CHAPTER 4: Revenue Cycle

Overview:
1. Sales order
2. Credit/ customer service
3. Shipping
4. Billing/ AR
5. Cash receipts/ collections

Sales Order Processing

* Begins w/ customer placing an order (Sales dept)
= sales order form
* The transaction is authorized by obtaining credit approval by the credit dept.
* Sales infromation is released to:
(a) Billing
(b) Warehouse = stock release/ picking ticket
(c) Shipping = packing slip & shipping notice
* Merchanside is picked from the Warehouse and sent to Shipping
= stock records are adjusted
* Shipping dept. prepares and send to customers:
(a) Merchandise
(b) Packing slip
(c) Bill of lading
* Shipping information is sent to billing. the latter compiles & reconciles the
relevant facts, and issues an invoice to customer, and updates the journal.
Information is transferred to:
(a) Accounts receivable
(b) Inventory control

=========================================
CHAP4: Revenue Cycle

* Physical component = ordering & delivering of goods; Financial component =

recording
*Subsystems:
1. Sales order processing
2. Sales return procedures
3. Cash receipts procedures

SALES ORDER PROCESSING

Accounting records:
1. Customer order
=non-standard document initiated by the customer, may or may not be a physical
document
2. Sales order
= a formal document prepared by the company to process the customer order
3. Customer open order file
= a monitoring file of customers' open orders updated for status order changes
4. Picking ticket
= "stock release document"
= identifies inventory items that must be located and picked from the warehouse
shelves
5. Back order record
= record of sales order pending inventory
= stays on file until the inventories arrive from the supplier
6. Stock records
= used for warehouse manaegement purposes only
= not a formal accounting record for inventory control
7. Packing slip
= travels w/ the goods to describe the contents of the order
8. Shipping notice
= forwarded to the billing function as evidence that the customer's order was filed
and shipped
9. Bill of lading
= a formal contract between the seller and the shipping company (carrier) to
transport the goods to the customer
= establishes legal ownership & responsibility of goods in transit
10. S.O. pending file
= list of pending orders awaiting of the shipping notice
11. Sales invoice
= almost same as the "customer bill"
12. Sales journal
= special journal
13. Sales journal voucher
= summary of sales journal entries
14. Journal voucher
= for manual procesing
= each voucher has represents a GJ entry & GL accounts affected
15. Journal voucher file
= replaces the need for a formal GJ
16. Inventory sub-ledger
= updated from information contained in the stock release documents
17. AR Sub-ledger
= customer records updated from information contained in the sales order

Procedures:
* Upper left of diagram
Purchase order > Company > Sales dept. (sales order) > Credit dept. > Sales dept.
(approved sales order & customer order open line) > Warehouse (approved sales order
for stock release)

* Left part of diagram

Warehouse (stock release docu. = picking ticket) > Back order record for
insufficient stocks > Stock records for update

* Right part of diagram

Billing dept. (sales order, sales invoice, sales journal voucher) > Accounting Dept
(Update inventory records > Updare AR)

SALES RETURN PROCEDURE

* Reasons for returns:
1. Shipped the wrong merchandise
2. goods were defective
3. Products were damaged in shipment
4. Late delivery hence buyer refused delivery
* Credit for unwanted products (SRA

Accounting records:
1. Return slip
= docu prepared by the receiving department to describe the returned items
2. Credit Memo
= authoriation for the customer to receive credit for merchandise returned
3. Inventory sub-ledger
4. AR sub ledger

Procedures:
Receiving Dept (return slip) > Warehouse (receipt of returned goods & copy of
return slip) > Sales dept. (credit memo) > Credit dept (credit memo approval
depending on the materiality & circumstances of the return) > Accounting dept.
(update SL & GL)

CASH RECEIPTS PROCEDURES

Accounting records:
1. Remittance advice
= contains information needed to service individual customer's accounts Check
2. Remittance list
= "cash prelist"
= form that lists down all checks received
3. Deposit slip
= document forwarded to the bank for deposit summary
4. Check
5. Cash receipts journal
= special journal
6. AR sub-ledger
7. Journal voucher

