Chapter 1 Accounting information system (AIS) processes financial and

The Information System: An Accountants Perspective some nonfinancial transactions. Three subsections:

The Information Environment The transaction processing system (TPS) which supports daily
business operations.
Information is a business resource. The general ledger/financial reporting system (GL/FRS) which
Operations management directly responsible for controlling produces reports.
day-to-day operations. The management reporting system (MRS) which provides
Middle management accountable for short-term planning and information for decision making.
coordinating activities to accomplish organizational objectives.
Top management responsible for longer-term planning and Management information system (MIS) processes nonfinancial
setting organizational objectives. transactions not processed by the AIS.
Two groups of external users: trading partners and
stakeholders. AIS Subsystems

Information Objectives The transaction processing system (TPS) :

Converts economic events into financial transactions.
The goal of an information system is to support: Records financial transactions in the accounting records.
Distributes essential financial information to support
The firms day to day operations. operations.
Management decision making. The general ledger/financial reporting system (GL/FRS) takes
The stewardship functions of management. information from the TPS and other input and:
Updates general ledger control accounts.
An Information Systems Framework Handles nondiscretionary reporting requirements.
The management reporting system (MRS) provides the
The information system is the set of formal procedures by internal information needed to manage a business and
which data are collected, processed into information, and handles discretionary reporting.
distributed to users.
A transaction is an event that affects or is of interest to the A General Model for AIS
organization and is processed by its information system as a
unit of work. End users fall into two groups :
A financial transaction is an economic event that affects the External users include creditors, stockholders,
assets and equities of the organization, is reflected in its government agencies, suppliers and customers.
accounts and is measured in monetary terms. Internal users include management and operations
A nonfinancial transaction is an event that doesnt meet the personnel.
definition of a financial transaction. Distributes essential financial information to support
operations.
 Data are facts which may or may not be processed and have Timeliness: No older than time frame of supported
no direct effect on a users actions. action.
Information causes a user to take an action that would Accuracy: Free from material errors.
otherwise not have been taken. Completeness: All essential information is present.
Data sources are financial transactions that enter the Summarization: Aggregated for the users needs.
information system for internal or external sources.
Data collection is the first operational stage in the Feedback is a form of output sent back to the system as a source
information system: of data.
Objective is to ensure data are valid, complete and free
from material errors. Functional Segmentation
Only relevant data should be captured.
Efficient collection procedures designed to collect data Materials Management
only once. purchasing, receiving and stores
Data processing tasks range from simple to complex. Production
The organizations database is its physical repository for production planning, quality control, and maintenance
financial and nonfinancial data. Marketing
Term could apply to a filing cabinet or computer disk. Distribution
Personnel
The levels in the data hierarchy: Finance

The data attribute is the most elemental piece of potentially The Accounting Function
useful data in the database.
A record is a complete set of attributes for a single occurrence Accounting manages the financial resource of the firm:
within an entity class. Captures and records transactions.
A file (or table) is a complete set of records of an identical Distributes transaction information to operations
class. personnel.
Value of information is determined by its reliability.
Database management involves three fundamental tasks: Relevance, accuracy, completeness, summarization and
storage, retrieval and deletion. timeliness.
Information generation is the process of compiling, arranging, Unreliable information has no value.
formatting, and presenting information to users. Information reliability requires accounting independence.
Regardless of physical form, useful information has: Accounting activities must be separate and independent
Relevance: Content must serve a purpose. of the functional areas maintaining custody of resources.
Timeliness: No older than time frame of supported Accounting supports these functions with information
action. but does not participate in the physical activities.

Information Technology
 Many organizations employ a combination of centralized and Due to the highly technical, dynamically changing and expense
distributed processing. of IT, many executives look to IT outsourcing.
Organization sells IT resources and leases back IT
Centralized Data Processing: services.
All data processing performed by large computer(s) in a With cloud computing data centers deliver hosted IT
common data center that serves users throughout the services over the Internet: Software as a service (SaaS),
organization. infrastructure as a service (IaaS) and platform as a
Lends itself to intra-organization communication and service (PaaS).
data sharing.
Distributed Data Processing (DDP): The Role of Accountants in AIS
Users process transactions locally with each user segment
possessing IT needs to support their operations. Accounts play a prominent role on system development teams
Users function independently and tend not to share data as domain experts, responsible for many aspects of the
and information conceptual system including specifying rules, reporting
requirements and internal control objectives.
Systems development is the process organizations use to IT professionals determine the most economical and
acquire information systems. effective technologies for the physical system, including
Can be purchased or built from scratch. data storage.
Commercial software available for general accounting Accountants perform audits which typically involve the AIS.
and industry specific applications. Sometimes called External audit is an independent attestation and opinion
turnkey systems because can be implemented with little (audit report) regarding financial statement
modification. presentation.
Custom software is developed through a formal process Requires auditors (independent CPAs) to test internal
called the system development life cycle. Requires an controls and perform substantive tests of data.
in-house team of qualified individuals. Critical element is auditor independence, which
Systems maintenance may be trivial or significant. means the auditor is free from factors that might
Between 80% - 90% of systems total cost may be influence the audit report.
incurred because of maintenance activities. Prior to SOX, accounting firms were permitted to provide both
Centrally organized companies with shared data use database advisory and attest services to clients.
administration to ensure security and integrity. SOX legislation restricts non-audit services that auditors
A network is a collection of computers and communication may provide and prohibits auditors from providing these
devices that allow users to communicate, access data and services:
applications, and share information and resources. Other accounting services including bookkeeping,
Network administration responsible for effective financial information systems design and
functioning of hardware and software. 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.

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.