Chapter 1 AIs

Rift Valley University Nekemte Campus Year 2016, Department of Accounting
CHAPTER ONE
ACCOUNTING INFORMATION SYSTEM AN OVERVIEW
1.1. An Overview Of Accounting Information System
 The Information Environment
We begin the study of AIS with the recognition that information is a business resource. Like the
other business resources of raw materials, capital, and labor, information is vital to the survival
of the contemporary business organization.
In 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
external users, such as customers, suppliers, and stakeholders who have an interest in the firm.
 What Is a System?
For many, the term system generates mental images of computers and programming. In fact, the
term has much broader applicability. Some systems are naturally occurring, whereas others are
artificial. Natural systems range from the atom - a system of electrons, protons, and neutrons - to
the universe - a system of galaxies, stars, and planets. All life forms, plant and animal, are
examples of natural systems. Artificial systems are man made. These systems include everything
from clocks to submarines and social systems to information systems.
 A system is a group of two or more interrelated components or subsystems that

serve a common purpose.
Systems are almost always composed of smaller subsystems, each performing a specific function
important to and supportive of the larger system for which it is a part.
 Elements of a System
Regardless of their origin, all systems possess some common elements. To specify: Let’s analyze
the general definition to gain an understanding of how it applies to businesses
and information systems.
i. Multiple Components. A system must contain more than one part. For example, a yo-
yo carved from a single piece of wood and attached to a string is a system. Without
the string, it is not a system.
ii. Relatedness. A common purpose relates the multiple parts of the system. Although
each part functions independently of the others, all parts serve a common objective. If
a particular component does not contribute to the common goal, then it is not part of
the system. For instance, a pair of ice skates and a volleyball net are both
components. They lack a common purpose, however, and thus do not form a system.
iii. System versus Subsystem. The distinction between the terms system and subsystem is
a matter of perspective. For our purposes, these terms are interchangeable. A system
is called a subsystem when it is viewed in relation to the larger system of which it is a
part. Likewise, a subsystem is called a system when it is the focus of attention.
Animals, plants, and other life forms are systems. They are also subsystems of the
ecosystem in which they exist. From a different perspective, animals are systems
composed of many smaller subsystems, such as the circulatory subsystem and the
respiratory subsystem.
ACCOUNTING INFORMATION SYSTEM 1

iv. Purpose. A system must serve at least one purpose, but it may serve several. Whether
a system provides a measure of time, electrical power, or information, serving a
purpose is its fundamental justification. When a system ceases to serve a purpose, it
should be replaced.
 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.
We have two broad classes of systems emerge from the decomposition: the accounting
information system (AIS) and the management information system (MIS).
The distinction between AIS and MIS centers on the concept of a transaction. The information
system accepts input, called transactions, which are converted through various processes into
output information that goes to users.
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. Transactions fall into two classes: financial transactions
and non financial transactions.
A financial transaction is an economic event that affects the assets and equities of the
organization, is reflected in its accounts, and is measured in monetary terms. Sales of products to
customers, purchases of inventory from vendors, and cash disbursements and receipts are
examples of financial transactions. Every business organization is legally bound to correctly
process these types of transactions.
Nonfinancial transactions are events that do not meet the narrow definition of a financial
transaction. For example, adding a new supplier of raw materials to the list of valid suppliers is
an event that may be processed by the enterprise’s information system as a transaction. Important
as this information obviously is, it is not a financial transaction, and the firm has no legal
obligation to process it correctly- or at all.
 An accounting information system
An accounting information system is a collection of resources such as people and equipment
designed to transform financial data into information. The information is communicated to a
wide variety of decision makers. AISs perform this transformation whether they are essentially
manual or computerized.
Organizations depend on information systems in order to stay competitive. Information is just as

much as a resource as plant and equipment. Productivity, which is crucial to staying competitive,
can be increased through better information systems. Accounting as an information system
identifies, collects, processes and communicates economic information about an entity to a wide
variety of people.
AIS consists of five functions:
1. The people who operate the system and perform various functions.
2. The procedures both manual and automated involved in collecting, processing, and
storing data about organization’s activities.
3. The data about the organization’s transactions

4. The software used to process the organization’s data
5. The information technology infrastructure including computers, peripheral devices, and
network communication devices.
The five components together enable AIS to fulfill three important functions in any organization.
1. Collecting and storing data
2. transferring data into information
3. Providing adequate controls to safeguard the organization’s assets including its data, to
ensure that the data are available when needed and are accurate and reliable.
Information is data that have been organized and processed to provide meaning to a user.
Usually, more information and better information translates into better decisions.
Characteristics that make information useful are:
1. Relevance: It reduces uncertainty by helping you predict what will happen or confirm
what already has happened.
2. Reliability : It’s dependable, i.e., free from error or bias and faithfully portrays events
and activities
3. Completeness: It doesn’t leave out anything that’s important
4. Timeliness: You get it in time to make your decision.
5. Understandability: It’s presented in a manner you can comprehend and use.
6. Verifiability: A consensus notion—the nature of the information is such that different
people would tend to produce the same result.
7. Accessibility: You can get to it when you need it and in a format you can use.
 Why Study the AIS?
An effective AIS is essential to the organization’s long run success through :
 It enables monitoring the events that occur and how well an organization works.
 It also tracks the effect of various events on the resources that the organization
controls.
 Information about the agents who participate in the events is used to assign
responsibility for actions taken.
Three factors influence the design of AIS:
 Developments in information technology (IT)
 The organization’s strategy
 The development culture
Organizational Strategy
Culture
AIS
Information
Technology

IT is profoundly changing the way that accounting and many other business activities are
performed. It is also essential to know the costs and benefits of new IT developments. This
requires developing basic understanding of business strategies and how IT can be used to
implement those strategies as well as how new developments in IT create an opportunity to
modify those strategies.
Moreover, because the AIS functions within an organization, it should be designed to reflect the
values of that organizational culture. The design of AIS also influences the organizational culture
by controlling the flow of information within the organization. For example, an AIS that makes
information easily accessible and widely available is likely to increase pressures for more
decentralized and autonomy.
1.2. The Role of the AIS in the Value Chain
The objective of most organizations is to provide value to their customers. This requires
performing a number of different activities. These activities are conceptualized as forming a
value chain. An organization’s value chain consists of five primary activities that directly
provide value to its customers. These are:
1. Inbound logistics- consists of receiving, storing, and distributing the materials that are
inputs used by the organization to create the services and products that it sells.
2. Operations- activities that transform inputs into final products or services.
3. Outbound logistics- are the activities involved in distributing finished products or
services to customers.
4. Marketing and sales- refers to the activities involved in helping customers to buy the
organization’s products or services.
5. Service- activities that provide post sale support to customers. Examples are repairs and
maintenance services.
Organizations also perform a number of other support activities that enable the five primary
activities to be performed efficiently and effectively. Those support activities can be grouped
into four categories:
1. Firm Infrastructure- refers to the accounting, finance, legal support, and general
administrative activities that are necessary for any organization to function. The AIS is
part of the firm infrastructure.
2. Human resources- activities that include recruiting, hiring, training, and providing
employee benefits and compensation.
3. Technology- activities that improve a product or service. Examples include research and
development, improvements in information technology, web site development, and
product design.
4. Purchasing- includes all the activities involving in procuring raw materials, supplies,
machinery, and the buildings used to carry out the primary activities.
Refer the following diagram :
1. Firm Infrastructure
2. Human Resources
3. Technology
4. ACCOUNTING INFORMATION SYSTEM
Purchasing 4
1. Inbound 2. Operations 3. Outbound 4. Marketing 5. Services

logistics logistics and sales
It shall be recalled that systems are often composed of subsystems. Thus, each step in an
organization’s value chain is itself a system consisting of a set of activities. For example, the
sales and marketing step includes such activities as market research, calling on customers, order
processing, and credit approval. In addition, an organization’s value chain is itself a part of a
larger system. Organizations interact with suppliers, distributors, and customers.
How Can AIS Add Value to an Organization?
The value chain model shows that the AIS is a support activity. Thus, AIS can add value to the
organization by providing accurate and timely information so that the five primary value chain
activities can be performed more effectively and efficiently. A well-designed AIS can do this by:
1. Improving the quality and reducing the cost of products and services- an AIS for example
can monitor machinery so that operators are notified immediately when the process falls
outside acceptable quality limits. This helps not only maintain product quality but also
reduces the amount of wasted materials and the costs of having to rework anything.
2. Improving efficiency- a well designed AIS can help improve the efficiency of operations
by providing more timely information. For example, a just in time manufacturing
approach requires constant, accurate, up to date information about raw materials
inventories and their costs.
3. Improved decision making- an AIS can improve decision making by providing accurate
information in a timely manner.
4. Sharing of knowledge- a well-designed AIS can make it easier to share knowledge and
expertise, perhaps thereby improving operations and even providing a competitive
advantage.
A well designed AIS can also help an organization profit by improving the efficiency and
effectiveness of its supply chain. For example, allowing customers to directly access the
company’s inventory and sales order entry systems can reduce the cost of sales and marketing
activities. Moreover, if such access reduces customers’ costs and time of ordering, both sales and
customer retention rates may increase.

