Chapter 1: The Information System: An Accountant’s Perspective

Internal & External Information Flows – the process of dividing the system into
smaller subsystem parts

• System Interdependency

– distinct parts are not self-contained

– they are reliant upon the functioning of

the other parts of the system

– all distinct parts must be functioning or

the system will fail

What is an Information System?

• An information system is the set of formal

• Horizontal flows of information used primarily procedures by which data are collected,
at the operations level to capture transaction processed into information, and distributed to
and operations data users.
• Vertical flows of information Information System Objectives in a Business Context
– downward flows--instructions, quotas, • The goal of an information system is to support
and budgets
– The stewardship function of
– upward flows--aggregated transaction management.
and operations data
– management decision making.
Information Requirements
– the firm’s day-to-day operations.
• Each user group has unique information
requirements. Transactions

• The higher the level of the organization, the • A transaction is a business event.
greater the need for more aggregated • Financial transactions
information and less need for detail.
– economic events that affect the assets
Information in Business and equities of the organization
• Information is a business resource: – e.g., purchase of an airline ticket
– needs to be appropriately managed • Nonfinancial transactions
– is vital to the survival of contemporary – all other events processed by the
businesses organization’s information system
What is Information? – e.g., an airline reservation--no
• Information is processed data that is used to commitment by the customer
make decisions, resolve conflicts, and/or reduce
uncertainty.

What is a System?

• A group of interrelated multiple components or

subsystems that serve a common purpose
What is Accounting Information Systems?
• System or subsystem?
• Accounting is an information system
– A system is called a subsystem when it
is viewed as a component of a larger • which identifies, collects, processes,
system. and communicates economic
information about an entity to a wide
– A subsystem is considered a system
variety of people regardless of the
when it is the focus of attention.
technology
System Decomposition vs. System Interdependency
• captures and records the financial
• System Decomposition effects of the firm’s transactions
 • distributes transaction information to Functions for transforming data into information
operations personnel to coordinate according to the general AIS model:
many key tasks
1. Data Collection
AIS vs. MIS • Capturing transaction data
• Recording data onto forms
• Accounting Information Systems (AISs) process
• Validating and editing the data
financial (e.g., sale of goods) and nonfinancial
transactions (e.g., addition of newly approved
2. Data Processing
vendor) that directly affect the processing of
financial transactions.  Classifying
 Transcribing
• Management Information Systems (MISs)  Sorting
process nonfinancial transactions that are not  Batching
normally processed by traditional AISs (e.g.,  Merging
tracking customer complaints).  Calculating
 Summarizing
 Comparing

3. Data Management
• Storing
• Retrieving
• Deleting

4. Information Generation
AIS vs. MIS: Solutions • Compiling
• Data Warehousing and Enterprise Resource • Arranging
Planning (ERP) • Formatting
• Presenting

Organizational Structure

• The structure of an organization helps to

allocate

AIS Subsystems • responsibility

• Transaction processing system (TPS) • authority

• supports daily business operations • accountability

• General Ledger/ Financial Reporting System • Segmenting by business function is a very

(GL/FRS) common method of organizing.

• produces financial statements and Functional Areas

reports • Inventory/Materials Management
• Management Reporting System (MRS) • purchasing, receiving and stores
• produces special-purpose reports for • Production
internal use
• production planning, quality control,
The General AIS Model and maintenance

• Marketing

• Distribution

• Personnel

• Finance

• Accounting

• Computer Services

Accounting Independence
Transforming the Data into Information
 • Information reliability requires accounting • Cost reductions in hardware and data entry
independence: tasks

• Accounting activities must be separate • Improved cost control responsibility

and independent of the functional areas
• Improved user satisfaction since control is closer
maintaining resources.
to the user level
• Accounting supports these functions
• Backup of data can be improved through the
with information but does not actively
use of multiple data storage sites
participate.

• Decisions-makers in these functions

require that such vital information be Potential Disadvantages of DDP
supplied by an independent source to
ensure its integrity. • Loss of control

The Computer Services Function • Mismanagement of organization-wide resources

• Hardware and software incompatibility

• Redundant tasks and data

• Consolidating tasks usually segregated

• Difficulty attracting qualified personnel

• Lack of standards

Centralized Databases in an IPU Environment: CDB vs.

