ACCOUNTING INFORMATION SYSTEM

The Information System: An Accountant’s Perspective

Module Code: AIS 101

OVERVIEW:

This module places the subject of accounting information systems in perspective of an accountant. It
is divided into three major sections, each dealing with a different aspect of information systems.

The first section explores information environment of the firm. It identifies the types of information used
in business, describes the flows of information through an organization, and presents a framework for
viewing AIS in relation together information systems components. The section concludes with a
review of the key element of the general model for AIS.

The second section of the module deals with the impact of organization structure on AIS. It presents
the business organization as a system of interrelated functions. Extensive attention is given to the IT
and accounting segments, which play collaborative roles as the purveyors of financial information for
the rest of the organization.

The third section discusses the role of accountants as designers and auditors of AIS. The nature of the
responsibilities shared by accountants and computer professionals for developing AIS applications
are examined.

LEARNING OUTCOMES:

1. Recognize the primary information flows within the business environment.

2. Understand the difference between accounting information systems and management
information systems.
3. Understand the difference between financial transactions and non-financial transactions.
4. Know the principal features of the general model for information systems.
5. Understand the organizational structure and functional areas of business.
6. Be able to distinguish between external auditing, internal auditing, and advisory services as
they relate to accounting information systems.

INTRODUCTION:

We begin the study of AIS with the recognition that information is a business resource. Like other
business resources such as raw materials, capital, and labor, information is vital to the survival of
contemporary business organization. Every business day, vast quantities of information flow to
decision makers and other users to meet a variety of internal needs. In addition, information flows out
from the organization to the external users, such as customers, suppliers and stakeholders who have
an interest in the firm.

DISCUSSION OF THE TOPIC:

AIS 101: THE INFORMATION SYSTEM: AN ACCOUNTANT’S PERSPECTIVE Page 1 of 10

 Lesson 1: The Information Environment

1.1 Internal and External Information Flows

Figure 1. Internal and External Flows of Information.

1.2 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

1.3 Information Objectives

 The goal of an information system is:

 To support the stewardship function of management,
 To support management decision making, and
 To support the firm’s day-to-day operations.

1.4 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.

1.5 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

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 Figure 2.Transactions Processed by the Information System.

1.6 What is 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.

1.7 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

Figure 3. A Framework for Information Systems.

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 1.8 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

1.9 General Model for AIS

Figure 4. General Model for Accounting Information System

1.10 Data versus Information

 Data are facts which may or may not be processed (edited, summarized or refined) and have
no direct effect on the user’s action.
 Information causes the user to take an action that he or she otherwise could not, or would not
have taken. It is often defined simply as processed data.

1.11 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

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 1.12 Transforming the Data into Information

 Functions for transforming data into information according to the general AIS model:
1. Data Collection
 Capturing transactions data  Validating and editing the
 Recording data onto forms data
2. Data Processing
 Classifying  Merging
 Transcribing  Calculating
 Sorting  Summarizing
 Batching  Comparing
3. Data Management
 Storing  Deleting
 Retrieving
4. Information Generation
 Compiling  Formatting
 Arranging  Presenting

1.13 Database Management

 The organization’s database is its physical repository for financial and nonfinancial data.
We use the term database in the generic sense. The term could apply to filing cabinet or
computer disk. Regardless of database’s physical form, business data are organized in a
logical hierarchy. The levels in the hierarchy are as follows:
 Data attribute is the most elemental piece of potentially useful data in the database.
 Record is a complete set of attributes for a single occurrence within and entity class.
 File is a complete set of records of an identical class.

Figure 5. The Data Hierarchy

1.14 Characteristics of Useful Information

 Regardless of physical form or technology, useful information has the following characteristics:

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  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

Lesson 2: Organizational Structure and AIS

2.1 Organizational Structure

 The structure of an organization helps to allocate

 responsibility
 authority
 accountability
 Segmenting by business function is a very common method of organizing.

Network
Administration

Figure 6. Functional Areas of a Firm

2.2 The Accounting Function

 Accounting manages the financial information resource of the firm. In this regard, it plays two
important role in transaction processing:
 Capture and record the financial effects of the economic events that constitute the
firm’s transaction.
 Distribute transaction information to operations personnel to coordinate many of their
tasks
 Information reliability requires accounting independence.