CHAPTER 2
2. AIS APPLICATIONS
2.1. THE REVENUE CYCLE: SALES AND CASH COLLECTIONS

• The revenue cycle is a recurring set of business activities and related information
processing operations associated with:
– Providing goods and services to customers
– Collecting their cash payments
• The primary external exchange of information is with customers.
REVENUE CYCLE BUSINESS ACTIVITIES
• Four basic business activities are performed in the revenue cycle:

– Sales order entry – Billing

– Shipping – Cash collection
SALES ORDER ENTRY

• Sales order entry is performed by the sales order department.
• The sales order department typically reports to the VP of Marketing.
• Steps in the sales order entry process include:
– Take the customer’s order
– Check the customer’s credit
– Check inventory availability
– Respond to customer inquiries (may be done by customer service or sales order
entry)
SHIPPING
• The second basic activity in the revenue cycle is filling customer orders and shipping the
desired merchandise.
• The process consists of two steps
– Picking and packing the order
– Shipping the order
• The warehouse department typically picks the order
• The shipping departments packs and ships the order
• Both functions include custody of inventory and ultimately report to the VP of
Manufacturing.
• The clerk then records online:
– The sales order number – The quantities shipped
– The item numbers ordered
• This produces
– Updates the quantity-on-hand field in the inventory master file
– Produces a packing slip
– Produces multiple copies of the bill of lading
• The bill of lading is a legal contract that defines responsibility for goods in transit
• It identifies: The carrier, the source, the destination, Special shipping instructions, who
pays for the shipping
The shipment is accompanied by:
– The packing slip
– A copy of the bill of lading
– The freight bill
• (Sometimes bill of lading doubles as freight bill)
• What happens to other copies of the bill of lading?
– One is kept in shipping to track and confirm delivery
– One is sent to billing to trigger an invoice
– One is retained by the freight carrier

BILLING
• The third revenue cycle activity is billing customers.
• This activity involves two tasks: Invoicing and Updating accounts receivable
• Accurate and timely billing is crucial.
• Billing is an information processing activity that repackages and summarizes information
from the sales order entry and shipping activities
• Requires information from:
– Shipping Department on items and quantities shipped
– Sales on prices and other sales terms
• The basic document created is the sales invoice. The invoice notifies the customer of:
– The amount to be paid
– Where to send payment
• An integrated AIS may merge the billing process with sales and marketing by using data
about a customer’s past purchases to send information about related products and services
with his monthly statement.
• The accounts receivable function reports to the controller
• This function performs two basic tasks
– Debits customer accounts for the amount the customer is invoiced
– Credits customer accounts for the amount of customer payments
• Two basic ways to maintain accounts receivable:
– Open-invoice method – Balance forward method
• OPEN-INVOICE METHOD:
– Customers pay according to each invoice
– Two copies of the invoice are typically sent to the customer
• Customer is asked to return one copy with payment
• This copy is a turnaround document called a remittance advice
– Advantages of open-invoice method
• Conducive to offering early-payment discounts
• Results in more uniform flow of cash collections
– Disadvantages of open-invoice method
• More complex to maintain
• BALANCE FORWARD METHOD:
– Customers pay according to amount on their monthly statement, rather than by
invoice
– Monthly statement lists transactions since the last statement and lists the current
balance
• The tear-off portion includes pre-printed information with
customer name, account number, and balance
• Customers are asked to return the stub, which serves as the
remittance advice

• Remittances are applied against the total balance rather than

against a specific invoice
– Advantages of balance-forward method:
• It’s more efficient and reduces costs because you don’t bill for
each individual sale
• It’s more convenient for the customer to make one monthly
remittance
• Cycle billing is commonly used with the balance-forward method
– Monthly statements are prepared for subsets of customers at different times.
• EXAMPLE: Bill customers according to the following schedule:
– 1st week of month—Last names beginning with A-F
– 2nd week of month—Last names beginning with G-M and so on
• Advantages of cycle billing:
– Produces more even cash flow
– Produces more even workload
– Doesn’t tie up computer for several days to print statements
• EXCEPTION PROCEDURES: ACCOUNT ADJUSTMENTS AND WRITE-OFFS:
– Adjustments to customer accounts may need to be made for:
• Returns
• Allowances for damaged goods
• Write-offs as uncollectible
– These adjustments are handled by the credit manager
• If there’s a return, the credit manager:
– Receives confirmation from the receiving dock that the goods were actually
returned to inventory
– Then issues a credit memo which authorizes the crediting of the customer’s
account
• If goods are slightly damaged, the customer may agree to keep them for a price
reduction
– Credit manager issues a credit memo to reflect that reduction
• If repeated attempts to collect payment fail, the credit manager may issue a credit
memo to write off an account:
• NOTE: Since accounts receivable handles the customer accounts, why does someone else
have to issue the credit memos?
– EXAMPLE; An accounts receivable employee could allow a relative or friend (or
even himself) to run up an account with the company and then simply write the
account off or credit it for returns and allowances.
• Having the credit memos issued by the credit manager is good segregation of duties between:
– Authorizing a transaction (write-off)
– Recording the transaction

CASH COLLECTIONS
• The final activity in the revenue cycle is collecting cash from customers
• The cashier, who reports to the treasurer, handles customer remittances and deposits them
in the bank
• Because cash and checks are highly vulnerable, controls should be in place to discourage
theft
– Accounts receivable personnel should not have access to cash (including checks)
CONTROL: OBJECTIVES, THREATS, AND PROCEDURES

• In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls
to ensure that the following objectives are met:
– All transactions are properly authorized
– All recorded transactions are valid
– All valid and authorized transactions are recorded
– All transactions are recorded accurately
– Assets are safeguarded from loss or theft
– Business activities are performed efficiently and effectively
– The company is in compliance with all applicable laws and regulations
– All disclosures are full and fair
• There are several actions a company can take with respect to any cycle to reduce threats of
errors or irregularities. These include:
– Using simple, easy-to-complete documents with clear instructions (enhances
accuracy and reliability).
– Using appropriate application controls, such as validity checks and field checks
(enhances accuracy and reliability).
– Providing space on forms to record who completed and who reviewed the form
(encourages proper authorizations and accountability).
– Pre-numbering documents (encourages recording of valid and only valid
transactions).
– Restricting access to blank documents (reduces risk of unauthorized transaction).
THREATS IN SALES ORDER ENTRY

•Threats in the sales order entry process include:
– THREAT 1: Incomplete or inaccurate customer orders
– THREAT 2: Sales to customers with poor credit
– THREAT 3: Orders that are not legitimate
– THREAT 4: Stock outs, carrying costs, and markdowns
THREATS IN SHIPPING
• Threats in the shipping process include:
– THREAT 5: Shipping Errors
– THREAT 6: Theft of Inventory

THREATS IN BILLING
• Threats that relate to this process are:
– THREAT 7: Failure to bill customers
– THREAT 8: Billing errors
– THREAT 9: Errors in maintaining customer accounts
THREATS IN CASH COLLECTION