DDP

• The data is retained in a central location.

Organization of Computer Services Function in a
Centralized System • Remote IPUs send requests for data.

• Central site services the needs of the remote

IPUs.

• The actual processing of the data is performed

at the remote IPU.

The Evolution of IS Models: The Flat-File Model

Organizational Structure for a Distributed Processing

System

Potential Advantages of DDP

Data Redundancy Problems
 • Data Storage - excessive storage costs of paper • economic agents (individuals and
documents and/or magnetic form departments that participate in an
economic event), and
• Data Updating - changes or additions must be
performed multiple times • and their interrelationships.

• Currency of Information - potential problem of • Entity-relationship diagrams are used to model

failing to update all affected files these relationships.

• Task-Data Dependency - user’s inability to

obtain additional information as needs change

• Data Integration - separate files are difficult to

Accountants as Information System Users
integrate across multiple users
• Accountants must be able to clearly convey
their needs to the systems professionals who
The Evolution of IS Models: The Database Model design the system.

• The accountant should actively participate

in systems development projects to ensure
appropriate systems design.

Accountants as System Designers

• The accounting function is responsible for the

conceptual system, while the computer
function is responsible for the physical system.

• The conceptual system determines the nature

of the information required, its sources, its
An REA Data Model Example destination, and the accounting rules that must
be applied.

Accountants as System Auditors

• External Auditors

• attest to fairness of financial statements

• assurance service: broader in scope

than traditional attestation audit

REA Model • IT Auditors

• The REA model is an accounting framework for • evaluate IT, often as part of external
modeling an organization’s audit

• economic resources (the assets of the • Internal Auditors

organization), • in-house IS and IT appraisal services
• economic events (phenomena that
affect changes in resources), and
 Chapter 2: Introduction to Transaction Processing
A Financial Transaction is...  Source Documents - used to capture and
formalize transaction data needed for
 an economic event that affects the assets and
transaction processing
equities of the firm, is reflected in its accounts,
and is measured in monetary terms.  Product Documents - the result of transaction
processing
 similar types of transactions are grouped
together into three transaction cycles:  Turnaround Documents - a product document
of one system that becomes a source document
 the expenditure cycle
for another system
 the conversion cycle
 Journals - a record of chronological entry
 the revenue cycle
 special journals - specific classes of
transactions that occur in high
frequency
Relationship between Transaction Cycles
 general journal - nonrecurring,
infrequent, and dissimilar transactions

 Ledger - a book of financial accounts

 general ledger - shows activity for each

account listed on the chart of accounts

 subsidiary ledger - shows activity by

detail for each account type

Flow of Information from Economic Event Into the

General Ledger

Each Cycle has Two Primary Subsystems

 Expenditure Cycle: time lag between the two

due to credit relations with suppliers:

 physical component (acquisition of

goods) Audit Trail
 financial component (cash
disbursements to the supplier)

 Conversion Cycle :

 the production system (planning,

scheduling, and control of the physical
product through the manufacturing
process)
Accountants should be able to trace in both directions.
 the cost accounting system (monitors
the flow of cost information related to Sampling and confirmation are two common
production) techniques.

 Revenue Cycle: time lag between the two due

to credit relations with customers :

 physical component (sales order

processing)

 financial component (cash receipts)

Example of Tracing an Audit Trail Verifying Accounts

Receivable
Manual System Accounting Records
  events (release of raw materials into
the production process)

 agents (inventory control clerk, vendor,

production worker)

Cardinalities

 Represent the numerical mapping between

entities:

 one-to-one

Computer-Based Systems  one-to-many

 The audit trail is less observable in computer-  many-to-many

based systems than traditional manual systems.

 The data entry and computer programs are the

physical trail.

 The data are stored in magnetic files.

Computer Files

 Master File - generally contains account data

(e.g., general ledger and subsidiary file)

 Transaction File - a temporary file containing

transactions since the last update
Data Flow Diagrams (DFD)…
 Reference File - contains relatively constant
information used in processing (e.g., tax tables,  use symbols to represent the processes, data
customer addresses) sources, data flows, and entities in a system
 Archive File - contains past transactions for  represent the logical elements of the system
reference purposes
 do not represent the physical system

Data Flow Diagram Symbols

Documentation Techniques

 Documentation in a CB environment is
necessary for many reasons.

