D217 - Accounting Information Systems

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Transaction

An event that affects or is of interest to the organization and is processed by its information system as a unit of work. There are financial and nonfinancial transactions.

Financial transaction

An economic event that affects he assets and equities of the organization, is reflected in its accounts and is measured in monetary terms.

• Ex.: sales of products to customers, purchases of inventory, and cash disbursement and receipts

AIS Three Major Subsystems

• Transaction Proessing System (TPS)

• General Ledger/Financial Reporting System (GL/FRS)

• Management Reporting System (MRS)

Transaction Process System (TPS)

• Central to overall function of the IS

• Converts economic events into financial transactions

• Records financial transactions in the accounting records

• Distributes essential financial information to operations personnel

• Has 3 transaction cycles

TPS 3 Transaction Cycles

• The Revenue Cycle

• The Expenditure Cycle

• The Conversion Cycle

General Ledger / Financial Reporting Systems (GL/FRS)

• Bulk of the input to the GL portion comes from transaction cycle subsystems

• FRS measures the status of financial resources and the changes in those resources

• Nondiscretionary reporting: organization has few or no choices in the information it provides. Much of this information consists of traditional financial statements, tax returns, and other legal documetns

Management Reporting System (MRS)

• Provides the internal financial information needed to manage a business 

• Can include budgets, variance reports, cost-volume-profit analyses, and reports using current cost data

• Processes nonfinancial transactions that are not normally processed by traditional AIS

• Discretionary reporting: organization chooses what information to report and how to present it.

General Model for AIS

Means it applies to ALL AIS

Key Elements of AIS Applicaiton

• End Users

• Data Sources

• Data Collection (First Stage)

• Data Processing

• Database Management

• Information Generation

• Feedback

1 - End Users

• External: creditors, stockholders, investors, regulatory agencies, tax authorities, suppliers, and customers

• Internal: management and operational

• Data vs Information

2 - Data Sources

• Financial transactions that enter the IS from either internal or external sources

  • External Financial Transaction (Most common): Sale of goods, services, the purchase of inventory, receipt of cash, disbursement of cash

  • Internal Financial Transaction: exchange of resources within the organization

    • Movement of raw materials into work-in-process (WIP), the application of labor and overhead to WIP, the transfer of WIP into finished goods inventory, and the depreciation of plant and equipment

3 - Data Collection (First Stage)

• Relevant data

• Efficient data

4 - Data Processing

Group that manages the computer resources used to perform day to day processing of transactions

• Simple

• Complex

5 - Database Management

• Physical repository for financial and nonfinancial data

• Organized in a logical hierarchy

• Arranged as attribute, record, file

• Fundamental tasks: storage, retrieval, deletion

• Guidelines:

  • Data Attribute

  • Record = Collection of Attributes

  • File = Collection of Record

  • Database Management Tasks

Database Management - Data Attribute

A logical and relevant characteristic of any entity about which the firm captures data.

Database Management - Record

• A complete set of attributes for a single occurrence within an entity class

• Unique identifier

Database Management - File

A complete set of records of an identical class

Database Management Tasks

• Storage

  1. assigns keys to new records and stores them in their proper location in the database.

• Retrieval

  1. the task of locating and extracting an existing record from the database for processing

• Deletion

  1.  the task of permanently removing obsolete or redundant records from the database

6 - Information Generation

• Relevance

  1. The contents of a report or document must serve a purpose. 

• Timeliness

  1. Information must be no older than the time frame of the action it supports

• Accuracy

  1. Information must be free from material errors. 

• Completeness

  1. No piece of information essential to a decision or task should be missing. 

• Summarization

  1. Information should be aggregated in accordance with the user’s needs

7 - Feedback

• Internal

  1. Example: feedback will initiate the inventory ordering process to replenish

• External

  1. Example: feedback about the level of uncollected customer accounts can be used to tailor credit granting policies

The Information Environment

Information is a business resource

• External users: customers, suppliers, stakeholders, or anyone who has an interest in the firm

• External Users fall into two groups:

  • Trading partners

  • Stakeholders

Three Information Objectives

• To support the firm’s day-to-day operations

• To support management decision making

• To support the stewardship function of management

An Information Systems Framework

Information System is the set of formal procedures by which data are collected, stored, processed into information, and distributed to users.

Two Broad Classes of Systems emerge from decomposition:

• Accounting information Systems (AIS)

• Management information system (MIS)

Segments

A functional Unit of a business organization.