• The major threat to this process:
– THREAT 10: Theft of cash
2. THE EXPENDITURE CYCLE: PURCHASING AND CASH DISBURSEMENTS

• The primary external exchange of information is with suppliers (vendors).
• Information flows to the expenditure cycle from other cycles, e.g.:
– The revenue cycle, production cycle, inventory control, and various departments
provide information about the need to purchase goods and materials.
• Information also flows from the expenditure cycle:
– When the goods and materials arrive, the expenditure cycle provides information
about their receipt to the parties that have requested them.
– Information is provided to the general ledger and reporting function for internal
and external financial reporting.
EXPENDITURE CYCLE BUSINESS ACTIVITIES

• The three basic activities performed in the expenditure cycle are:
– Ordering goods, supplies, and services
– Receiving and storing these items
– Paying for these items
• These activities mirror the activities in the revenue cycle.
ORDERING GOODS, SUPPLIES, AND SERVICES

•
Key decisions in this process involve identifying what, when, and how much to purchase
and from whom.
• Weaknesses in inventory control can create significant problems with this process:
– Inaccurate records cause shortages.
• One of the key factors affecting this process is the inventory control method to be used.
• Whatever the inventory control system, the order processing typically begins with a
purchase request followed by the generation of a purchase order.
• A request to purchase goods or supplies is triggered by either:
– The inventory control function; or
– An employee noticing a shortage
• Advanced inventory control systems automatically initiate purchase requests when
quantity falls below the reorder point.

• The need to purchase goods typically results in the creation of a purchase requisition.
The purchase requisition is a paper document or electronic form that identifies:
– Who is requesting the goods
– Where they should be delivered
– When they’re needed
– Item numbers, descriptions, quantities, and prices
– Possibly a suggested supplier
– Department number and account number to be charged
• Most of the detail on the suppliers and the items purchased can be pulled from the
supplier and inventory master files.
• The purchase requisition is received by a purchasing agent (aka, buyer) in the purchasing
department, who typically performs the purchasing activity.
– In manufacturing companies, this function usually reports to the VP of
Manufacturing.
• A crucial decision is the selection of supplier.
• Key considerations are: Price, Quality and Dependability.
• Dependability is especially important in JIT systems because late
or defective deliveries can bring the whole system to a halt.
• Consequently, certification that suppliers meet ISO 9000 quality
standards is important. This certification recognizes that the
supplier has adequate quality control processes.
• Once a supplier has been selected for a product, their identity should become part of the
product inventory master file so that the selection process does not have to be carried out
for every purchase.
– A list of potential alternates should also be maintained.
– For products that are seldom ordered, the selection process may be repeated every
time.
• It’s important to track and periodically evaluate supplier performance, including data on:
– Purchase prices
– Rework and scrap costs
– Supplier delivery performance
• The purchasing function should be evaluated and rewarded based on how well it
minimizes total costs, not just the costs of purchasing the goods.
• A purchase order is a document or electronic form that formally requests a supplier to
sell and deliver specified products at specified prices.
• The PO is both a contract and a promise to pay. It includes:

– Names of supplier and purchasing agent – Delivery location
– Order and requested delivery – Shipping method
dates – Details of the items ordered
• Multiple purchase orders may be completed for one purchase requisition if multiple
vendors will fill the request.
• The ordered quantity may also differ from the requested quantity to take advantage of
quantity discounts.
• A blanket order is a commitment to buy specified items at specified prices from a
particular supplier for a set time period.
– Reduces buyer’s uncertainty about reliable material sources
– Helps supplier plan capacity and operations
RECEIVING AND STORING GOODS

• The receiving department accepts deliveries from suppliers.
– Normally reports to warehouse manager, who reports to VP of Manufacturing.
• Inventory stores typically stores the goods.
– Also reports to warehouse manager.
• The receipt of goods must be communicated to the inventory control function to update
inventory records.
• The two major responsibilities of the receiving department are:
– Deciding whether to accept delivery
– Verifying the quantity and quality of delivered goods
• The first decision is based on whether there is a valid purchase order.
– Accepting un-ordered goods wastes time, handling and storage.
• Verifying the quantity of delivered goods is important so:
– The company only pays for goods received
– Inventory records are updated accurately
• The receiving report is the primary document used in this process:
– It documents the date goods received, shipper, supplier, and PO number
– Shows item number, description, unit of measure, and quantity for each item
– Provides space for signature and comments by the person who received and
inspected
• Receipt of services is typically documented by supervisory approval of the
supplier’s invoice.
• When goods arrive, a receiving clerk compares the PO number on the packing slip with
the open PO file to verify the goods were ordered.
– Then counts the goods
– Examines for damage before routing to warehouse or factory
• Three possible exceptions in this process:
– The quantity of goods is different from the amount ordered
– The goods are damaged
– The goods are of inferior quality
PAYING FOR GOODS AND SERVICES

• There are two basic sub-processes involved in the payment process:
– Approval of vendor invoices
– Actual payment of the invoices
• Approval of vendor invoices is done by the accounts payable department, which reports
to the controller.
• The legal obligation to pay arises when goods are received.
– But most companies pay only after receiving and approving the invoice.
– This timing difference may necessitate adjusting entries at the end of a fiscal period.
• Objective of accounts payable:
– Authorize payment only for goods and services that were ordered and actually
received.
• Requires information from:
– Purchasing—about existence of valid purchase order
– Receiving—for receiving report indicating goods were received
• Payment of the invoices is done by the cashier, who reports to the treasurer.
• The cashier receives a voucher package, which consists of the vendor invoice and
supporting documentation, such as purchase order and receiving report.
• This voucher package authorizes issuance of a check to the supplier.

– The control objectives are the same as in the revenue cycle.
THREATS IN EXPENDITURE CYCLE

• Threats in the process of ordering goods include:
– THREAT 1: Stockouts and/or Excess Inventory
– THREAT 2: Ordering Unnecessary Items
– THREAT 3: Purchasing Goods at Inflated Prices
– THREAT 4: Purchasing Goods of Inferior Quality
– THREAT 5: Purchasing from Unauthorized Suppliers
– THREAT 6: Kickbacks
EXPENDITURE CYCLE INFORMATION NEEDS

• Information is needed for the following operational tasks in the expenditure cycle, including:
– Deciding when and how much inventory to order
– Deciding on appropriate suppliers
– Determining if vendor invoices are accurate
– Deciding whether to take purchase discounts
– Determining whether adequate cash is available to meet current obligations
• Information is also needed for the following strategic decisions:
– Setting prices for products/services – Determining short-term borrowing
– Establishing policies on returns and needs
warranties – Planning new marketing
– Deciding on credit terms campaigns
• The AIS needs to provide information to evaluate the following:
– Purchasing efficiency and effectiveness
– Supplier performance
– Time taken to move goods from receiving to production
– Percent of purchase discounts taken
• Both financial and operating information are needed to manage and evaluate these activities
• Both external and internal information are needed
• When the AIS integrates information from the various cycles, sources, and types, the reports
that can be generated are unlimited. They include reports on:
– Supplier performance – Number of deliveries handled by
– Outstanding invoices receiving clerk
– Performance of expenditure cycle – Number of inventory moves by
employees warehouse worker
– Number of POs processed by – Inventory turnover
purchasing agent – Classification of inventory based
– Number of invoices processed by on contribution to profitability
A/P clerk
• Accountants should continually refine and improve these performance reports
3. The Human Resources Management / Payroll Cycle
• The HRM/Payroll cycle is a recurring set of business activities and related data
processing operations associated with effectively managing the employee
workforce.
• The most important tasks performed in the HRM/payroll cycle are:
– Recruiting and hiring new – Compensation (payroll)
employees – Performance evaluation
– Training – Discharge of employees
– Job assignment (voluntarily or involuntarily)
• Payroll costs are also allocated to products and departments for use in product pricing and
mix decisions.
• In most companies these six activities are split between a payroll system and an HRM
system.
• The payroll system handles compensation and comes under the purview of the controller.
• The HRM system handles the other five tasks and comes under the purview of the director of
human resources.
• There are five major sources of input to the payroll system:
– HRM department provides information about hirings, terminations, and pay-rate
changes.
– Employees provide changes in discretionary deductions (e.g., optional life insurance,
Credir & saving cont.).
– Various departments provide data about the actual hours worked by employees.
– Government agencies provide tax rates and regulatory instructions.
– Insurance companies and other organizations provide instructions for calculating and
remitting various withholdings.
• Principal outputs of the payroll system are checks:
– Employees receive individual paychecks.
– A payroll check is sent to the bank to transfer funds from the company’s regular
account to its payroll account.
– Checks are issued to government agencies, insurance companies, etc., to remit
employee and employer taxes, insurance premiums, union dues, etc.
• The payroll system also produces a variety of reports.
PAYROLL CYCLE ACTIVITIES