Procedures:
Mailroom (receiving the check payments & remittance advice) > Cash
receipts/collection dept. (checks bank deposit & compared to remittance list;
deposit slip) > Accounting dept. (post & update cash and AR SL)

REVENUE CYCLE CONTROLS

* Transaction Authorization
= to ensure that only valid transactions are processed
(a) Credit check (credit dept.)
= credit worthiness of customer
(b) Return policy (credit dept.)
= grants are based on the materiality of the transaction
(c) Remittance list
= means for verifying that customer checks and remittance advices match in amount
* Segragation of duties
= no single individual/ dept. processes a transaction in its entirety
(a) authorization & processing of transaction should be separate
(b) asset custody & asset record keeping should be separate
(c) organization should be structured to prevent collusion to commit fraud
* Supervision
= compensating control for companies
* Accounting records
= acco. records form an audit trail that allows independent auditors to trail
transactions
(a) Pre-numbered documents
= sequential numbering
(b) Sepcial journals
= system provides a concise record of an entire class of events
(c) SL/GL
= source documents captured by journals
(d) Files:
1. Open sales order file
2. Shipping log
3. Credit records file
4. S.O Pending file
5. Back-order file
6. Journal voucher file
* Access controls
= prevent and detect unauthorized and illegal access to the firm's assets
* Independent verification (audit??)
= verify the accuracy and completeness of tasks that other functions in the process
perform

_________________________________________

CHAP5: Expenditure Cycle - Purchaces and Cash Discbursement Procedures

*Subsystems:
1. Purchase processing
2. Cash disbursement
3. Payroll processing
4. Fixed assets procedures

PURCHASING
1. Identify inventory needs
2. Placing the order
3. Receiving the inventory
4. Recognizing the liability

Accounting records:
1. Purchase requisition
= an internal dosument that initiates the purchase order
2. Purchase order
= a formal document sent to the supplier detailing the items being ordered
3. Open/Closed PO file
= a listing of processed PO, updated for receiving/served orders
4. PO blid copy
5. Valid vendor file
= a listing of the company's vendors/suppliers
6. Receiving report
= a document prepared upon receipt and physical inspection of goods ordered
7. AP pending file
= a list of open PO for Ap creation awaiting the receiving report
8. receving report file
= listing of all receiving reports prepared
9. Inventory sub-ledger
10. Supplier's (sales) invoice
11. AP sub-ledger
= supplier's accounts set up to recognize liability after performing the 3-way
matching
12. Open AP file
= list of outstanding AP organized by payment due date
12. Purchase journal
= special journal
13. Journal voucher
= represents a GJ entry and indicates the GL accounts affected for GL posting

Process:
Inventory control (purchase requisition) > Purchasing dept. (purchase order, open
PO file, valid vendor file) > Receving (closed PO file) > Warehouse > (physical
inventories) > Acco. dept. (post udates to inventory & AP accounts, open vouchers
payable (AP) file)

CASH DISBURSEMENT
1. Identify liabilities due
2. Prepare cash disbursement
3. Update AP record
4. Post to GL

Primary objective: avoid early payments & avoid late payments

Accounting records:
A. Voucher payable system
1. Voucher register
= summary of all cash disbursement vouchers processed
2. Cash disbursement voucher
= prepared for every disbursement reflected on the vouhcer register
3. Vouchers payable file
= equivalent record of open AP file
4. Voucher packet
= voucher + supporting documents
5. Check register
= "cash disbursement journal"
= special journal for all types of payments processed
6. Closed voucher file
= a listing of all voucher packets processed (paid)

PROCESS:
Acco.dept. (Open vouchers payable (AP file) for amounts due, check preparation,
post updates to AP account)

EXPENDITURE CONTROLS (Ref: James Hall, pp. 257)

1. Transaction authorization
(a) Purchases subsystem
(b) Cash disbursement subsystem
2. Segregation of duties
(a) Inventory control from the warehouse (inventory custody)
(b) General ledger and AP sub-ledger from cash disbursements
3. Supervision
(a) Inspection of assets
(b) Theft of assets
4. Accounting records
5. Access controls
(a) Direct access
(b) Indeirect access
6. Independent verification
(a) Independent verification by AP
(b) Independent verification by the general ledger dept.