Examples of Segmentations:

• Materials Management

• Production (*conversion cycle)

• Marketing

• Distribution

• Personnel

• Finance

Materials Management Segmentation

• Subfunctions

  • Purchasing

  • Receiving

  • Storage

Production Segmentation (Conversion Cycle)

• Two broad classes

  • Primary manufacturing activities

    • Shape and assemble raw materials into finished goods

  • Production support activities

    • Production planning

    • Quality control

    • Maintenance

Four Information Technology Functions:

• Data Processing

  • Centralized

  • Distributed

• Systems Development and Maintenance

• Data Administration

• Network Administration

Centralized Data Processing

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

Reorganizing the IT function into small information processing units (IPUs) that are distributed to end users and placed under their control.

Systems Development

• Commercial Software

  • Turnkey Software

• Custom Software

  • Enterprise Resource Planning (ERP)

    • Systems assembled of prefabricated software components

  • Systems development life cycle

    • Software development process

    • Custom syustems are more expensive

Outsourcing the IT Function

• Cloud Computing

• Software as a Service (SaaS)

• Infrastructure as a Service (IaaS)

• Platform as a Service (PaaS)

Accountants as System Auditors

• External (Attestation) Audits

• Internal (Operational) Audits

External (Attestation) Audits

• Also known as financial audits

• An independent attestation performed by an expert who expresses an opinion in the form of a formal audit report regarding the presentation of financial statements. 

  • Attest function

  • Substantive tests

Attest Function

Independent auditor’s responsibility to opine as to the fair presentation of a client firm’s financial statement. 

Substantive Tests

Tests that determine whether database contents fairly reflect the organization’s transactions.

The Expenditure Cycle

Incurs expenditures in exchange for resources

The Conversion Cycle

Provides value added through its products and services

The Revenue Cycle

Receives revenue from outside sources

Digital Accounting Records

Modern accounting systems store data in four types of digital computer files:

• Master files

• Transaction files

• Reference files

• Archive files

Master Files

Include account data, examples include subsidiary ledgers, general ledger

Transaction Files

Temporary file of transaction records, examples include sales orders, inventory receipts, and cash receipts

Reference Files

Stores data used as standards for processing transactions, examples include payroll program, price list, authorized suppliers, employee rosters, credit history files, freight charges

Archive Files

Contains records of past transactions that are retained for future reference, examples include journals, prior-period payroll info, former employee info, written off accounts

The Digital Audit Trail + Steps

• Allows transaction tracing

• Steps

  • Capture the economic event

  • Convert the source documents to digital form

  • Update the various master file subsidiary and GL control accounts effected, errors are detected

  • File can now be erased for the next batch

System Flowcharts

System flowchart is the graphical representation of the physical relationships among key elements of a system.

Revenue Cycle

It is two phases:

• The physical phase involving the transfer of assets or services from the seller to the buyer

• The financial phase, involving the receipt of cash by the seller in payment of the accounts receivable

Two major subsystems:

• The sales order processing subsystem

• The cash receipts subsystem

Data Coding Schemes

Creating simple numeric or alphabetic codes to represent complex economic phenomena that facilitate efficient data processing.

A System Without Codes

This uncoded entry takes a great deal of recording space, is time-consuming to record, and is obviously prone to many types of errors.

A System WITH Codes

Advantages of data coding in AIS are:

• Concisely representing large amounts of complex information that would otherwise be unmanageable. 

• Providing a means of accountability over the completeness of the transactions processed. 

• Identifying unique transactions and accounts within a file. 

• Supporting the audit function by providing an effective audit trail.

Sequential Codes

Represent items in some sequential order (ascending or descending)

• Advantages: Sequential coding supports the reconciliation of a batch of transactions, such as sales orders, at the end of processing. 

• Disadvantages: Sequential codes carry no information content beyond their order in the sequence.  Also, sequential coding schemes are difficult to change.

Block Codes

Coding scheme that assigns ranges of values to specific attributes such as account classifications.

• Chart of Accounts:

• Advantages: Block coding allows for the insertion of new codes within a block without having to reorganize the entire coding structure. 

• Disadvantages: the information content of the block code is not readily apparent

Chart of Accounts:

Listing of an organization’s accounts showing the account number and name. (Critical to a firm’s financial and management reporting systems.)

Group Codes

Used to represent complex items or events involving two or more pieces of related data. 

• Advantages:

  • They facilitate the representation of large amount of diverse data.

  • They Allow complex data structures to be represented in a hierarchical form that is logical and more easily remembered by humans.

  • They permit detailed analysis and reporting both within an item class and across different classes of items. 

• Disadvantages: They tend to be overused.

Alphabetic Codes

Characters assigned sequentially.

• Advantages: Capacity is increased by alphanumeric codes. 

• Disadvantages:

  • There is difficulty rationalizing the meaning of codes that have been sequentially assigned.

