S2: Enterprise and Accounting Information Systems

Enterprise Resource Planning systems

Cross functional: Supports multiple business functions. They facilitate integration of information across departments such as accounting, customer management, human resources.

Accounting Information System (AIS)

Collects, records, and stores accounting information then complies that information using accounting rules to report both financial and nonfinancial information to decision makers in an enterprise.

What are the three main subsystems AIS is made of?

1. Transaction Processing System

2. Financial Reporting System

3. Management Reporting System

Transaction Processing System

converts economic events into financial transactions (Journal entries). Typically covers sales cycle, conversion cycle and expenditure cycle.

Financial Reporting System

Aggregates daily financial information from the TPS and other sources for infrequent events such as mergers, lawsuit settlements, or natural disasters to enable timely regulatory and financial reporting.

Management Reporting System

Provides internal financial information to solve day-to-day business problems such as budgeting, variance analysis, or cost-volume-profit analysis.

What are the five objectives of AIS?

1. Record valid transactions

2. Properly classify those transactions

3. Record the transactions at their correct value

4. Record the transactions in the correct accounting period

5. Properly present the transactions and related information in the financial statements

What is the sequence of events of an AIS?

1. Transaction data from source documents is entered into the AIS by the end user

2. Original Source documents, if they exist, they are filed

3. Transactions are recorded in the appropriate journal

4. Transactions are posted to the general and subsidiary ledgers

5. Trial balances are prepared

6. Adjustments, accruals and corrections are entered

7. Financial reports are generated

What are some key functions of AIS for the revenue and cash collection cycle?

- Automatically approves or denies credit based on the customer's credit record and payment history.

- Records sales invoices in the database, and send packing slips to the shipping department

- Closes sales invoices, posts to the general ledger accounts

What are some key functions of AIS for the purchasing and disbursement cycles?

- Digitally prepares the purchase order and delivers the purchase order to the vendor

-Approves payment of invoices and sets the payment date according to the terms of the invoice.

-AIS prints and distributes the signed checks to the mail room for mailing.

What are some key functions of AIS for human resources for Payroll Cycles?

-AIS is integrated with HRMS (Human resource management system) to enable real-time changes of employment data

- Allows employees to enter timekeeping data

-Allocates labor costs to job costs

What are some key functions of AIS for production cycles?

-AIS receives a work order for a production run and this new production order is input as a new record in the work in progress subsidiary ledger.

-As labor and materials are added to the production run, the documents that reflect these events are sent to AIS and AIS automatically updates the WIP account/

What are some key functions of AIS for the fixed asset Cycle?

-AIS has a terminal for fixed asset groups to create a record of the asset subsidiary ledger that includes each asset's useful life, salvage value, depreciation methodology.

-Automatically updates general ledger and creates depreciation schedule.

What are some key functions of AIS for the Treasury cycle?

- AIS can provide various reports to assist with cash management. These cover cash receipts and other trends in cash collections and disbursements.

-Journal entries are posted for each change in cash, and the system automatically provides updated general ledger information

What are some key functions of AIS for the general ledger and reporting cycles?

-AIS updates the general ledger as various transactions occur and journal entries are posted

-AIS can automatically produce a trial balance.

-AIS produces final financial statements after adjustments are made.

-AIS automatically closes temporary accounts so that a new accounting period can begin.

Process improvement driven by IT Systems

Organizations can improve the performance of its information systems by improving business processes that provide inputs to those systems.

What are the four broad areas of process improvement that can improve AIS performance?

-Automation

- Shared services

- Outsourcing

- Offshore Operations

Automation

An umbrella term that describes the process of using technology to perform tasks without human intervention.

Shared Services

refers to seeking out redundant services, combining them, and then sharing those services within a group or organization

Outsourcing

Defined as the contracting of services to an external provider.

Offshore Operations

Offshore operations relate to outsourcing of services or business functions to an external party in a different country.

Robotic Process Automation

A specific form of business process automation that refers to the use of programs to perform repetitive tasks that do not require skilled human labor.

Natural Language Processing Software

-technology developed and used to encode, decode, and interpret human language so that it can perform tasks, interact with humans or carry out commands on other technological devices.

-siri, alexa

AI (Artificial intelligence)

AI is an umbrella term used to describe systems that are created to perform complex tasks typically requiring human intelligence and judgement.

Examples: Speech recognition or NLP (Natural language processing)

Machine Learning

A subset of artificial intelligence that enables systems to learn and improve from experience without being explicitly programmed. Uses algorithms and data to learn and make decisions.

neural networks

A form of technology that is modeled after neurons that facilitate the function of human or animal memory. This is used in machine learning applications.

Managing system changes

When implementing automation, outsourcing or advanced technology to improve business processes and organization must manage system changes so that core business functions are not disrupted.

What is Processing Integrity

Processing integrity refers to a system's ability to initiate and complete transactions so that they are valid, accurate, completed timely, and authorized to meet a company's objective.

What does the AICPA define deficiencies the design of a control in a SOC 2 engagement?

1. Necessary controls are missing

2. Existing controls that are not designed properly

How does the AICPA define a deficiency in the OPERATION of a control in a SOC 2 engagement?

1. Does not operate as designed

2. Is performed by a person who lacks authority or competence to perform the control effectively

Performing tests of controls

The service auditor is responsible for designing and performing the tests of controls, which may involve making inquiries, reperforming controls, observing service organization personnel performing the controls and reviewing documentation

COSO Internal Control Framework for IT systems

In the COSO 5 point internal control integrated framework there are two categories with principles that pertain specifically to internal control over information technology.

1. Control Activities Category

2. Information and communication category

Control Activity Category (Principle 11)

Principle 11 states that there should be general controls over technology in order to achieve organizational objectives.

Information and communication category (Principle 13)

Principle 13 states that organizations should acquire, create and use quality information in order to support internal controls.

Blockchain

Is a control system originally designed to govern the creation and distribution of bitcoin.

Blockchain Technology

Designed to ensure that bitcoin couldn't be replicated and to limit its initial creations o there was only a finite number of bitcoins.