CHAPTER 3: THE TRADITIONAL ACCOUNTING INFORMATION SYSTEM ARCHITECTURE
1. What is Accounting Information?
economic events = transactions
external:internal:
exchanges withaccumulation and
outsidersassignment of cost data
monetary association
monetary terms, ratios, percentages
data is both historical and future oriented
2. Who Needs Accounting Information?
internal/external users
3. Who Receives the Most Accounting Information?
managers - 1st level, middle, top
4. What is an Accounting Information System?
AIS is a delivery system for accounting information
answers the following questions:
Where does the information come from?
How is it processed?
How is it communicated to users?
Purposes:
a. Meet Statutory Reporting Requirements.
SEC, IRS, state agencies, payroll
b. Provide Reliable Accounting Information to Users.
heavily oriented to management use
external reporting is secondary
c. Protect Against Risks from:
Abuse of Accounting Data
Abuse of Accounting System
5. Computerization of AIS:
creates overlapping responsibilities of accountants and IS
professionals
a. Key Components:
Hardware
Software
People
The computer is as compared to manual systems.
faster
more accurate, reliable
can more easily handle large volumes of data
less expensive than manual operation
makes certain types of data communication possible
6. Importance of AIS to the Organization
external vs. internal monitoring of activities
good vs. bad system - developed, operated, and controlled
should last long enough to recoup investment
7. Roles of the Accounting Professionals
a. Users of AIS - project team members
b. Consultants - (MAS)
should complement the IS professional
c. Auditors - (SAS 3)
external and internal auditors
The auditor must understand the system in enough detail to know how to retrieve and assemble relevant information.
Should be able to answer the following questions:
How are data entered?
What are the outputs?
Are they reliable?
What interaction is possible between the user and the
system?
Can data get lost?
What controls are necessary? ( * key question)
8. Professional Exam Requirements:
CPA, CMA, CIA, CISA exams all cover AIS
WHAT IS A SYSTEM?
A SYSTEM IS A SET OF INTERACTING ELEMENTS
FORMING A COMPLEX WHOLE
AND UNITED IN PURSUIT OF COMMON GOALS
AND OBJECTIVES.
OPENOR CLOSED?
INTERACTS WITH ITS ENVIRONMENT OR
IS EFFECTIVELY ISOLATED FROM ITS ENVIRONMENT
EXAMPLES OF SYSTEMS?
A system is defined in general systems theory as:
a set of interacting elements
forming a complex whole
and united in pursuit of common goals or objectives.
An accounting information system is made up of:
transaction cycles and applications
that provide accounting information to
internal and external users.
A system is closed: if it is isolated from its environment.
A system is open: if significant interaction is taking
place through its inputs and outputs.
inputs = influence of the environment on the system
outputs = system's influence on the environment
feedback - where part of output is fed back as an input to the system
INPUTPROCESSOUTPUT
FEEDBACK LOOP
STRUCTURE OF THE ACCOUNTING INFORMATION SYSTEM
A. TYPES ARE AS NUMEROUS AS TYPES OF ORGANIZATIONS
LACK OF UNIFORMITY COMPLICATES OUR ABILITY TO UNDERSTAND AND INTERPRET ACCOUNTING SYSTEMS.
A SUBSYSTEM IN ONE ORGANIZATION MAY OR MAY NOT BE PRESENT IN ANOTHER ORGANIZATION.
B. TRANSACTION CYCLES
AN ATTEMPT TO ESTABLISH A COMMON FRAMEWORK TO UNIFY ESSENTIAL ELEMENTS OF DIFFERENT SYSTEMS.
TRANSACTION CYCLES ARE IDENTIFIED WITH BROADLY DEFINED FUNCTIONAL SUBSYSTEMS OF THE ACCOUNTING SYSTEM.
ACCOUNTING INFORMATION SYSTEMS AND BUSINESS ORGANIZATIONS
INFORMATION IS AS MUCH A RESOURCE (ASSET) AS PLANT AND EQUIPMENT
ACCOUNTING IS ESSENTIALLY AN INFORMATION SYSTEM.