________________________________________________

CHAP 6: Expenditure cycle - Payroll processing & fixed assets procedures

PAYROLL PROCESSING
* A special case purchase processing system:
1. Purchase of labor instead of raw materials or FG for resale
2. Payroll process differs per classes of employees (payment: hourly, monthly,
piece, commission)
3. There is a special accounting procedures for employee deductions & withholding
taxes that do not apply to trade accounts
4. Payroll activities are recurring (weekly, bi-weekly, monthly). Preparing large
number of payroll checks in addition to normal trade account can overload the
general purchases & cash disbursements system
5. Writing checks to employees require special controls. Combining payroll and
trade transaction can encourage payroll fraud
Accounting records:
1. Personal action forms
= identifies employees authorized to receive a paycheck and are used to refelct
changes in pay rates, payroll deductions and job calissifications
2. Job tickets
= document that captures the time that individual workers spend on each production
3. Time cards
= captures the time the employee is at work
4. Labot distribution summary
= summary of charges forwarded to the GL function after cost accounting allocates
labor costs to the WIP accounts
5. Payroll register
= listing of employees receiving payroll showing gross pay, additional pay,
deductions, WHT
6. Employee payroll records
= "payslip"
= record of an employee's payroll breakdown per cutoff
7. Employee paycheck
= a negotiable instrument that is presented to the bank for encashment of amount
received as payroll
8. Payroll imprest account
= a cash fund account set aside for the payment of payroll only
9. AP/ Salaries Payable

Process:
Personnel (HR)/ Production dept. (time cards, job tickets) > Payroll (payroll
computation) > Accounting (job tickets for WIP monitoring, post updates on AP sub-
ledger, setup of AP initiates cash disbursement procedures)

Payroll Controls
1. Transaction authorization
= use of personnel action form to keep the employee records current
2. Segregation of duties
= the time keeping fuction should be separate from the personnel function (HR)
3. Supervision
= timekeeping process (biometrics)
4. Accounting records
= for audit trail
5. Access controls
= to prevent misappropriation of cash and labor
6. Independent verification
(a) Verification of time
(b) Paymaster
(c) Accounts payable
(d) General ledger

FIXED ASSETS SYSTEM

* Specific objectives of the fixed asset system
1. Process the acquisition of fixed assets as needed and in accordance with formal
management ap#proval and procedures.
2. Maintain adequate accounting records of asset acquisition, cost, description,
and physical location in the organization
3. Maintain accurate depreciation records for depreciable assets in accordance
withacceptable method
4. Provide management with information to help plan for future fixed asset
investments.
5. Properly record the retirement and disposal of fixed assets
* shares some characteristics w/ the procure to pay process, but 2 important
differences distinguish these systems:
1. P2P processes routine transactions while fixed asset system processes non-
routine transactions for a wider group of users
2. P2P processes expenses of the current period while fixed asset system
capitalizes expensitures that benefits multiple periods, involving cost allocation
& matching procedures that are not part of the routine expenditures

Accounting records:
1. Depreciation schedule
= used ot initiate the task of calculating depreciations w/o an external event
(source document) to trigger the transaction
2. Fixed asset record sturcture
= contains the information of the specific fixed asset inclu its location, book
value, etc.
3. Asset status report/ Asset listing
4. Fixed asset depreciation report
= uses the depreciation schedule for the summary of the annual depreciation of the
fixed assets
5. Disposal report
= describes the final disposition of the fixed asset chosen from the disposal
options

Process:
1. Asset acquistion = starts from user dept. > authorization & approval >
purchasing dept. > AP dept. > cash disbursements dept. > fixed asset dept.
2. Asset management = depreciation, asset changes (physical improvements/ physical
location)
3. Asset disposal = disposal request form, disposal options (sell, scrap, donate,
retire)

Fixed asset controls:

