Chapter 1 – The Information System: An Accountant’s A Framework for Information Systems

Perspective
Transactions Processed by the Information Systems
The Information Environment
 Accounting information systems (AIS) are
specialized subset of information systems that
processes financial transactions.
 Information flows are the flows of information into
and out of an organization.
 Trading partners is a category of external user,
including customer sales and billing information,
purchase information for suppliers, and inventory
receipts information.
 Stakeholders are entities either inside or outside an
organization that have a direct or indirect interest in
the firm.

Internal and External Flows of Information

Information Objectives
Three fundamental objectives that are common to all
organizations:
 To support the firm’s day-to-day operations.
 To support management decision making.
 To support the stewardship function of management.
An Information Systems Framework
 The information system is the set of formal
procedures by which data are collected, processed
into information, and distributed to users.
 A management information system (MIS) is a system
that processes nonfinancial transactions not normally
processed by traditional accounting information
systems.
 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.
 A financial transaction is an economic event that
affects the assets and equities of the organization, is
measured in financial terms, and is reflected in the
accounts of the firm.
 Nonfinancial transactions are events that do not meet
the narrow definition of a financial transaction.
 The Accounting Information System
 The transaction processing system (TPS) is an
activity composed of three major subsystems—the
revenue cycle, the expenditure cycle, and the
conversion cycle.
 The general ledger/financial reporting system
(GL/FRS) is a system that produces traditional
financial statements, such as income statements,
balance sheets, statements of cash flows, tax returns,
and other reports required by law.
 The management reporting system (MRS) is a system
that provides the internal financial information
needed to manage a business.
 The Management Information System
 The Need to Distinguish between AIS and MIS
Examples of MIS Applications in Functional Areas

Data Sources
 Data sources are financial transactions that enter the
AIS Subsystems information system from either internal or external
 Transaction Processing System sources.
 General Ledger/Financial Reporting Systems Data Collection
 Nondiscretionary reporting is a type of reporting  Data collection is the first operational stage in the
in which the organization has few or no choices information system
in the information it provides. Much of this Data Processing
information consists of traditional financial  Data Processing is a group that manages the
statements, tax returns, and other legal computer resources used to perform the day-to-day
documents. processing of transactions.
 Management Reporting System Database Management
 Discretionary reporting is a type of reporting in  Database is a physical repository for financial data.
which the organization can choose what  DATA ATTRIBUTE
information to report and how to present it.  RECORD
 FILE
A General Model For AIS  DATABASE MANAGEMENT TASKS: Database
The general model for AIS is a model that describes all management is a special software system that is
information systems, regardless of their technological programmed to know which data elements each user
architecture. is authorized to access.

End Users The Data Hierarchy

 End users are users for whom the system is built.
 External users include creditors, stockholders,
potential investors, regulatory agencies, tax
authorities, suppliers, and customers.
 Internal users include management at all levels of
the organization as well as operations personnel.
 DATA VERSUS INFORMATION: Data are facts,
which may or may not be processed (edited,
summarized, or refined) and which have no direct
effect on the user. Information causes the user to
take an action that he or she otherwise could not, or
would not, have taken.