1. IT IDENTIFIES, COLLECTS, PROCESSES AND COMMUNICATES ECONOMIC INFORMATION ABOUT AN ENTITY TO A WIDE VARIETY OF USERS.
2. INFORMATION vs. DATA
INFORMATION IS USEFUL DATA ORGANIZED SO THAT CORRECT DECISIONS CAN BE BASED UPON IT.
3. EXTERNAL vs. INTERNAL USERS
4. ECONOMIC EVENTS vs. TRANSACTIONS
AN (AIS) ACCOUNTING INFORMATION SYSTEM IS A COLLECTION OF RESOURCES (ELEMENTS) DESIGNED TO TRANSFORM FINANCIAL AND OTHER DATA INTO INFORMATION. AIS PERFORM THIS TRANSFORMATION WHETHER THEY ARE ESSENTIALLY MANUAL SYSTEMS OR THOROUGHLY COMPUTERIZED.
Computerization of AIS:
creates overlapping responsibilities of accountants and IS
professionals
a. Key Components:
Hardware
Software
People
The computer is as compared to manual systems.
faster
more accurate, reliable
can more easily handle large volumes of data
less expensive than manual operation
makes certain types of data communication possible
HOW TO REMEMBER THIS?
LOOK AT THE DEFINITION OF A SYSTEM.
EXAMPLES OF SYSTEMS.
UNIVERSITY
A BUSINESS
ALL ORGANIZATIONAL SYSTEMS SEEK OBJECTIVES THROUGH A PROCESS OF RESOURCE ALLOCATION--WHICH IS ACCOMPLISHED THROUGH MANAGERIAL DECISION MAKING.
INFORMATION HAS ECONOMIC VALUE TO THE EXTENT THAT IT ENABLES DECISION MAKING.
ISN=T THIS REALLY WHY WE USE A COMPUTER?
TO FACILITATE OUR DECISION MAKING?
THE COMPUTER IS A TOOL FOR ACCOUNTANT DECISION MAKING.
BY PROCESSING THE DATA THE AIS INFLUENCES ORGANIZATIONAL DECISION MAKING.
COULD THE COMPUTER LEAD US TO MAKE A BAD DECISION?
AUDITORS ARE REQUIRED TO UNDERSTAND
THE FLOW OF TRANSACTIONS
THROUGH COMPUTERIZED FINANCIAL SYSTEMS.
TRANSACTION PROCESSING CYCLES
1. ORGANIZATION IS FACED WITH HUNDREDS OF ECONOMIC EVENTS.
THE INITIAL TASK OF THE AIS IS TO DECIDE/ RECOGNIZE WHICH ARE TRANSACTIONS THAT SHOULD BE PROCESSED BY THE SYSTEM.
2. THEN MUST FIND A WAY TO CLASSIFY THESE TRANSACTIONS SO THAT MEANINGFUL REPORTS AND FINANCIAL STATEMENTS CAN BE GENERATED.
THE WAY WE DO THIS IS THROUGH THE USE OF CODES AND THROUGH THE USE OF TRANSACTION CYCLES (BUSINESS PROCESSES).
Transaction coding
Block and Group Codes (Chart of Accounts)
Sequential Codes (Source Document Numbers)
Mnemonic Codes (Alpha/NumericaBMemory Aids)
Decimal Codes
Transactions are coded to classify them for further processing.
Helps to establish audit trail.
Chart of Accounts provides principal classification scheme and coding.
CODES
Alternative symbolic forms to identify data
1. Sequential
Consecutive numbers are assigned to objects. Good for control: prenumbered documents such as checks, invoices, receiving reports.
2. Block
Characters in a code are grouped together (blocked) to classify objects into certain groups. Fixed length: good for chart of accounts such as Assets 1000-00, Liabilities 2000-00, etc.
3. Group (within Block)
Subdivisions: part of block to identify subsets of data. Subclassifications are implemented within each block of the code. 1000B01=Home Office, 1000B02=Store, etc.
4. Mnemonic
A code that is similar to the pronunciation of the object that is coded. Use of letters/numbers as memory aids: A185R14B = Auto Tire, size 185 x 14 radial, etc.
5. Decimal
Allows for unlimited expansion to the right of the decimal point in the code. Expands for new items. Correspondence for medical insurance for officers, employees, etc. 160.1, 160.2
TRANSACTION CYCLES or BUSINESS PROCESSES
SALES/COLLECTIONS PROCESS - Events related to the distribution of goods and services to other entities and the collection of related payment.