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

2.3 The Information Technology Function

1. Data Processing
 Distributed Data Processing
 Reorganizing the computer services function into small information processing units
that are distributed to end users and placed under their control
 Centralized Data Processing
 All data processing is performed by one or more large computers housed at a
central site that serves users throughout the organization.
2. Systems Development and Maintenance
 System Development
 purchase commercial software; or
 build custom systems in-house from scratch
 System Maintenance
 Usually covers 80 to 90 percent of a total system’s cost may be incurred because of
maintenance activities
3. Database Administration
 headed by the database administrator who is responsible for the security and integrity of
the database
4. Network Administration
 is responsible for the effective functioning of the software and hardware that constitute the
organization’s network

Lesson 3: Accountant’s Unique Role in AIS

1. 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.
2. Accountants as system auditors
 External (Financial) Audits
 Independent attestation regarding the 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

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  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
 Internal Audit
 an independent appraisal function established within an organization to examine
and evaluate its activities as a service to the organization
 Different constituencies from external audit
 Fraud Audit
 investigate anomalies and gather evidence of fraud that may lead to criminal
conviction
 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”

END OF DISCUSSION

REFERENCES:

1. Introduction to Accounting Information Systems, Eight International Edition

James Hall
Chapter 1
(To have a digital scanned copy, contact the DWCC Library); or
2. Accounting Information Systems, Seventh Edition
James Hall
Chapter 1
http://site.iugaza.edu.ps/hmadi/files/2014/11/JAMES-AIS_unprotected.pdf

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 LEARNING ACTIVITIES:
Name:
ID Number:
Multiple Choice. Write in the space below the letter of the correct answer.
_______1. Which of the following is NOT a
financial transaction?
a. Purchase of products
b. Cash receipts
c. Update valid vendor file
d. Sale of inventory
_______2. The following are subsystems of
the Accounting Information System,
EXCEPT
a. Transaction Processing System.
b. Human Resources System.
c. General Ledger/Financial
Reporting System.
d. Management Reporting System.
_______3. Which of the following is NOT a
purpose of the Transaction Processing
System?
a. managing and reporting on the
status of financial investments
b. converting economic events into
financial transactions
c. distributing essential information
to operations personnel to
support their daily operations
d. recording financial transactions in
the accounting records
_______4. The objectives of the data
collection activity of the general model
for Accounting Information Systems are
to collect data that are
a. relevant and redundant.
b. efficient and objective.
c. efficient and redundant.
d. efficient and relevant.
_______5. Which of the following is NOT a
characteristic of effective information?
a. relevance
b. accuracy
c. summarization
d. precision
_______6. Which of the following is NOT a
database management task?
AIS 101: THE INFORMATION SYSTEM: AN ACCOUNTANT’S PERSPECTIVE
Date:
Score: Rating:
a. retrieval
b. storage
c. summarization
d. deletion
_______7. When viewed from the highest to
most elemental level, the data
hierarchy is
a. attribute, record, file.
b. record, attribute, key.
c. file, record, attribute.
d. file, record, key.
e. key, record, file.
_______8. Which is NOT an accountant’s
primary role in information systems?
a. system user
b. system auditor
c. system designer
d. system programmer
_______9. Which of the following is NOT an
objective of all information systems?
a. support for the stewardship
function of management
b. support for management
decision making
c. support for the day-to-day
operations of the firm
d. all of the above are objectives
_______10.Which of the following best
describes the activities of the materials
management function?
a. purchasing, receiving, and
inventory control
b. receiving, sales, distribution, and
purchasing
c. receiving, storage, purchasing,
and accounts payable
d. purchasing, receiving, and
storage
e. purchasing, storage, and
distribution
Page 9 of 10
 SYNTHESIS:

What am I learning from this module?

What am I finding hard or challenging about the topic?

What was the most important thing I learned from this module?

Be positive even if others are not. Work hard even if others have quit. Continue
to dream big even if others have given up on theirs – Tamthewise

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