• Let’s take a look at payroll cycle activities.
• The payroll application is processed in batch mode because:
– Paychecks are issued periodically.
– Most employees are paid at the same time.
• The seven basic activities in the payroll cycle are:
– Update payroll master file – Disburse payroll
– Update tax rates and deductions – Calculate employer-paid benefits
– Validate time and attendance data and taxes
– Prepare payroll – Disburse payroll taxes and
miscellaneous deductions
UPDATE PAYROLL MASTER FILE

• The HRM department provides information on new hires, terminations, changes in pay
rates, and changes in discretionary withholdings.
• Appropriate edit checks, such as validity checks on employee number and reasonableness
tests are applied to all change transactions.
• Changes must be entered in a timely manner and reflected in the next pay period.
• Records of terminated employees should not be deleted immediately as some year-end
reports .require data on compensation for all employees during the year.
UPDATE TAX RATES AND DEDUCTIONS
• The payroll department receives notification of changes in tax rates and other payroll
deductions from government agencies, insurers, unions, etc.
• These changes occur periodically.
VALIDATE TIME AND ATTENDANCE DATA
• Information on time and attendance comes in various forms depending on the employee’s
pay scheme.
PREPARE PAYROLL
• The employee’s department provides data about hours worked.

• A supervisor confirms the data.
• Pay rate information is obtained from the payroll master file.
PREPARE PAYROLL
• Procedures:
– The payroll transaction file is sorted by employee number (same sequence as
master file).
– For each transaction, the payroll master file is read for pay rates, etc., and gross
pay is calculated.
• Hourly Employees: Gross pay = (hours worked x wage rate) +
Overtime + Bonuses
• Salaried Employees: Gross pay = annual salary x fraction of year
worked
– Payroll deductions are summed and subtracted from gross pay to obtain net pay.
There are two types of deductions: Payroll tax withholdings and Voluntary deductions
DISBURSE PAYROLL
• Most employees are paid either by:

– Check
– Direct deposit
– In some industries, such as construction, cash payments may still be made, but does
not provide good documentation
CALCULATE EMPLOYER-PAID BENEFITS AND TAXES

• The employer pays some payroll taxes and employee benefits directly
– The employer withholds Income taxes and Pension contributions.
– May also withhold voluntary deductions such as union dues, Insurance
payments etc.
• In addition, the employer pays:
– The employer share of health, disability, and life insurance premiums, as well as
pension contributions

• In the HRM/payroll cycle, the control objectives are the same as in the revenue
cycle.
• Following is a discussion of threats to the HRM/payroll system, organized around
three areas:
– Employment practices – General control issue
– Payroll processing
THREATS IN EMPLOYMENT PRACTICES
– THREAT 1: Hiring Unqualified or Larcenous Employees
– THREAT 2: Violation of Employment Law
THREATS IN PAYROLL PROCESSING

– THREAT 3: Unauthorized Changes to the Payroll Master File
– THREAT 4: Inaccurate Time Data
– THREAT 5: Inaccurate Processing of Payroll
– THREAT 6: Theft or Fraudulent Distribution of Paychecks
GENERAL THREATS
• The general threats are:
– THREAT 7: Loss, Alteration, or Unauthorized Disclosure of Data
– THREAT 8: Poor Performance
KEY DECISIONS AND INFORMATION NEEDS

• The payroll system should be integrated with cost data and HR information so
management can make decisions with respect to the following types of issues:
– Future work force staffing needs
– Employee performance
– Employee morale
– Payroll processing efficiency and effectiveness
KEY DECISIONS AND INFORMATION NEEDS

• Benefits of an integrated HRM/payroll model:
– Access to current, accurate information about employee skills and knowledge.
– HRM activities can be performed more efficiently and costs reduced.
• EXAMPLE: Employment application terminals in Wal-Mart.
– Recruiting costs can be reduced, when applicant data is electronically accessible.
THE PRODUCTION CYCLE

• The production cycle is a recurring set of business activities and related data
processing operations associated with the manufacture of products.
• Information flows to the production cycle from other cycles, e.g.:
– The revenue cycle provides information on customer orders and sales forecasts
for use in planning production and inventory levels.
– The expenditure cycle provides information about raw materials acquisitions
and overhead costs.
– The human resources/payroll cycle provides information about labor costs and
availability.
• Information also flows from the production cycle:
– The revenue cycle receives information from the production cycle about finished
goods available for sale.
– The expenditure cycle receives information about raw materials needs.
– The human resources/payroll cycle receives information about labor needs.
– The general ledger and reporting system receives information about cost of goods
manufactured.
• Decisions that must be made in the production cycle include:
– What mix of products should be produced?
– How should products be priced?
– How should resources be allocated?
– How should costs be managed and performance evaluated?
• These decisions require cost data well beyond that required for external financial
statements.
PRODUCTION CYCLE ACTIVITIES

• The four basic activities in the production cycle are:
– Product design – Production operations
– Planning and scheduling – Cost accounting
• Accountants are primarily involved in the fourth activity (cost accounting) but must
understand the other processes well enough to design an AIS that provides needed
information and supports these activities.
GENERAL LEDGER AND REPORTING SYSTEM

 The general ledger and reporting system (GLARS) includes the processes in place to
update general ledger accounts and prepare reports that summarize results of the organization’s
activities.
• One of the primary functions of GLARS is to collect and organize data from:
– Each of the accounting cycle subsystems, which provide summary entries related to
the routine activities in those cycles.
– The treasurer, who provides entries with respect to non-routine activities such as
transactions with creditors and investors
– The budget department, which provides budget numbers
– The controller, who provides adjusting entries.
• The information must be organized to meet the needs of internal and external
users.
• The system must be designed to produce regular periodic reports and to support
real-time inquiries.
• The basic activities in the GLARS are:
RVU, Department of Accounting
– Update the general ledger

– Post adjusting entries
– Prepare financial statements
– Produce managerial reports
– The first three represent the basic steps in the accounting cycle

Chapter 3
3.System Development and Documentation Tools and Techniques
Documentation encompasses the narratives, flowcharts, diagrams, and other written material
that explain how the system works. This information covers the who, what, when, where, why,
and how of data entry, processing, storage, information output and system controls. One
popular means of documenting a system is to develop diagrams, flowcharts, tables, and other
graphical representations of information. These are then supplemented by a narrative
description of the system, which is a written step-by step explanation of system components
and interactions.
The two most common tools of system documentation- dataflow diagrams and flowcharts will
be discussed in this part. These tools save the organization both time and money.
Depending on the job function being performed, documentation tools are important on one or
more of the following levels:
1. At minimum, documentation is read to determine how the system works.

2. Internal control documentations are evaluated to identify control strengths and
weaknesses and to recommend improvements.
3. The greatest amount of skill is needed to prepare documentation.
An understanding of documentation tools is required regardless of the type of accounting career
chosen. For example, auditors are required to understand the client's system of internal controls
before conducting an audit.
Why documentation is important?
Depicting how the system works.