ACQUISITION/PAYMENT PROCESS- Events related to the acquisition of goods and services from other entities and the settlement of the obligation.
CONVERSION BUSINESS PROCESS - Events related to the transformation of resources into goods and services.
HUMAN RESOURCE BUSINESS PROCESS – Events related to hiring, training, compensation of employees (payroll processes).
FINANCING BUSINESS PROCESS - Events related to the acquisition and management of capital funds, including cash.
WHAT JOURNAL ENTRIES FALL INTO EACH CYCLE?
NON-OPERATING
FINANCIAL REPORTING CYCLE - obtains accounting and operating data from other cycles and processes these into financial reports.
ALL TRANSACTION DATA EVENTUALLY FLOW INTO THE GENERAL LEDGER.
TRANSACTIONS MAY BE INITIATED :
by personnel within the organization
by the computer itself through programmed instructions
by outside bodies such as taxing or regulatory bodies
by the passage of time, i.e. depreciation
TRANSACTION FLOWS in a Traditional Accounting System
a. Flow of Transactions
Captured and Coded to Account
Recorded in Records and Files
b. Flow Diagram of Conventional Accounting
Source Document
Journalize in Appropriate Journal (by Transaction Date)
Post to Account in Ledger
Make Unadjusted Trial Balance
Post Adjusting Journal Entries
Make Adjusted Trial Balance
Prepare Financial Statements
Post Closing Journal Entries
Prepare Post Closing Trial Balance
TRANSACTION VS. MASTER FILES
TRANSACTION FILES: capture detailed transaction data, usually in chronological order, providing a kind of diary of the organization's financial activities. They are analogous to paper journals or registers of manual accounting systems. They are created to suit major types or transactions.
MASTER FILES: correspond to the general ledger and the subsidiary ledgers in manual based accounting systems.
TO DRAW ACCOUNTING PERSPECTIVE INTO THE AIS COURSE:
1. THINK OF A SET OF FINANCIAL STATEMENTS - AN ANNUAL REPORT
2. LOOK AT EACH ACCOUNT BALANCE IN THE BALANCE SHEET, INCOME STATEMENT, ETC.
3. TIE THE ACCOUNT BALANCE TO THE SYSTEMS OR ACCOUNTING CYCLE THAT GENERATES THAT BALANCE - THE JOURNAL ENTRIES THAT FEED TRANSACTIONS INTO THAT CYCLE
4. THINK OF THE DOCUMENTS THAT ARE AGGREGATED TO INITIATE THESE JOURNAL ENTRIES - THE FLOW OF THESE DOCUMENTS WILL BE MAPPED OR DIAGRAMMED IN THE DOCUMENT AND SYSTEMS FLOWCHARTS THAT WE DRAW TO REPRESENT THE SYSTEM
5. THE DOCUMENT IS USED TO RECORD THE TRANSACTION
SO WE CAN GO FROM DOCUMENTS TO THE FINANCIAL STATEMENTS = AGGREGATION
OR FROM THE FINANCIAL STATEMENTS BACK TO THE SUPPORTING DOCUMENTS = DISAGGREGATION
CRITICISMS OF TRADITIONAL APPROACH
1. DUPLICATION OF PROCESSES AND DATA
2. ONLY A SUBSET OF ALL BUSINESS EVENTS UNDERLYING THE TRANSACTION IS REPRESENTED--ONLY THOSE THOSE EVENTS DEEMED ACCOUNTING TRANSACTIONS ARE INCLUDED
3. PROCESSING MAY BE UNTIMELY
4. CAPTURING ONLY LIMITED INFORMATION--LIMITED CHARACTERISTICS ABOUT THE EVENTS
5. LEVEL OF AGGREGATION OR SUMMARIZATION
6. ONLY ONE VIEW OF DATA IS PRESENTED
TO ANSWER THESE CRITICISMS WE MUST:
REDEFINE EVENTS
IDENTIFY BUSINESS RISK ASSOCIATED WITH EACH EVENT
REDESIGN THE INFORMATION SYSTEM
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