decreases and current balance of each account.
 General ledgers – contain the firm’s account information in the form of highly
summarized control accounts.
- Summarizes the activity for each of the organization’s
accounts.
 Subsidiary ledgers – contain the details of the individual accounts that constitute a
particular control account.
- Kept in various accounting departments of the firm.
Audit Trail

 Tracing transactions from source documents to financial statements. Most important to

the accountants is the year-end audit.
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ACCOUNTING RECORDS (COMPUTER-BASED SYSTEMS)

Types of Files
1. Master files – generally contains account data
2. Transaction files – temporary file of transaction records
3. Reference files – stores data used as standards for transaction processing
4. Archive files – records of past transactions
DOCUMENTATION TECHNIQUES
Data Flow Diagram

 Used to represent systems at different levels of detail from very highly to highly detailed.

Entity Relationship Diagram

 Used to represent the relationship between entities.

 Entities are physical resources, events, and agents about which the organization wishes to
capture data.
 Cardinality – numerical mapping between entities
 1:1 (one to one)
 1:M (one to many)
 M:M (many to many)
Flowcharts

 Graphical representation of a system that describes the physical relationships between its
key entities.
 Document flowchart – used to depict the elements of a manual system.

 System flowcharts – portray the computer aspects of a system.

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
 Flowcharting Guide:
 Layout the physical areas of the activity
 Transcribe the written facts into visual format
 Program Flowchart – provides the operational details that a system flowchart may not
provide.

Record Layout Diagrams

 Used to reveal the internal structure of the records that constitute a file or database table.


ETHICAL ISSUES IN BUSINESS

Ethics

 Principles of conduct that individuals use in making choices and guiding their behavior in
situations that involve the concepts of right and wrong.
Manager’s Ethical Responsibility (Proportionality)

 The benefit from a decision must outweigh the risks.

1. Justice – benefits of the decision should be distributed fairly to those who share the
risks. Those who do not benefit should not carry the burden of the risk.
2. Minimize risk – even if judged acceptable by principles, the decision should be
implemented so as to minimize all of the risks and avoid any unnecessary risks.
Computer Ethics

 Privacy
 Security (Accuracy and confidentiality)
 Ownership of Property
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 Equity in Access
 Environmental Issues
 Artificial Intelligence
 Unemployment and displacement
 Misuse of computers

Sarbanes-Oxley Act & Ethical Issues

The SEC has rules that compliance with Section 406 necessitates a written code of ethics that
addresses the following ethical issues:
 Conflict of interest
 Full and fair disclosures
 Legal compliance
 Internal reporting of code violations
 Accountability
FRAUD & FRAUD SCHEMES
Fraud and the Accountants

 Fraud denotes a false representation of a material fact made by one party to another party
with the intent to deceive and induce the other party to justifiably rely on the fact to his or
her detriment.
 According to common law, a fraudulent act must meet the following 5 conditions:
1. False Representation – there must be a false statement or nondisclosure.
2. Material Fact – a fact must be substantial factor in inducing someone to act.
3. Intent – there must be an intent to deceive or the knowledge that one’s statement is
false.
4. Justifiable reliance – the misinterpretation must have been a substantial factor on
which the injured party relied.
5. Injury or loss – the deception must have caused injury or loss to the victim of the
fraud.
 Fraud in the business environment has a more specialized meaning. It is a(n):
1. Intentional deception
2. Misappropriation of a company’s assets
3. Manipulation of its financial data to the advantage of the perpetrator
 Auditors encounter fraud at two levels:
1. Employee fraud
2. Management fraud
 Factors that contribute to fraud:
1. Situational pressures
2. Opportunities
3. Personal characteristics (ethics)
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Fraud Schemes:
1. Fraudulent Financial Statements (Underlying problems)
 Lack of auditor independence
 Lack of director independence
 Questionable executive compensation schemes
 Inappropriate accounting practices

The Sarbanes-Oxley Act

 Creation of an accounting oversight board (PCAOB)

 Author independence
 Corporate governance and responsibility
 Disclosure requirements
 Penalties for fraud and other violations
2. Corruption
 Bribery
 Illegal gratuities
 Conflicts of interest
 Economic extortion
3. Asset Misappropriation
 Charges to expense account – the most common way to conceal misappropriation.
 Lapping – the use of a customer check, received in payment of their accounts, to conceal
cash previously stolen by an employee.
 Transaction fraud – involves deleting, altering, or adding false transactions to divert
assets to the perpetrator.
 Computer fraud schemes:
 Program fraud (creating illegal programs)
 Operations fraud (misuse or theft of computer resources)
 Database management fraud (altering, deleting, corrupting)
 Scavenging (searching through the trash of the computer)
 Eavesdropping (listening to output transmissions)
INTERNAL CONTROL CONCEPTS & TECHNIQUES
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Internal Control

 Organizational plan and all related measures to safeguard assets, ensure the accuracy and
reliability of accounting records, promote operational efficiency, and encourage
adherence to prescribed managerial policies.
Modifying Assumptions
1. Management Responsibility – the establishment and maintenance of a system of
internal control is a management responsibility.
2. Reasonable Assurance – the IC system should provide a reasonable assurance that the 4
broad objectives of internal control are met in a cost-effective manner.
3. Methods of Data Processing – internal controls should achieve the 4 broad objectives
regardless of the data processing method used.
4. Limitations – (1) Possibility of errors; (2) circumvention; (3) Management override; (4)
changing conditions
Exposures and Risks