1. Authorization controls
= fixed asset acquisition should be formal and explicitly authorized (independent
approval for high-value items)
2. Supervision controls
= supervisors must ensure that fixed assets are being used in accordance w/ the
organization's policies and business related purposes
3. Independent verification controls
= Internal auditor:
(a) should review the asset acquisition and approval procedures to determine the
reasonableness of factors used in the analysis.
(b) should verify the location, condition, and fair value of the organization’s
fixed assets
(c) depreciation charges should be reviewed and verified

______________________________________

CHAP7: Conversion Cycle

* consists of both physical & information activities related to manufacturing
products for sale
*Subsystems:
1. Production planning and control
= involves planning, scheduling, and control of the physical product thru the
manufacturing process
= includes determining RM requirements, authorizing the work to be performed and
the realease of RM into production, and directing the movement of the WIP thru its
various stages
2. Cost accounting
= monitors the flow of cost information related to production.
= the information produced is used for inventory valuation, budgeting, cost
control, performance reporting, and management decisions

Production methods:
1. Continuous processing
= Creates a homogeneous product thru continuous series of standard procedures
= To maintain FG inventory at levels needed to meet expected demand (sales
forecast)
2. Make-to-order
= Involves the fabrication of discrete products in accordance w/ the customer
specifications (sales orders)
3. Batch processing
= Each item in the batch is similar & requires the same raw materials & operations
= Large number of items per batch
= most common

Process: (batch production)

1. Plan and control production
= specifies the materials & operations requirements
= production scheduling
2. Perfrom production operations (production work center)
= actual production
3. Maintain inventory control
(a) FG Warehouse
(b) Inventory control
= status report of FGI and RMI
= maintain an adequate level of inventory to meet current demand
4. Perform cost accounting

Accounting records: (batch production)

1. Production schedule
= the formal plan and authorization to begin production
= includes batch number, quantity, and timetable for beg. and end of production
2. Bill of materials (BOM)
= types and quantites of the RM and subassemblies used in producing a single unit
of finished product
= 1:1, RM for one product for one BOM hence multiplied for the number of item in
the batch
3. Route sheet
= shows the production path that a particular batch of product follows during
manufacturing
= sequence of operations & standard time allocated to each task
4. Work order
= "production order"
= drawn from BOM & route sheet
= specify the materials and production for each batch
= together w/ move tickes, inititates the manufacturing process
5. Move ticket
= records work done in each center & authorizes the movement of the job/ batch from
one work center to the next
6. Materials requisition
= authorizes the storekeeper of RM to release the materials to individuals/ work
centers
= specifies only standard quantities

Conversion cycle controls: (Ref: James hall, pp. 347)

1. Transaction authorization
(a) Work orders
(b) Move tickets
(c) Materials requisition
2. Segragation of duties
*Objectives:
(a) to separate the tasks of transaction authorization and transaction processing
(b) to segregate record keeping from asset custody:
(1) invenotry control separate from RM & FG inventory custody
(2) cost accounting separate from work centers
(3) GL separate from other acccounting functions
3. Supervision
*supervisors oversee:
(a) RM usage = to minimize waste
(b) timekeeping
4. Access
(a) Direct access = nature of physical product & production process influences the
type of access of access controls needed
(b) Indirect access = access to records (source documents) that control them
5. Accounting records
= prenumbered source documents to detect errors
6. Independent verification
(a) Cost accounting function reconciles all cost of production.
(b) GL reconciles overall system
(c) internal & external auditors

Information system that support lean manufacturing

1. Materials requisiton planning (MRP)
= automated production planning and control system used to support inventory
management.
2. Manufacturing resources planning (MRP II)
= extension of MRP that has evolved beyond the confines of inventory management.
= coordinates a wide range manufacturing activities
3. Enterprise resource planning (ERP)
= intergrates departments and functions across a company into one system of
integrated applications that is con#nected to a single database
= composed of function-specific modules that connect industry best practices (i.e
Xero, Quickbooks)
= Electronic data interchange (EDI), via internet or direct connection, it allows
the form to have external transactions (suppliers/ customers)