Studying and reviewing written descriptions of the inputs, processing steps, and outputs of the
system make the job easier.
Training users
Documentation also includes the user guides, procedure manuals, and other operating
instructions that help people learn how the AIS operates.
Designing new systems

Documentation helps system designers develop new systems in much the same way that
blueprints help architects design buildings.
Controlling system development and maintenance costs

Good documentation helps system designers develop object-oriented SW, that is, programs that
contain modular, reusable code. This object-orientation helps programmers avoid writing
duplicate programs and facilities changes when programs must be modified later.
Standardizing communications with others

Documentation techniques such as flowcharts and data flow diagrams are standard industry
tools, and they are more likely to be interpreted the same way by all parties viewing them.
Auditing AISs
Documentation helps auditors determine the strengths and weaknesses of a system’s controls.
Documenting business processes

By mapping the business processes, documentation helps managers better understand the ways
in which their businesses operate.
The basic documentation tools are:
1. Data flow diagram- a graphical description of the source and destination of data that
shows data flow within an organization, the processes performed on the data and how
data are stored.
2. Document flow chart- a graphical description of the flow of documents and information
between departments or areas of responsibility within an organization.
3. System flowchart- a graphical description of the relationship among the input,
processing, and output in an information system.
4. Program flowchart- a graphical description of the sequence of logical operations that a
computer performs as it executes a program.
These tools are used extensively in the system development process. Systems development is a
complex process and these tools are used to create order from chaos and complexity. In
addition, the team members who develop information systems projects often change and these
documentation tools help the new team members get up to speed quickly.
Both DFDs and flowcharts are easy to prepare and revise when one of the recently developed
DFDs or flowcharting software packages is used. They are easier to use than most word
processors. Once a few basic commands are mastered, users can quickly and easily prepare,
store, revise, and print presentation quality DFDs or flowcharts.
Data Flow Diagrams

A data flow diagram (DFD) graphically describes the flow of data within an organization. It is
used to document existing systems and plan and design new ones. There is no ideal way to
develop a DFD, because different problems call for different methods. Some general guidelines
for developing DFDs are:

1. Understand the system- involves observing the flow of information through an

organization and interviewing the individuals who use and process the data.
2. Ignore certain aspects of the system- as DFD diagrams the origin, flow, transformation,
storage and destinations of data, all control actions and processes should be ignored.
3. Determine system boundaries- is determining what to include in and exclude form the
system. All relevant data elements shall be included in the DFD because excluded items
will not be considered during systems development. When in doubt about an element's
importance, include it until a definitive decision can be made to discard it.
4. Develop a context diagram- a context diagram is a good way of depicting system
boundaries. In the diagram's center is a circle; inside of it is displayed the system of
concern. The outside entities, with which the system interacts directly, are in boxes on
either side, connected by data flows depicting the data passed between them. DFDs are
prepared, in successively more detail, to depict data flows in the system.
5. Identify data flows- all data flows shall be identified entering or leaving the system's
boundary, including where the data originate and the final destination. Any significant
movement of information is usually a data flow. All data flows come from and go to
either a transformation process, a data store (file), or a data source or destination. As
each of this is identified, it should be connected to the appropriate data flow. Data flows
can move in two directions, shown as a line with arrows on both ends.
6. Group data flows- a data flow consists of one or more pieces of datum. Data elements
that always flow together should be grouped together and shown as one data flow until
they are separated. If the data elements do not always flow together, then they should
be shown as two separate data flows.
7. Identify transformation processes- this is by placing a circle wherever work is required to
transform one data flow into another. All transformation processes should have one or
more incoming or outgoing data flows.
8. Group transformation processes- transformation processes that are logically related or
occur at the same time and place should be grouped together. Unrelated items shall
never be combined into a single transformation process. If data are not processed
together, or are sometimes processed differently, then, they shall be separate.
9. Identify all files or data stores- data are stored temporarily or permanently in most
systems. Each data repository, and each data flow into and out of it, should be
identified.
10. Identify all data sources and destinations- all sources and destinations of data should be
identified and included on the DFD.
11. Name all DFD elements- except for data flows into or out of data stores (data store is
sufficient to identify the data flow), data elements should be given unique and
descriptive names representing what is known about them. This makes DFD easier to
read and understand as it provides the reader with key information. Naming data flows
first forces the developer to concentrate on the all-important data flows, rather than on
the processes or stores. Once data flows have been labeled, naming the process and
data stores is usually easy, because they typically take their names from the data inflows
or outflows. Choosing active and descriptive names such as daily inventory update and
validate transaction, rather than input data or update process. Process names should
include action verbs such as update, edit, prepare, and record.
12. Subdivide the DFD- a cluttered DFD is hard to read and understand. If there are more
than five to seven processes on a single page, then, higher level and lower level DFDs

shall be used. The context diagram shall be decomposed into high level processes, and
then exploded into successively lower level processes.
13. Give each process a sequential number- in completed DFD, each process is given a
sequential number that helps readers move back and forth between different DFD
levels. Data flows should only go from lower numbered to higher numbered processes.
14. Repeat the process- DFD developers must work through organization data flows several
times. Each subsequent pass helps refine the diagram and identify the fine points. When
refining, the DFD shall be organized to flow from top to bottom and from left to right.
15. Prepare a final copy- the final copy of the DFD shall be drawn. Data flow lines shall be
allowed to cross over each other, if necessary, a data store or destination may be
repeated. The name of the DFD, the data prepared, and the preparer shall be placed on
each page.
Elements in a Data Flow Diagram
A DFD is composed of four basic elements: data sources and destinations, data flows,
transformation processes, and data stores. Each will be represented in a DFD by a unique
symbol.
The
Process
Data Stores
Source/Destination
Entity
Data Flow
Demarco & Yourdon Gane & Sarson

Symbols
Symbols
se four symbols are combined to show how data are processed.
For example, in the diagram below, the input to process C is data flow B, which comes form data
source A. The outputs of process C are data flows D and E. Data flow E is sent to data destination
F.

Data Flow Diagrams
Data Data flow (B) Process Data flow (D)

source (C)
(A)
Data flow (E)
Data
destination
(F)
©2003 Prent ice Hall Business Publishing, 6-15

Accounting Information Systems, 9/e, Romney/Steinbart
 A data source or data destination symbol on the DFD represents an

organization or individual that sends or receives data that they system uses or produces.
An entity can be both a source and a destination. Data sources or destinations are
represented by a square.
 A data flow represents the flow of data between processes, data stores and data
sources and destinations. Data that passes between data stores and either a data source
or a destination must go through some form of data processing (transformation
process). Data flow arrows are labeled to indicate the type of data being passed. Thus,
the reader knows exactly what information is flowing; no inferences are required. A data
flow can consist of one or more pieces of datum. For example, data flow B (customer
payment) in the diagram below consists of two parts: a payment and remittance data.
Process 1.0 (process payment) splits these two data elements and sends them in
different directions. The remittance data (D) flows to another process, where it is used
to update accounts receivable records, and the payment (E) is sent to the bank with a
deposit slip. Because data flows may consist of more than one data element, the
designer must determine the number of lines to show. The determining factor is if the
data elements always flow together. For example customers may send inquiries about
the processing of their payments with payments or separately.
 A transformation process represents the transformations of data. The diagram
below shows that process payment (C) takes customer payment and splits into the
remittance data and the deposit (which includes the checks and deposit slip created
within process payment). The updating receivables (F) process takes the remittance data
(D) and the accounts receivables (F) data, producing updated receivables record and
sending receivables information to the credit manager.
 A data store is a temporary or permanent repository of data. DFDs do not show the
physical storage medium such as disks, and paper, used to store data. As with other DFD
elements, data store names should be descriptive. Data stores are represented by
horizontal lines, with respective name recorded inside.
 A data dictionary contains description of all the elements, stores, and flows in a
system. Data flows and data stores are typically collections of data elements. Typically, a
master copy of the data dictionary is maintained to ensure consistency and accuracy
throughout the development process.