General Model for Accounting Information Systems

Information Generation
 Information generation is the process of compiling,
arranging, formatting, and presenting information to
users.
 RELEVANCE
 TIMELESS
 ACCURACY
 COMPLETENESS
 SUMMARIZATION
Feedback
 Feedback is a form of output that is sent back to the The Accounting Function
system as a source of data. The Value of Information
 Reliability is the property of information that makes
Organizational Structure and AIS it useful to users.
 Physical AIS comprise technologies of various types Accounting Independence
and configurations as well as people and tasks from  Independence is the separation of the record-keeping
across the organization. function of accounting from the functional areas that
 The sales processing system, which is a subsystem of have custody of physical resources.
the revenue cycle, includes the following
organization functions: sales, credit, inventory Information Technology
control, warehousing, shipping, billing, accounts Data Processing
receivable, general ledger, and data processing.  Centralized data processing is a model under which
all data processing is performed by one or more large
Functional Segmentation computers, housed at a central site, that serve users
Segments are functional units of a business organization. throughout the organization.
Materials Management  Distributed data processing (DDP) is reorganizing the
 Purchasing IT function into small information processing units
 Receiving (IPUs) that are distributed to end users and placed
 Stores under their control.
Production Systems Development and Maintenance
 Production planning involves scheduling the flow of  SYSTEMS DEVELOPMENT: Commercial software
materials, labor, and machinery to efficiently meet is pre-coded software that a user purchases from a
production needs. software vendor. Commercial software packages are
 Quality control monitors the manufacturing process sometimes called turnkey systems because they often
at various points to ensure that the finished products can be implemented by the user with little or no
meet the firm’s quality standards. modification.
 Maintenance keeps the firm’s machinery and other
manufacturing facilities in running order.
Marketing
Distribution
Personnel
Finance

Functional Areas of
a Firm

Functions from
Resources
Centralized Data Processing Model  IT outsourcing is contracting with a third-party
vendor to take over the costs, risks, and
responsibilities associated with maintaining an
effective corporate IT function, including
management of IT assets and staff and delivery of IT
services such as data entry, data center operations,
applications development, applications maintenance,
and network management.
 Cloud computing is a location-independent
computing variant of IT outsourcing whereby shared
data centers deliver hosted IT services over the
Internet. These services fall into three categories:
software as a service (SaaS), infrastructure as a
service (IaaS), and platform as a service (PaaS).
 Software as a service (SaaS) is a software distribution
model in which service providers host applications
Distributed Data Processing Model for client organizations over a private network or the
Internet.
 Infrastructure as a service (IaaS) is the provision of
computing power and disk space to client firms who
access it from desktop PCs. The client firm can
configure the infrastructure for storage, networks, and
other computing needs, including running operating
systems and data processing applications.
 Platform as a service (PaaS) enables client firms to
develop and deploy onto the cloud infrastructure
consumer-generated applications using facilities
provided by the PaaS vendor.

The Role of Accountants in AIS

 Accountants are involved in both the design and the
audit of AIS.
 Accountants play a prominent role on systems
development teams as domain experts.
 SYSTEMS DEVELOPMENT (continued): Turnkey
 The IT professionals on the team are responsible for
systems are completely finished and tested systems
the physical system.
that are ready for implementation. Custom software is
software built to individual specifications. Custom
Accountants as System Designers
systems are more expensive than commercial
 Conceptual system is the production of several
packages. Systems development life cycle is the
alternative designs for a new system.
software development process. Enterprise resource
 Physical system is the medium and method for
planning (ERP) is a system assembled of
capturing and presenting the information.
prefabricated software components.
 Data storage is an efficient information system that
 SYSTEMS MAINTENANCE
captures and stores data only once and makes this
 Database Administration
single source available to all users who need it.
Network Administration
Accountants as System Auditors
 A network is a collection of interconnected
 Auditor is an expert who expresses an opinion about
computers and communications devices that allows
the fairness of a company’s financial statements.
users to communicate, access data and applications,
 Attest function is an independent auditor’s
and share information and resources.
responsibility to opine as to the fair presentation of a
 Network administration is being responsible for the
client firm’s financial statement.
effective functioning of the software and hardware
 Substantive tests are tests that determine whether
that constitute the organization’s network. This
database contents fairly reflect the organization’s
involves configuring, implementing, and maintaining
transactions.
network equipment.
 Attest Service versus Advisory Services
Outsourcing the IT Function
  Tests of controls are tests that establish
whether internal controls are functioning
properly.
 IT auditing is the review of the computer-
based components of an organization. The
audit is often performed as part of a broader
financial audit.
 Internal Audits
 Internal auditing is the appraisal function
housed within the organization.
 External versus Internal Auditors
 Fraud Audits
 The Role of the Audit Committee
 Designer/Auditor Duality