EOQ MODEL (Conceptual)

* To reduce total inventory costs.
* Parameters:
1. Ordering costs (OC) = higher inventory qty. order, lower OC
2. Carrying costs (CC) = higher inventory qty. order, higher CC
* Reorder point
= level as to which order must be made
= lead time * daily demand
* Safety stocks
= added to the reorder point to avoid unanticipated stock#-out events

LEAN MANUFACTURING
* evolved from the Toyota Production System (TPS) w/c is the Just in Time (JIT)
production model
* Goals:
1. Improved efficiency & effectiveness in every area
2. Getting the right products to the right place, at the right time, in the right
quantity while minimizing waste and remaining flexibility
* Characteristics/ Principles:
1. Pull processing
= pulling products from the consumer end (demand)
2. Perfect quality
= zero defects from RM, WIP, FG inventory
= considers the cost of scrap, reworking, delays, defects, etc.
3. Waste minimization
= All activities that do not add value and maximize the use of scarce resources
must be eliminated
4. Inventory reduction
= three common problems:
(a) inventories cost money
(b) inventories camouflage production problems
(c) willingness to maintain inventories can precipitate overproduction.
5. Production flexibility
= strive to reduce setup time to a minimum
6. Established supplpier relations
= firm must have established and cooperative relationships w/ vendors
7. Teams attitude
= Each employee must be vigilant of problems that threaten the continuous flow
operation of the production line.

Manufacturing flexibility (Flexible production system)

* achieved by lean manufacturing bc modern customers want quality products,. quick
action, and variety of choices

Techniques and technologies that promote lean manufacturing:

1. Physical reorganization of the production facilities
2. Automation of the manufacturing process
= Traditional > Islands of technology > Computer integrated manufacturing (CIM)

CIM Environment:
1. Automated storage and retrieval systems (AS/RS)
= carry raw materials from stores to the shop floor and finished products to the
warehouse.
2. Robotics
= prgrammed to perform specific actions
3. Computer-aided design (CAD)
= used by engineers to design better products faster
4. Computer-aided manufacturing (CAM)
= use of computers to assist the manufacturing process.

Accounting in Lean Manufacturing Environment

* focuses on manufacturing performance
* focuses on demand rather than supply
1. Activity-based costing
2. Value stream accounting

Deficiencies in traditional system:

1. Inaccurate cost allocation
2. Promotes non-lean behavior
3. Time lag
4. Financial operation

ACTIVITY-BASED COSTING
* Assigning cost to activities based on their use of resources and assigning cost
to cost objects based on their use of activities.
* Activities
= describe the work performed in a firm
Cost objects
= reason for performing the activity
Activity driver
= measures the activity consumption by the cost object.
Process:
1, Determine the cost of activity
2. Activity costs assigned to their activity driver

Advantages & disadvantages: (Ref. James Hall, pp. 357)

VALUE STREAM ACCOUNTING

* Captures costs by value stream rather than by department or activity
* Includes all costs associated w/ the product family, but makes no distinction
between direct and indirect costs
* Product family
= essential aspect
= share common processes from order to shipping
* Raw material costs
= how much RM has been purhased for the value of the stream rather than the input
(used)
* Labor costs
= all labor work included in the stream
* Overhead
= Charge per square foot the value stream is the only one allocated cost
= Goal: to minimize the space used

_____________________________________________

CHAP8: Financial Reporting and Management Reporting Systems

GENERAL LEDGER SYSTEM (GLS)

* Input > Process > Output
1. Input
(a) Collect transaction data promptly & accurately
(b) Classify/ code data accounts
(c) Validate collected transactions/ maintain accounting controls (equal dr & cr)
2. Process:
(a) Post transaction to proper accounts
(b) Update GL account and transaction files
(c) Record adjustments
3. Output
(a) Store transaction data
(b) generate timely FS reports