  • Users tend to have difficulty sorting records that are coded alphabetically.

Mnemonic Codes

Characters in the form of acronyms that convey meaning.

• Advantages: does not require the user to memorize meaning

• Disadvantages: they have limited ability to represent items within a class.

Revenue Cycle Activities

• Data Flow Diagrams (DFDs)

• Sales Order Procedures

• Sales Return Procedures

• Cash Receipts Procedures

Sales Order Procedures

Tasks involved in receiving and processing a customer order

• Receive Order (customer order, sales order)

• Check Credit (establish creditworthiness, returned approved sales order)

• Pick Goods (stock release [aka picking ticket], verified stock release, possible back-order record, adjust stock records)

• Ship Goods (packing slip, shipping notice, bill of lading, shipping log)

• Bill Customer (sales order, S.O. pending file, sales invoice, sales journal, journal voucher, journal voucher file)

• Update Inventory Records (inventory subsidiary ledger)

• Update Accounts Receivable Records (AR subsidiary ledger, ledger copy)

• Post to General Ledger

Sales Return Procedures

This involves reversing the previous transaction in the sales order procedure.

• Prepare Return Slip

• Prepare Credit Memo

• Approve Credit Memo

• Update Sales Journal (recorded as contra entry)

• Update Inventory and AR records

• Update General Ledger

Cash Receipts Procedures

They involve receiving and securing the cash, depositing the cash in the bank, matching the payment with the customer and adjusting the correct account, and properly accounting for and reconciling the financial details of the transaction. 

• Open Mail and Prepare Remittance List (remittance advices, remittance list)

• Record and Deposit Checks (cash receipts journal, deposit slip)

• Update Accounts Receivable Records

• Update General Ledger

• Reconcile Cash Receipts and Deposits (controller’s office, 1. A copy of the prelist, 2. Deposit slips received from the bank, 3. Related journal vouchers)

Physical Systems

Physical Accounting information systems are a combination of computer technology and human activity.

Revenue Cycle Risks

• Selling to un-creditworthy customers

• Shipping customers the wrong items or incorrect quantities

• Inaccurately recording sales and cash receipts transactions in journals and accounts

• Misappropriation of cash receipts and inventory

• Unauthorized access to accounting records and confidential reports

Internal Controls for Revenue Cycle - Selling to un-creditworthy customers

• Physical Control: Transaction Authorization, Segregation of Duties

• IT Controls: Automated Credit Checking

Internal Controls for Revenue Cycle - Shipping customers the wrong items or incorrect quantities

• Physical Control: Independent Verification

• IT Controls: Scanner Technology, Automated Inventory Ordering

Internal Controls for Revenue Cycle - Inaccurately recording sales and cash receipts transactions in journals and accounts

• Physical Controls: Access Controls, Segregation of duties

• IT Controls: Passwords, Multilevel security

Internal Controls for Revenue Cycle - Misappropriation of cash receipts and inventory

• Physical Controls: Transaction authorization, supervision, access controls segregation of duties

• IT Controls: Multilevel security

Internal Controls for Revenue Cycle - Unauthorized access to accounting records and confidential reports

• Physical Controls: Access Controls, Segregation of duties

• IT Controls: Passwords, Multilevel security

Internal Control Activities

• Physical Controls

• IT Controls

Point-of-Sale (POS) Systems

Universal Product Code (UPC)

Reengineering using Electronic Data Interchange (EDI)

Devised to expedite routine transactions between manufacturers and wholesalers, and wholesalers and retailers.

Compensating Controls

Controls like supervision when you don’t have enough employees to adequately separate functions.

Two subsystems to the Expenditure Cycle

• Purchases

• Cash Disbursements

Purchase processing procedures

• Monitor Inventory Records

  • Purchase Requisition

    • Purchase Order

  • Conversion Cycle 

    • Transferring raw materials into the production process

  • Revenue Cycle

    • Selling finished goods to customer

• Prepare Purchase Order

• Receive Goods

  •  Blind Copy

  •  Receiving report

  •  AP Pending File

  • Receiving Report File

• Update Inventory Records

  • Standard Cost System

  • Actual Cost Inventory Ledger

• Set up Accounts Payable

  • Supplier’s invoice

  • AP Packet

  • Open AP File

  • AP Subsidiary Ledger

Purchase Requisition

Document that authorizes a purchase transaction. 

Purchase Order

Document based on a purchase requisition that specifies items ordered from a vendor or supplier.