 Five common documentation techniques:

 Entity Relationship Diagram

 Data Flow Diagrams

 Document Flowcharts

 System Flowcharts
System Flowcharts…
 Program Flowcharts
 illustrate the relationship among processes and
the documents that flow between them
Entity Relationship Diagram (ERD)  contain more details than data flow diagrams
 A documentation technique to represent the  clearly depict the separation of functions in a
relationship between entities in a system. system
 The REA model version of ERD is widely used in Symbol Set for Representing Manual Procedures
AIS. REA uses 3 types of entities:

 resources (cash, raw materials)

Flowchart Showing Stated Fact I Translated into Visual Flowchart Showing Translation of Facts 1, 2, and 3 into
Symbols Visual Symbols

Flowchart Showing All Stated Facts Translated into Flowchart Showing All Facts Translated into Visual
Visual Symbols Symbols

Program Flowcharts…

System Flowcharts…

 are used to represent the relationship between

the key elements--input sources, programs, and
output products--of computer systems

 depict the type of media being used (paper,

magnetic tape, magnetic disks, and terminals)

 in practice, not much difference between

document and system flowcharts

Database Backup Procedures

Symbol Set for Representing Computer Processes
 • Destructive updates leave no backup.

• To preserve adequate records, backup

procedures must be implemented, as shown
below:

 The master file being updated is copied

as a backup.

 A recovery program uses the backup to

create a pre-update version of the
master file.

Advantages of Batch Processing

 Organizations can increase efficiency by

grouping large numbers of transactions into
Computer-Based Accounting Systems batches rather than processing each event
separately.
 Two broad classes of systems:
 Batch processing provides control over the
 batch systems transaction process via control figures.
 real-time systems

Real-Time Systems…
Batch Processing  process transactions individually at the
 A batch is a group of similar transactions that moment the economic event occurs
are accumulated over time and then processed  have no time lag between the economic event
together. and the processing
 The transactions must be independent of one  generally require greater resources than batch
another during the time period over which the processing since they require dedicated
transactions are accumulated in order for batch processing capacity; however, these cost
processing to be appropriate. differentials are decreasing
 A time lag exists between the event and the  oftentimes have longer systems development
processing. time

Steps in Batch Processing/Sequential File

 Keystroke - source documents are transcribed

by clerks to magnetic tape for processing later

 Edit Run - identifies clerical errors in the batch

and places them into an error file

 Sort Run - places the transaction file in the

same order as the master file using a primary
key

 Update Run - changes the value of appropriate

fields in the master file to reflect the transaction

 Backup Procedure - the original master

continues to exist and a new master file is
created
Why Do So Many AIS Use Batch Processing? Group Codes

 AIS processing is characterized by high-volume,  Represent complex items or events involving

independent transactions, such are recording two or more pieces of data using fields with
cash receipts checks received in the mail. specific meaning

 The processing of such high-volume checks can  For example, a coding scheme for tracking sales
be done during an off-peak computer time. might be 04-09-476214-99, meaning:

 This is one reason why batch processing maybe

done using real-time data collection.
• Disadvantages:

– arbitrary information
Uses of Coding in AIS
– overused
 Concisely represent large amounts of complex
information that would otherwise be
unmanageable
Mnemonic Codes
 Provide a means of accountability over the
 Alphabetic characters used as abbreviations,
completeness of the transactions processed
acronyms, and other types of combinations
 Identify unique transactions and accounts
 Do not require users to memorize the meaning
within a file
since the code itself is informative – and not
 Support the audit function by providing an arbitrary
effective audit trail
 NY = New York

 Disadvantages:
Sequential Codes
 limited usability and availability
 Represent items in sequential order

 Used to prenumber source documents

 Track each transaction processed

 Identify any out-of-sequence documents

 Disadvantages:

 arbitrary information

 hard to make changes and insertions

Block Codes

 Represent whole classes by assigning each class

a specific range within the coding scheme

 Used for chart of accounts

 The basis of the general ledger

 Allows for the easy insertion of new codes

within a block

 Don’t have to reorganize the coding

structure

 Disadvantage:

 arbitrary information