Customer Remittance data

payment (B) (D)
Customer Process
(A) payment
(C)
Deposit (E)
Bank
(J)
©2003 Prentice Hall Business Publishing, 6-17

Data Flow Diagrams

Accounts
receivable
(H)
(G)
Receivables
information
Update (I) Credit
receivables manager
(F) (K)

Subdividing the DFD

Data flow diagrams are subdivided into successively lower levels in order to provide ever-
increasing amounts of detail because few systems can be diagrammed on one sheet of paper.
Users have differing needs, so a variety of levels can better satisfy these requirements.
The highest-level DFD is referred to as a context diagram. A context diagram provides the reader
with a summary level view of the system. It depicts a data processing system and the external
entities that are the sources and destinations of the system's inputs and outputs. For example,
the following can be considered as the context diagram of payroll processing procedures for a
certain company. It shows that the payroll processing system receives time card data from
different departments and employees' data from the human resource department. When these
data are processed, the system produces:
1. Tax reports and payments for governmental agencies

2. Employee payments
3. A deposit in the payroll account at the bank, and
4. Payroll data for management.

Time
Payroll
Tax reports and payments Government
cards Agencies
Departments Processing
Employee Employees
S
paychecks
y
Payroll
Human s
check Bank
resources t
Employee e report Management
Payroll
data m
Flowcharts
A flowchart is an analytical technique used to describe some aspect of an information system in
a clear, concise, and logical manner. Flowcharts use a standard set of symbols to pictorially
describe transaction processing procedures. The following are general guidelines for preparing
flowcharts that are readable, clear, concise, consistent, and understandable.
1. Understanding a system before flowcharting it by interviewing users, developers,

auditors, and management or having them complete a questionnaire as well as by
reading through a narrative description of the system, or walking through system
transactions.
2. Identifying the entities to be flowcharted such s departments, job functions, or external
parties as well as identifying documents and information flows in the system and the
activities or processes performed on the data, for instance drawing a box around the
entities, a circle around the documents and a line around the activities.
3. Dividing the flowchart into columns when several entities such as departments and
functions need to be shown on the flowchart with a label for each followed by
flowcharting the activities of each entity in its respective columns.
4. Flowcharting only the normal flow of operations, ensuring that all procedures and
processes are in proper order and identifying exception procedures by using an
annotation symbol.
5. Designing the flowchart so that flow proceeds from top to bottom and from left to right.
6. Giving the flowchart a clear beginning and ending by designing where the document
originated and showing the final disposition of all documents so there are no loose ends
that leave the reader dangling.
7. Using the standard flowcharting symbols and drawing them with a template or a
computer
8. Clearing labeling all symbols by writing a description of the input, process, or output
inside the symbol. If description may not fit, annotation symbol shall be used.
9. Placing document numbers in the top right hand corner of the symbol when using
multiple copies of a document. The document numbers should accompany the symbols
as it moves through the system.

10. Having an input and output for each manual processing symbol. Two documents shall
not be connected directly except when moving from one column to another column.
11. Using on page connectors to avoid excess flow lines, which results in a neat looking page
as well as using off-page connectors to move from one flowchart page to another. All
connectors shall be clearly labeled to avoid confusion.
12. Using arrowheads on all flow lines and not assuming that the reader will know the
direction of the flow.
13. Clearly labeling the pages 1 of 3, 2 of 3 etc if a flowchart can not fit into a single page.
14. Showing documents or reports first in the column in which they are created and then
moving to another column for further processing. A manual process is not needed to
show documents being flowcharted.
15. Showing all data entered into or retrieved from a computer file as passing through a
processing operation (a computer program) first.
16. Drawing a line from the document to a file to indicate that it is being filed. A manual
process is not needed to show a document entering a file.
17. Drawing a rough sketch of the flowchart as a first effort. Concern shall be with capturing
content than perfect drawing. Few systems can be flowcharted in a single draft.
18. Redesigning the flowchart to avoid clutter and a large number of crossed lines.
19. Verifying the flowchart's accuracy by reviewing it with the people familiar with the
system. It shall be assured that all uses of flowchart conventions are consistent.
20. Drawing the final copy of the flowchart, placing the name of the flowchart, the date, and
the preparer's name on each page.
Flowchart Symbols
There are various types of symbols used to create flowcharts. Each symbol has a special
meaning that is easily conveyed by its shape. The shape indicates and describes the operation
performed and the input, processing, output, and storage media employed. The symbols are
drawn by a software program or with a flowcharting template.
Flowcharting symbols can be divided into the following four categories:
1. Input/output symbols- represent devices or media that provide input to or record

output from processing operations.
2. Processing symbols- either show what type of device is used to process data or indicate
when processing is completed manually.
3. Storage symbols- represent the device used to store data that the system is not
currently using.
4. Flow and miscellaneous symbols- indicate the flow of data and goods. They also
represent such operations as where flowcharts begin and end, where decisions are
made, and when to add explanatory notes to flowcharts.
Flowchart Symbols:

Document Manual operations
Online keying
Computer processing
Display
Input/output; Auxiliary operation
Journal/ledger
Document or processing flow
Magnetic disk On-page connector
Off-page connector
Magnetic tape
Terminal
Decision
Document Flowcharts
A document flowchart illustrates the flow of documents and information among areas of
responsibility within an organization. They trace a document from its cradle to its grave. They
show where a document originates, its distribution, the purpose for which it is used, its ultimate
disposition, and everything that happens as it flows through the system.
A document flowchart is particularly useful in analyzing the adequacy of control procedures in a

system, such as internal checks and segregation of duties. Flowcharts that describe and evaluate
internal controls are often referred to as internal control flowcharts.
The document flowchart can reveal weaknesses or inefficiencies in a system such as inadequate
communication flows, unnecessary complexity in document flows, or procedures responsible for
causing wasteful delays. They also can be prepared as part of the system design process and
should be included in the documentation of an information system.
Major flowchart symbols are available from EXCEL. To view the Drawing Toolbar of
MS EXCEL, select the following options from the main menu:
In EXCEL, “View/Toolbar/Drawing”
Or you can also click directly on the Drawing icon in the Standard Toolbar.
Following is a typical example of how a document flowchart can be designed:

System Flowcharts
System flowcharts depict the relationship among the input, processing, and output of an AIS. A
system flowchart begins by identifying both the inputs that enter the system and their origins.
The input is followed by the processing portion of the flowchart. The input is followed by
processing portion of the flowchart that is the steps performed on the data. The logic the

computer uses to perform the processing task is shown on a program flowchart. The resulting
new information is the output component, which can be stored for later use, displayed on a
screen, or printed on paper. In many instances, the output from one process is an input to
another.
System flowcharts are an important systems analysis, design, and evaluation tool. They are
universally employed in systems work and provide an immediate form of communication among
workers. The system flowchart is an excellent vehicle for describing information flows and
procedures within AIS.
An illustration of how a system flowchart works is shown below:

Program Flowcharts
A program flowchart illustrates the sequence of logical operations performed by a computer in
executing a program. It describes the specific logic to perform a process shown on a systems
flowchart. A flow line connects the symbols and indicates the sequence of operations. The
processing symbol represents a data movement or arithmetic calculation. Once designed and
approved, the program flowchart serves as the blueprint for coding the computer program.
Input
Storag Process
e
Output
Enter
sales
Start Appr
order Reject
ove d No
Order
Inventor
for Yes
y Back-
credit?
No
available Order
? Yes
Fill order Stop
 The input/output symbol represents either reading of input or writing of output.