Vouchers Payable System

• AP dept uses cash disbursement vouchers, maintains voucher register

• Post to the general Ledger

The Cash Disbursements System

• Identify Liabilities Due

• Prepare Cash Disbursement (check register, cash disbursements journal, update AP record, post to GL)

Greatest risk of misappropriation of funds

The greatest risk of misappropriation of funds occurs in accounts payable. This may take the form of payments for goods not ordered or received and to vendors that do not exist. The risk can be reduced through supervision, segregation of duties, independent verification, or automated processes.

Internal Control Objective

An objective of internal control is to mitigate the risk from errors and fraud. 

Expenditure Cycle Transactions Risks

• Unauthorized inventory purchases

• Receiving wrong items, incorrect quantities, or damaged goods

• Inaccurately recording purchases and cash disbursement transactions in journals and accounts

• Misappropriation of cash and inventory

• Unauthorized access to accounting records and confidential reports

Internal Controls for Expenditure Cycle - Unauthorized inventory purchases

• Physical Controls: Transaction authorization

• IT Controls: Automated purchase approval

Internal Controls for Expenditure Cycle -Receiving wrong items, incorrect quantities, or damaged goods

• Physical Controls: Independent verification, supervision

• IT Controls: Scanner Technology

Internal Controls for Expenditure Cycle - Inaccurately recording purchases and cash disbursement transactions in journals and accounts

• Physical Controls: Transaction Authorization, accounting records, independent verification

• IT Controls: Input data edits, error messages, automated postings to subsidiary and GL accounts, file backup

  • Following Input Data Edits Programs

    • Controls

    • Check digit

Internal Controls for Expenditure Cycle -Misappropriation of cash and inventory

• Physical Controls: Supervision, Independent Verification, segregation of duties

  • Three-Way Match

    • The Purchase Order (PO)

    • The Receiving report

    • The Supplier’s Invoice

• IT Controls: Automated three way match, and payment approval, multilevel security

Internal Controls for Expenditure Cycle - Unauthorized access to accounting records and confidential reports

• Physical Controls: access controls, segregation of duties

• IT Controls: password control, multilevel security

Payroll System General Tasks

• Personnel Department (Prepare Payroll Function)

• Production Department

• Update WIP Account

• Prepare Payroll

• Distribute Paycheck

• Prepare Accounts Payable

• Prepare Cash Disbursement

Payroll - Personnel Department (Prepare Payroll Function)

• Personnel Action Forms

  • Identify employees authorized to receive a paycheck 

  • Reflect changes in pay rates, deductions, classifications

Payroll - Production Department

• Job Tickets

  • Time the individual employee spent on each production job

• Timecards

  • Capture the time the employee is at work.

Payroll - Update WIP Account

• Forwarded to the GL function

• Labor distribution Summary

  • Summarization of labor costs in WIP accounts

Payroll - Prepare Payroll

1. Prepares the payroll register showing gross pay, deductions, overtime pay, and net pay.

2. Enters this information into the employee payroll records

3. Prepares employee paychecks

4. Sends the paychecks to the distribute paycheck function

5. Files the timecards, personnel action form, and copy of the payroll register

Payroll - Distribute Paycheck

Paymaster: the individual who distributes paychecks to employees

Payroll - Prepare Accounts Payable

AP clerk reviews the payroll register for correctness

Payroll - Prepare Cash Disbursement

• Payroll Imprest Account

  • A single account from which all paychecks for the employees are drawn.

Payroll Register

Includes: Pay rate, withholding information, and hours worked

Update General Ledger

Receives:

• LABOR DISTRIBUTION SUMMARY from cost accounting,

• DISBURSEMENT VOUCHER from accounts payable

• JOURNAL VOUCHER from cash disbursements

Basic Technology Payroll System

1. Personnel action and time and attendance information from the personnel and production departments initiate the payroll process.

2. Payroll department reconciles this information, calculates the payroll, and sends the paychecks to the paymaster for distribution to employees.

3. Cost accounting receives information regarding the time spent on each job from production. This is used for posting to accounts in the WIP subsidiary ledger.

4. AP receives payroll summary information (payroll register) from the payroll department and authorizes the cash disbursements department to deposit a single check, in the amount of the total payroll, in a bank imprest account on which the payroll is drawn.

5. The general ledger department reconciles summary information from cost accounting and AP. GL accounts are updated to reflect these transactions.

Technological steps for Payroll System

1. Human Resources: enters data in real time

2. Cost Accounting

3. Employee Timekeeping

4. Data Processing 

Payroll - Cost Accounting

Labor usage file: file in which the cost accounting department enters job cost data (real time or daily)

Payroll - Employee Timekeeping

1. Time and attendance file: generated by employees directly entering timekeeping data in real time

2. Biometric time clocks: verify employees’ identities by using fingerprint or hand-vein scan technology

3. Magnetic swipe ID cards

4. Proximity cards

5. Mobile remote devices