CHAPTER 1

THE INFORMATION SYSTEM: AN

ACCOUNTANT’S PERSPECTIVE

Accounting Information Systems, 8e

James A. Hall
 LEARNING OBJECTIVES

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.
INTERNAL & EXTERNAL INFORMATION FLOWS
 INTERNAL INFORMATION FLOWS

• Horizontal flows of information used primarily at the

operations level to capture transaction and operations
data.
• Vertical flows of information
downward flows — instructions, quotas, and budgets
upward flows — aggregated transaction and operations
data
 INFORMATION OBJECTIVES

• The goal of an information system is to

support
To support the stewardship function of
management,
To support management decision making,
and
 To support the firm’s day-to-day operations
 WHAT IS AN INFORMATION SYSTEM?

An information system is the set of

formal procedures by which data are
collected, processed into
information, and distributed to
users.
 TRANSACTIONS

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.
• Financial transactions
economic events that affect the assets and equities of the organization
e.g., purchase of an airline ticket
• Nonfinancial transactions
all other events processed by the organization’s information system
e.g., an airline reservation — no commitment by the customer
TRANSACTIONS
 WHAT IS AN ACCOUNTING
INFORMATION SYSTEM?
Accounting is an information system.
It identifies, collects, processes, and communicates
economic information about a firm using a wide
variety of technologies.
It captures and records the financial effects of the
firm’s transactions.
It distributes transaction information to operations
personnel to coordinate many key tasks.
 AIS VERSUS MIS

Accounting Information Systems (AIS) process

 financial transactions; e.g., sale of goods
 nonfinancial transactions that directly affect the processing of
financial transactions; e.g., addition of newly approved vendors.
Management Information Systems (MIS) process
 nonfinancial transactions that are not normally processed by
traditional AIS; e.g., tracking customer complaints
AIS VERSUS MIS?
 AIS SUBSYSTEMS

• Transaction Processing System (TPS)

Supports daily business operations
• General Ledger / Financial Reporting System
(GL/FRS)
Produces financial statements and reports
• Management Reporting System (MRS)
Produces special-purpose reports for internal use
GENERAL MODEL FOR AIS
 DATA SOURCES

Data sources are financial transactions that enter the information

system from internal and external sources.
External financial transactions are the most common source of
data for most organizations.
 E.g., sale of goods and services, purchase of inventory, receipt
of cash, and disbursement of cash (including payroll)
Internal financial transactions involve the exchange or movement
of resources within the organization.
 E.g., movement of raw materials into work-in-process (WIP),
application of labor and overhead to WIP, transfer of WIP into
finished goods inventory, and depreciation of equipment
TRANSFORMING THE DATA INTO INFORMATION

Functions for transforming data into information

according to the general AIS model:
1. Data Collection
2. Data Processing
3. Data Management
4. Information Generation
TRANSFORMING THE DATA INTO INFORMATION

Functions for transforming data into information

according to the general AIS model:
1. Data Collection Capturing transaction data
2. Data Processing Recording data onto forms
3. Data Management Validating and editing the
4. Information Generation data
TRANSFORMING THE DATA INTO INFORMATION

Functions for transforming data into information

according to the general AIS model:
1. Data Collection Classifying Calculating
2. Data Processing Transcribing Summarizin
3. Data Management Sorting g
4. Information Generation Batching Comparing
Merging
TRANSFORMING THE DATA INTO INFORMATION

Functions for transforming data into information

according to the general AIS model:
1. Data Collection Storing
2. Data Processing Retrieving
3. Data Management Deleting
4. Information Generation
TRANSFORMING THE DATA INTO INFORMATION

Functions for transforming data into information

according to the general AIS model:
1. Data Collection Compiling
2. Data Processing Arranging
3. Data Management Formatting
4. Information Generation Presenting
 CHARACTERISTICS OF USEFUL INFORMATION

Regardless of physical form or technology, useful information

has the following characteristics:
• Relevance: serves a purpose
• Timeliness: no older than the time period of the action it supports
• Accuracy: free from material errors
• Completeness: all information essential to a decision or task is
present
• Summarization: aggregated in accordance with the user’s needs
 ORGANIZATIONAL STRUCTURE

• The structure of an organization helps to allocate

responsibility
authority
accountability
• Segmenting by business function is a very common
method of organizing.
 FUNCTIONAL SEGMENTATION

• Materials Management • Marketing

purchasing, receiving • Distribution
and stores • Personnel
• Production • Finance
production planning, • Accounting
quality control, and • Information Technology
maintenance
 ACCOUNTING INDEPENDENCE

• Information reliability requires accounting independence.

• Accounting activities must be separate and independent of
the functional areas maintaining resources.
• Accounting supports these functions with information but
does not actively participate.
• Decision makers in these functions require that such vital
information be supplied by an independent source to ensure
its integrity.
 IT: DATA PROCESSING

Distributed Data Centralized Data

Processing Most companies fall in between. Processing

Reorganizing the All data processing is

computer services performed by one or more
large computers housed at a
function into small
central site that serves users
information throughout the organization.
processing units that Primary areas:
are distributed to end  database administration
users and placed  data processing
under their control.  systems development
 systems maintenance
DISTRIBUTED DATA PROCESSING MODEL
 ACCOUNTANT’S UNIQUE ROLES IN AIS

• Accountants must be able to clearly convey their needs to

the systems professionals who design the system.
• The accountant should actively participate in systems
development projects to ensure appropriate systems design.
 ACCOUNTANTS AS SYSTEM DESIGNERS

• Accountants are the domain experts and responsible for the

conceptual design of the AIS.
• Conceptual system design involves specifying the criteria
for identifying delinquent customers and the information
that needs to be reported.
• As the domain expert, the accountant determines the nature
of the information required, its sources, its destination, and
the accounting rules that need to be applied.
 ACCOUNTANTS AS SYSTEM AUDITORS

• External (Financial) Audits

• Internal Audit
• Fraud Audit
 ACCOUNTANTS AS SYSTEM AUDITORS

• External (Financial) Audits

• Internal Audit • Independent attestation regarding the
• Fraud Audit fairness of the presentation of
financial statements
• Two types of evidence
Tests of controls
Substantive tests
 ATTEST SERVICE VERSUS ADVISORY SERVICES

• SOX restricts non-audit services to clients. Auditor may not provide:

bookkeeping or other services related to the accounting records or financial statements
of the audit client
financial information systems design and implementation
appraisal or valuation services, fairness opinions, or contribution-in-kind reports
actuarial services
internal audit outsourcing services
management functions 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.
 ACCOUNTANTS AS SYSTEM AUDITORS

• External (Financial) Audits

• Internal Audit • an independent appraisal function
• Fraud Audit established within an organization to
examine and evaluate its activities as
a service to the organization.
• Different constituencies from
external audit
 ACCOUNTANTS AS SYSTEM AUDITORS

• External (Financial) Audits

• Internal Audit • investigate anomalies and gather evidence of
fraud that may lead to criminal conviction.
• Fraud Audit
• Initiated
• When corporate management suspects
employee fraud.
• Or, boards of directors hire fraud auditors
to investigate their own suspected
executives
 THE ROLE OF THE AUDIT COMMITTEE

A subcommittee of the Board of Directors that

has special responsibilities regarding audits.
• an independent “check and balance” for the
internal audit function and liaison with external
auditors
• Usually three people (outsiders)
• SOX requires one to be a “financial expert”