 The decision symbol represents a comparison of one or more variables and the transfer
of flow to alternative logic paths.
 All points where the flow begins or ends are represented by the terminal symbol.
Differences between DFDs and Flowcharts
- DFDs emphasize the flow of data and what is happening in a system, whereas a
flowchart emphasizes the flow of documents or records containing data.
- A DFD represents the logical flow of data, whereas a flowchart represents the
physical flow of data.
- Flowcharts are used primarily to document existing systems.
- DFDs, in contrast, are primarily used in the design of new systems and do not
concern themselves with the physical devices used to process, store, and
transform data.
- DFDs make use of only four symbols.
- Flowcharts use many symbols and thus can show more detail.
AIS Development Strategies

Traditionally, Accountants have faced the following difficulties in developing an AIS:
- Demands for development resources are so numerous that AIS projects are
backlogged for several years.
- A newly designed AIS doesn't always meet users needs
Purchase Software
 Canned software is written by software development companies and is sold on the open
market to a broad range of users with similar requirements.
 Turnkey systems are a combination of software and hardware sold as a package. The
vendor installs the entire system and user needs only to “turn the key”.
The Internet has given companies a new way to acquire software:
Application service providers (ASPs) host Web-based software on their computers and deliver
the software to their clients over the Internet.
Purchasing Software and The SDLC
Companies that buy rather than develop AIS software still go through the systems development
life cycle (SDLC).
1. Systems analysis
2. Conceptual design
3. Physical design
4. Implementation and conversion
5. Operation and maintenance
The Systems Acquisition Process

Investigate
software
packages
Will package No Can package No Develop

meet needs? be modified? software
internally
Yes
Send RFP for Yes

Yes
software and
hardware Send RFP for
hardware,
if necessary
Evaluate
proposal Select best
combination

Development by In-House IS Department
 Most often, organizations develop their own custom software, because canned software
that fit their specific needs is not available.
 Developing custom software is difficult and error-prone.
 It also consumes a great deal of time and resources.

Custom Software Development by an Outside Company
When contracting with an outside organization, a company should maintain control over the
development process. Some guidelines:
• Carefully select a developer

• Sign a contract
• Plan and monitor each step
• Maintain effective communication
• Control all costs
End-User-Developed Software
 End-user computing (EUC) is the hands-on development, use, and control of computer-
based information systems by users.
 With the advent of inexpensive PCs and powerful, inexpensive software, users began
developing their own systems to create and store data, access and download company
data, and share data and computer resources in networks.
 Examples of end user development uses:
 Retrieving information from company databases to produce simple reports or to answer
one-time queries
 Performing “what if” sensitivity or statistical analyses
 Developing applications using prewritten software (spreadsheet or database system)
 Preparing schedules and lists, such as depreciation schedules, accounts receivable aging,
and loan amortizations
Benefits of End-User Computing
User creation, control, and implementation Freeing up IS resources
Systems that meet user needs Versatility and ease of use
Timeliness
Risks of End-User Computing

Logic and development errors Systems incompatibility
Inadequately tested applications Duplication of systems
Inefficient systems Increased costs
Poorly controlled and documented systems
Organizations use several different approaches to mange and control end-user computing. For
example, a help desk can encourage, support, coordinate and control end-user activities.

What are some duties of the help desk?
– Providing hot-line assistance to help resolve problems

– Serving as a clearinghouse for information, coordination, and assistance training
end users, and providing corresponding technical maintenance and support
– Evaluating new end-user hardware and software products
– Assisting with application development
– Developing and implementing standards
– Controlling corporate data
Outsource the System
 What is outsourcing?
 It is hiring an outside company to handle all or part of an organization’s data
processing activities.
 In a mainframe outsourcing agreement, the outsourcers buy their client’s computers
and hire all or most of the client’s employees.
 In a client/server or PC outsourcing agreement, an organization outsources a particular
service, a segment of its business, a particular function, or PC support.
Benefits of Outsourcing
A business and information solution Lower costs
Asset utilization Improved development time
Access to greater expertise and more Elimination of peaks and valleys usage
advanced technology
Facilitation of downsizing
Risks of Outsourcing

Rift Valley University, Department of Accounting Year,2016 / 2008
Inflexibility
Loss of control of system and/or data
Reduced competitive advantage
Locked-in system
Unfulfilled goals
Possibility of poor service
Chapter Four
The System Development Process

Companies change their systems for a variety of reasons:
– To respond to changes in user needs or business needs

– To take advantage of or respond to technology changes
– To accommodate improvements in their business process
– To gain a competitive advantage and/or lower costs
– To increase productivity
– To accommodate growth
– To accommodate downsizing or distribute decision making
– To replace a system that is aged and unstable
The five stages in the systems development life cycle are:
– Systems analysis
– Conceptual Design
– Physical Design
– Implementation and Conversion
– Operation and Maintenance
1) System Analysis
There are five steps in the analysis phase:
1. Initial investigation- is conducted to screen projects. At this stage, the following are essential:

Gaining a clear picture of the problem or need

Determining the project's viability and expected costs and payoffs
Evaluating the project's scope and the nature of the new AIS, and
Recommending whether the development project should be initiated as proposed, modified
or abandoned.
At this stage the exact nature of the problems under review must be determined. Sometimes, what
is thought to be the cause of the problem is not the real source. If a project is approved, a proposal
to conduct system analysis is prepared. It is assigned a priority and added to the master plan, and
the development team begins the survey of the existing AIS.
2. Systems survey- at this stage, an extensive study of the current AIS is undertaken. It may take
weeks or months depending on the complexity and the scope of the system. The objectives of a
system survey include:
Gain a thorough understanding of the company operations, policies, and procedures; data
and information flows; AIS strengths and weaknesses; and available hardware, software, and
personnel.
Make preliminary assessment of current and future processing needs, and determine the
extent and nature of the changes needed.
Develop working relationships with users and build support for the AIS
Collect data that identify user needs, conduct a feasibility analysis and make
recommendations to management.
Finally, the findings are documented, the existing system is modeled and analyzed and a survey report is
prepared.
3. Feasibility study- a more thorough feasibility analysis is conducted to determine the project's
viability. Especially important is economic feasibility. The feasibility analysis is updated as the
project proceeds and costs and benefits become clearer.
The feasibility study and its updates are used by the steering committee as the project proceeds to
decide whether to:
a. Terminate the project

b. Proceed
c. Proceed if specific problems are resolved
Five aspects need to be considered during a feasibility study:
a. Technical feasibility
 Is the technology there to do it?
b. Operational feasibility
 Do we have people who can do it, and will it get used?
c. Legal feasibility
 Does it comply with legal, regulatory, and contractual obligations?
d. Scheduling feasibility
 Can it be done in time?
e. Economic feasibility
 Will the benefits exceed the costs
Economic feasibility is probably the most important and frequently analyzed aspect. This
examination requires a careful investigation of costs and benefits.

It typically uses a capital budgeting model that considers:
 Cost savings and other benefits

 Initial outlay costs
 Operating costs
 Other costs
4. Information needs and systems requirements- once a project is deemed to be feasible, the
company identifies the information needs of the AIS users and documents system requirements.
the strategies for determining requirements include the following:
Ask users what they need-
Analyze existing system
Examine existing system use
Create a prototype
5. Systems analysis report- is the conclusion of the system analysis phase. It is used to summarize
and document the analysis activities and serve as a repository of data from which system designers
can draw. A go-no-go decision is generally made three times during system analysis:
During the initial investigation- to determine whether to conduct a feasibility survey
At the end of the feasibility study- whether to proceed to the information requirements phase
At the completion of the analysis phase- to decide whether to proceed to the next phase.
Tools to collect information are:
Traditional Methods
 Interview
 Questionnaire
 Observation
 Document analysis
Modern Methods
 Joint Application Design (JAD)

1. started in late 1970s at IBM
2. Brings together key users, managers and systems analysts involved in the
analysis of the current system
3. Its structure of roles and its agenda differentiates it from group interview
4. Purpose: collect system requirements simultaneously from key people
5. Conducted off-site—away from the normal work place for the people involved—
to minimize distraction

 Prototyping
1. Repetitive process involving analysts and users
2. Rudimentary version of system is built and rebuilt based on feedbacks
3. Replaces or augments SDLC
4. Goal: to develop concrete specifications for ultimate system
5. Quickly converts requirements to working version of desired system
6. Once the user sees requirements converted to physical system, they ask for
modifications or generate additional requests
Most useful when:
 User requests are not clear
 Few users are involved in the system
 Designs are complex and require concrete form
 History of communication problems between analysts and users
 Tools are readily available to build prototype
Drawbacks
 Tendency to avoid formal documentation
 Difficult to adapt to more general user audience
 Sharing data with other systems is often not considered
 Systems Development Life Cycle (SDLC) checks are often bypassed
2) Conceptual design
In the conceptual systems design phase, a general framework is developed for implementing user
requirements and solving problems identified in the analysis phase. What are the three steps in
conceptual design?
1. Evaluate design alternatives.