 Exposure – the absence or weakness of a control

1. Destruction of assets
2. Theft of assets
3. Corruption of information or the information system
4. Disruption of the information system
The Preventive-Detective-Corrective Internal Control Model
1. Preventive Controls – are passive techniques designed to reduce the frequency of
occurrence of undesirable events.
2. Detective Controls – form the second line of defense. These are devices, techniques, and
procedures designed to identify and expose undesirable events that elude preventive
controls.
3. Corrective Controls – are actions taken to revers ethe effects of errors detected in the
previous step.
THE REVENUE CYCLE
Revenue Cycle

 Revenue cycle transactions also have a physical and a financial component, which are
processed separately.
Sales Order Processing

 Receive Order
 Credit Check


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 Bill Customers
 Update Inventory Records
 Update Accounts Receivable


 Pick Goods
 Ship Goods

Sales Return Procedures

 An organization can expect that a certain percentage of its sales will be returned.
 The company shipped the customer the wrong merchandise.
 The goods were defective.
 The product was damaged in shipment.
 The buyer refused delivery because the seller shipped the goods too late or they
were delayed in transit.

Cash Receipts Procedures

REVENUE CYCLE ACCOUNTING RECORDS

Sales Order
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 Captures vital information such as the customer’s name, address, and account number;
the name, number, and description of the items sold; and the quantities and unit prices of
each item sold.
Sales Order Processing Accounting Records
1. Customer Order – non-standard document initiated by the customer, may or may not be
a physical document.
2. Sales Order – formal document prepared by the company to process thw customer order.
3. Customer Open Order File – monitoring file of customer’s open orders updated for
status order changes.
4. Pricing Ticket – or stock release document; identifies inventory items that must be
located and picked from the warehouse shelves.
5. Back Order Record – a record of sales orders pending inventory availability.
6. Stock Records – used for warehouse management purposes only; not the formal
accounting records for inventory control.
7. Packing Slip – travels with the goods to the customer to describe the contents of the
order.
8. Shipping Notice – forwarded to the billing function as evidence that the customer’s order
was filled and shipped.
9. Bill of Lading – formal contract between the seller and the shipping company to
transport the goods to the customer. This document establishes legal ownership and
responsibility for assets In transit.
10. S.O. Pending File – list of pending orders awaiting receipt of the shipping notice.
11. Sales Invoice – or customer’s bill; includes unit prices, taxes, and freight charges.
12. Sales Journal – special journal used for recording sales on account transactions.
13. Sales Journal Voucher – summary of sales journal entries.
14. Journal Voucher – each voucher represents a general journal entry and indicates the
G/L accounts affected.
15. Journal Voucher File – under a journal voucher system, it replaces the need for a
formal general journal.
16. Inventory Sub-Ledger – updated from information contained in the stock release
documents.
17. A/R Sub-ledger – customer records updated from information contained in the sales
ledger.
18. Return Slip – document prepared by the receiving department to describe the returned
item(s).
19. Credit Memo – authorization for the customer to receive credit for the merchandise
returned.
20. Inventory Sub-ledger – same document with the sales order processing system.
21. A/R Sub-ledger – same document with the sales order processing system.
Cash Receipts Procedures Accounting Records
1. Remittance Advice – contains information needed to service individual customer’s
accounts.
2. Remittance List – or cash prelist; a form that lists down all checks received.
3. Deposit Slip – a document forwards to the bank for deposit summary.
4. Cash Receipts Journal – record of cash receipts transactions (cash sales, miscellaneous
cash receipts, collections on account)
5. A/R Sub-ledger – same document with the sales order processing system.
6. Journal Voucher - same document with the sales order processing system.
Revenue Cycle Controls

 Transaction Authorization – to ensure that only valid transactions are processed.

1. Credit Check:
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 Is a function of the credit department.

 Concern/objectives – creditworthiness of a customer
2. Return Policy:
 Processing of sales returns is a function of the credit department.
3. Remittance List:
 Provides a means for verifying that customer checks and remittance advices
match in amount.
 Segregation of Duties – no single individual or department processes a transaction in its
entirety.
1. Supervision:
 Is a compensating control for companies that have too few employees where
segregation of duties is not adequate.
 Accounting Records – form an audit trail that allows independent auditors to trace
transactions through the various states of processing.
1. Pre-numbered documents:
 Sequential numbering of documents to allow transactions to be uniquely
identified and for tracking purposes.
2. Special Journals:
 Provides a concise record of an entire class of events.
3. SL/GL:
 Source documents captured by journals and subsidiary ledgers flow into the
general ledger for FS preparation – a complete audit trail.
4. Files:
 Open sales order file – status of customer orders
 Shipping Log – orders shipped
 Credit records file – customer credit data
 Sales order pending file – orders not yet shipped or billed
 Back-order file – out-of-stock orders
 Journal voucher file – list of all JVs posted to the GL.
 Access Controls – prevent and detect unauthorized and illegal access to the firm’s
assets.
1. Independent Verification:
 Verify the accuracy and completeness of tasks that other functions in the process
perform.