Chapter 1

The
Information
System:
An
Accountant’s
Perspective

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 Objectives for Chapter 1
· Recognize the primary information flows within the business
environment.
· Understand the difference between accounting information systems
and management information systems.
· Understand the difference between financial transactions and non-
financial transactions.
· Know the principal features of the general model for information
systems.
· Understand the organizational structure and functional areas of a
business.
· Be able to distinguish between external auditing, internal auditing, and
advisory services as they related to accounting information systems.

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 The Information Environment
· Information is a business resource.

· Operations management directly responsible for controlling

day-to-day operations.
· Middle management accountable for short-term planning and
coordinating activities to accomplish organizational
objectives.
· Top management responsible for longer-term planning and
setting organizational objectives.
· Two groups of external users: trading partners and
stakeholders.

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The Information Environment

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 Information Objectives
· The goal of an information system is to support:
The firm’s day to day operations.

Management decision making.

The stewardship function of management.

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 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 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.
· A financial transaction is an economic event that affect the
assets and equities of the organization, is reflected in its
accounts and is measured in monetary terms.
· A nonfinancial transaction is an event that doesn’t meet the
definition of a financial transaction.

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 An Information Systems Framework

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 An Information Systems Framework

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 An Information Systems Framework
· Accounting information system (AIS) processes financial and
some nonfinancial transactions. Three subsections:
The transaction processing system (TPS) which supports
daily business operations.
The general ledger/financial reporting system (GL/FRS)
which produces reports.
The management reporting system (MRS) which provides
information for decision making.
• Management information system (MIS) processes nonfinancial
transactions not processed by the AIS.

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 An Information Systems Framework

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 AIS Subsystems
• The transaction processing system (TPS) :
– Converts economic events into financial transactions.
– Records financial transactions in the accounting records.
– Distributes essential financial information to support operations.
• The general ledger/financial reporting system (GL/FRS)
takes information from the TPS and other input and:
– Updates general ledger control accounts.
– Handles nondiscretionary reporting requirements.
• The management reporting system (MRS) provides the
internal information needed to manage a business and handles
discretionary reporting.

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 A General Model for AIS

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 A General Model for AIS
• End users fall into two groups :
– External users include creditors, stockholders, government
agencies, suppliers and customers.
– Internal users include management and operations personnel.
– Distributes essential financial information to support operations.
• Data are facts which may or may not be processed and have
no direct effect on a user’s actions.
• Information causes a user to take an action that would
otherwise not have been taken.
• Data sources are financial transactions that enter the
information system for internal or external sources.

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 A General Model for AIS
• Data collection is the first operational stage in the
information system:
– Objective is to ensure data are valid, complete and free from
material errors.
– Only relevant data should be captured.
– Efficient collection procedures designed to collect data only once.
• Data processing tasks range from simple to complex.
• The organization’s database is its physical repository for
financial and nonfinancial data.
– Term could apply to a filing cabinet or computer disk.

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 A General Model for AIS
• The levels in the data hierarchy:
The data attribute is the most elemental piece of potentially
useful data in the database.
A record is a complete set of attributes for a single occurrence
within an entity class.
A file (or table) is a complete set of records of an identical
class.
• Database management involves three fundamental tasks:
storage, retrieval and deletion.

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 A General Model for AIS

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 A General Model for AIS
• Information generation is the process of compiling,
arranging, formatting, and presenting information to users.
• Regardless of physical form, useful information has:
Relevance: Content must serve a purpose.

Timeliness: No older than time frame of supported action.

Timeliness: No older than time frame of supported action.

Accuracy: Free from material errors.

Completeness: All essential information is present.

Summarization: Aggregated for the user’s needs.

Feedback is a form of output sent back to the system as a source of data.

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 Functional Segmentation
• Materials Management
– purchasing, receiving and stores
• Production
– production planning, quality control, and maintenance
• Marketing
• Distribution
• Personnel
• Finance

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 Functional Segmentation

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Functional Segmentation

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 The Accounting Function
• Accounting manages the financial resource of the firm:
– Captures and records transactions.
– Distributes transaction information to operations personnel.
• Value of information is determined by its reliability.
– Relevance, accuracy, completeness, summarization and
timeliness.
– Unreliable information has no value.
• Information reliability requires accounting independence.
– Accounting activities must be separate and independent of the
functional areas maintaining custody of resources.
– Accounting supports these functions with information but does
not participate in the physical activities.

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 Information Technology
• Many organization employ a combination of centralized
and distributed processing.
Centralized Data Processing:
– All data processing performed by large computer(s) in a common
data center that serves users throughout the organization.
– Lends itself to intra-organization communication and data
sharing.
Distributed Data Processing (DDP):
– Users process transactions locally with each user segment
possessing IT needs to support their operations.
– Users function independently and tend not to share data and
information.

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Information Technology

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Information Technology

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 Information Technology
• Systems development is the process organizations use to
acquire information systems.
– Can be purchased or built from scratch.
– Commercial software available for general accounting and
industry specific applications. Sometimes called turnkey
systems because can be implemented with little modification.
– Custom software is developed through a formal process called
the system development life cycle. Requires an in-house team
of qualified individuals.
• Systems maintenance may be trivial or significant.
– Between 80% - 90% of system’s total cost may be incurred
because of maintenance activities.

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 Information Technology
• Centrally organized companies with shared data use
database administration to ensure security and integrity.
• A network is a collection of computers and communication
devices that allow users to communicate, access data and
applications, and share information and resources.
– Network administration responsible for effective functioning of
hardware and software.
• Due to the highly technical, dynamically changing and
expense of IT, many executives look to IT outsourcing.
– Organization sells IT resources and leases back IT services.
– With cloud computing data centers deliver hosted IT services
over the Internet: Software as a service (SaaS), infrastructure
as a service (IaaS) and platform as a service (PaaS).
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 The Role of Accountants in AIS
• Accounts play a prominent role on system development
teams as domain experts, responsible for many aspects of
the conceptual system including specifying rules, reporting
requirements and internal control objectives.
– IT professionals determine the most economical and effective
technologies for the physical system, including data storage.
• Accountants perform audits which typically involve the AIS.
– External audit is an independent attestation and opinion (audit
report) regarding financial statement presentation.
• Requires auditors (independent CPAs) to test internal controls and
perform substantive tests of data.
• Critical element is auditor independence, which means the auditor is free
from factors that might influence the audit report.

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 The Role of Accountants in AIS
• Prior to SOX, accounting firms were permitted to provide
both advisory and attest services to clients.
– SOX legislation restricts non-audit services that auditors may
provide and prohibits auditors from providing these services:
• Other accounting services including bookkeeping, financial
information systems design and implementation, appraisal or
valuation, actuarial, and internal audit outsourcing.
• Management or human resources, broker or dealer,
investment adviser, or investment banking services.
• Legal services and expert services unrelated to the audit.
• Any other service that the Board determines, by regulation, is
impermissible.

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 The Role of Accountants in AIS
• Internal auditing is an independent appraisal function
within an organization to examine and evaluate activities.
– External auditors represent outsiders and internal auditors
represent the interests of the organization.
• Fraud audits have increased in popularity as a corporate
governance tool.
– May be initiated by managers to investigate employees or the
board to investigate management.
• Audit committees serves an independent “check and
balance” for internal audit functions and a liaison with
external auditors.
– Usually three people, one of which must be a “financial expert”.

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