2. Prepare design specifications.
3. Prepare conceptual systems design report.
 Evaluate design alternatives:
 The design team should identify and evaluate design alternatives using the following criteria:
1. How well it meets organizational and system objectives
2. How well it meets users’ needs
3. Whether it is economically feasible
4. Its advantages and disadvantages
 Prepare design specifications:
 Once a design alternative has been selected, the team develops the conceptual design
specifications for the following elements:
1. Output
2. Data storage
3. Input
4. Processing procedures and operations

 Prepare conceptual systems design report:

 At the end of the conceptual design a conceptual systems design report is developed and
submitted.
1. To guide physical systems design activities
2. To communicate how management and user information needs will be met
3. To help assess systems’ feasibility
3) Physical design
Different activities will come as a series of steps as shown by the diagram below:
Physical Systems Design
Output Program
design design
File and data Procedures

base design design
Input Controls
design design
Physical Systems Design: Output Design
 The objective of output design is to determine the characteristics of reports, documents, and
screen displays.
 Output fits into one of four categories:
1. Scheduled reports
2. Special-purpose analysis
3. Triggered exception reports
4. Demand reports
Physical Systems Design
 Physical design translates the broad,

user-oriented AIS requirements of
conceptual design into detailed
specifications that are used to code
and test the computer program.
Conceptual Physical
systems design systems design


Physical Systems Design: File and Database Design
What are some file and database design considerations?
– medium of storage
– organization and access
– processing mode
– maintenance
– size and activity level
Physical Systems Design: Input Design
 When evaluating input design, the design team must identify the different types of data input
and optimal input method.
 What are the two principal types of data input?
1. Forms
2. Computer screens
Physical Systems Design: Procedures Design
 Procedures design should answer the who, what, where, and how questions related to all AIS
activities.
 What should procedures cover?
 input preparation
 transaction processing
 error detection and corrections
 controls
 reconciliation of balances
 database access
 output preparation and distribution
 computer operator instructions
Physical Systems Design: Control Design
What are some control design considerations?
 Validity  Authorization
 Accuracy  Security
 Numerical Control  Availability
 Maintainability  Integrity
 Audit Control
Physical Systems Design Report

 At the end of the physical design phase the team prepares a physical systems design report.
 This report becomes the basis for management’s decision whether to proceed to the
implementation phase.
4) Implementation and conversion
Systems implementation is the process of installing hardware and software and getting the AIS up
and running. It includes the following activities.
The Systems Development

Life Cycle: Implementation and
Conversion
Implementation and Conversion
Develop plan
Install hardware and software
Train personnel, test the system
Operation
Complete documentation
and
Convert from old to new system Maintenance
Fine-tune and review
Deliver operational system

The relationship of the items in this phase and the conversion process (next phase) will be as shown
below in a series of activities.
Systems Implementation
Implementation planning
Develop and Prepare site; Select

test software install and and train
programs test hardware personnel
Complete Test system

documentation
Conversion
Systems Implementation: Complete Documentation

 Three types of documentation must be prepared for new systems.

1. Development documentation
2. Operations documentation
3. User documentation
Systems Implementation: Test the System
 There are three common forms of testing.

1. Walk-through
2. Processing of test transactions
3. Acceptance tests
Systems Implementation: Conversion
 There are four conversion approaches.

1. Direct conversion
2. Parallel conversion
3. Phase-in conversion
4. Pilot conversion
Systems Implementation: Data Conversion
 Data files may need to be modified in three ways:

1. Files may be moved to a different storage
2. Data content may be changed
3. File format may be changed
5) Operations and maintenance
Operation and Maintenance
 The final step in the SDLC is to

operate and maintain the new system.
 A postimplementation review should
be conducted on a newly installed
system.
Implementation Operation and

and conversion maintenance

What are some factors to consider during the post implementation review?

 Goals and objectives  Controls and security

 Satisfaction  Errors
 Benefits  Training
 Costs  Communications
 Reliability  Organizational changes
 Documentation  Accuracy
 Timeliness  Compatibility
The key Players in System Development Process
The Players refer to who are the people involved in developing and implementing AIS?
 Management
 Accountants
 Information systems steering committee
 Project development team
 Systems analysts and programmers
 External players
What are top management’s roles?
o providing support and encouragement

o establishing system goals and objectives
o determine information requirements
What are accountants’ roles?
– determine their information needs

– may be members of the project development team
– play an active role in designing system controls
What are the steering committee’s roles?
– set policies that govern the AIS

– ensures top-management participation
– guidance and control
– facilitates coordination and integration of IS activities
What are the project development team’s roles?
– plan each project

– monitor project
– make sure proper consideration is given to the human element
What are the system analyst’s and programmer’s roles?

– study existing systems

– design new systems and prepare specifications
– write computer programs
Why is planning an important step in systems development?
– consistency
– efficiency
– cutting edge  How do people resist AIS changes?
– lower costs  aggression
– adaptability  projection
 avoida

Teaching Material: Accounting Information System
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Chapter 1 AIs

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Rift Valley University Nekemte Campus Year 2016, Department of Accounting

 A system is a group of two or more interrelated components or subsystems that

ACCOUNTING INFORMATION SYSTEM 1

Organizations depend on information systems in order to stay competitive. Information is just as

ACCOUNTING INFORMATION SYSTEM 2

ACCOUNTING INFORMATION SYSTEM 3

1. Inbound 2. Operations 3. Outbound 4. Marketing 5. Services

ACCOUNTING INFORMATION SYSTEM 5

2.1. THE REVENUE CYCLE: SALES AND CASH COLLECTIONS

ACCOUNTING INFORMATION SYSTEM 6

– Sales order entry – Billing

SALES ORDER ENTRY

ACCOUNTING INFORMATION SYSTEM 7

ACCOUNTING INFORMATION SYSTEM 8

• Remittances are applied against the total balance rather than

ACCOUNTING INFORMATION SYSTEM 9

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES

THREATS IN SALES ORDER ENTRY

ACCOUNTING INFORMATION SYSTEM 10

THREATS IN CASH COLLECTION

2. THE EXPENDITURE CYCLE: PURCHASING AND CASH DISBURSEMENTS

EXPENDITURE CYCLE BUSINESS ACTIVITIES

ORDERING GOODS, SUPPLIES, AND SERVICES

ACCOUNTING INFORMATION SYSTEM 11

ACCOUNTING INFORMATION SYSTEM 12

RECEIVING AND STORING GOODS

PAYING FOR GOODS AND SERVICES

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES

THREATS IN EXPENDITURE CYCLE

EXPENDITURE CYCLE INFORMATION NEEDS

PAYROLL CYCLE ACTIVITIES

UPDATE PAYROLL MASTER FILE

UPDATE TAX RATES AND DEDUCTIONS

VALIDATE TIME AND ATTENDANCE DATA

• The employee’s department provides data about hours worked.

• Most employees are paid either by:

CALCULATE EMPLOYER-PAID BENEFITS AND TAXES

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES

THREATS IN PAYROLL PROCESSING

KEY DECISIONS AND INFORMATION NEEDS

KEY DECISIONS AND INFORMATION NEEDS

THE PRODUCTION CYCLE

PRODUCTION CYCLE ACTIVITIES

GENERAL LEDGER AND REPORTING SYSTEM

– Update the general ledger

ACCOUNTING INFORMATION SYSTEM 22

1. At minimum, documentation is read to determine how the system works.

Why documentation is important?

Depicting how the system works.

Designing new systems

Controlling system development and maintenance costs

ACCOUNTING INFORMATION SYSTEM 23

Standardizing communications with others

Documenting business processes

The basic documentation tools are:

Data Flow Diagrams

ACCOUNTING INFORMATION SYSTEM 24

1. Understand the system- involves observing the flow of information through an

ACCOUNTING INFORMATION SYSTEM 25

Demarco & Yourdon Gane & Sarson

ACCOUNTING INFORMATION SYSTEM 26

Data Flow Diagrams

Data Data flow (B) Process Data flow (D)

©2003 Prent ice Hall Business Publishing, 6-15