GLS Database:
1. General ledger master file
= principal file in the GLS database
= based on the organization's published chart of accounts
2. General ledger history file
= provides historical financial data for comprehensive financial reports
3. Journal voucher file
= total collection of the journal vouchers processed in the current period
4. Journal voucher history file
= contains journal vouchers for the past periods
5. Responsibility center file
= contains inputs (revenues, expenditures, assets) for each reponsibility center in
the organization; financial data by responsibility reports for MRS
6. Budget master file
= budgeted amounts for revenues, expenditures, assets for responsibility centers;
budget data by responsibility reports for MRS

GSL Reports:
* General ledger analysis
1. listing of transactions
2, allocation of expenses to cost centers
3. comparison of account balances from prior periods
4. trial balances
* Financial statements
* Managerial reports
1. analysis of cash
2. analysis of sales
3. analysis of receivables
* Chart of accounts

Potential risks in GL/ FRS

1. A defective audit trail.
2. Unauthorized access to the general ledger.
3. GL accounts that are out of balance with subsidiary accounts.
4. Incorrect GL account balances because of unauthorized or incorrect journal
vouchers.

Controls (SAS 78)

1. Transaction Authorization = use of journal voucher to authorize entry to GL
2. Segregation of duties
3. Access controls
4. Accounting records
* Audit trail
= record of the path that a transaction takes through the input, processing, and
output phases of transaction processing
= facilitates error prevention and correction
5. Independent verification
* two operational reports:
(a) Journal voucher listing
= provides relevant details about each journal voucher posted to the GL.
(b) GL change report
= presents the effects of journal voucher postings to the GL accounts.

Using databse technology

* Input > Monitoring > Generate FS

HTML: Hyper Text Markup Language

* Format used to produce = layout, fonts, graphics
* Hypertext links to other documents on the web
* Cannot be proccessed to IT automation

XML: eXtensible Markup Language

* Meta-language for describing markup languages
* Extensible
= Any markup language can be created:
1. Capable of storing data in relational form
2. Can be used to model data structure of an org's internal database

XBRL: eXtensible Business Reporting Language

* XML-based language for standardizing methods for preparing, publishing, and
exchanging financial infromation
* XBRL taxonomies are classification schemes
* Audit implication:
1. Taxonomy creation
= incorrect taxonomy > invalid mapping > misrepresentation of financial data
2. Taxonomy mapping error
3. Validation of instance documents
= ensure that approximate taxonomy and tags have been applied
3. Audit scope and timeframe
= impact on auditor responsbility as a consequence of real-time distribution of FS

MANAGEMENT REPORTING SYSTEMS (MRS)

* Produce financial and nonfinancial information needed by management to "plan,
evaluate, control"
* "Discretionary reporting"
* Mandated by SOX legislation
= equires that all public companies monitor and report on the effectiveness of
internal controls over financial reporting

Factors that influence MRS design:

1. Management principles
(a) Fomalization of tasks
*management should structure the firm around the tasks it performs rather than
around individuals with unique skills
*allows formal specification of the information needed to support the tasks
(b) Responsibility and Authority
* Responsibility = obligation to achieve desired results
* Authority = power to make decisions within the limits of that responsibility
* Span of control = number of subordinates directly under the manager's control
* Manager delegates responsibility to a subordinate
* Define the vertical reporting channels of the firm through which information flow
(c) Management by exception
* Managers should limit their attention to potential problem areas
* Focusing on changes in key factors that are symptomatic of potential problems.
2. Management function, level, and decision type
(a) Strategic planning decisions
*Top management
(b) Tactical planning decisions
* Middle management
(c) Management control decisions
* Using resources as productively as possible in all functional areas
* Evaluating the performance of subordinates againsts pre-established standards
(c) Operational control decisions:
* Deal w/ routine tasks
* Narrower focus, dependent on details
* three basic elements:
(1) Set attainable standards
(2) Evaluate performance = actual - standard = variance
(3) Take corrective action
3. Problem sturcture
* Reflects how well the decision maker understands the problem
* Three elements:
(a) Data = relevant values
(b) Procedures = sequence of steps or decision rules used
(c) Objectives = desired result
## Unstructured problems = have no precise solution techniques
Structured problems = all three elements are known w/ certainty
4. Types of management reports
* Report
= may be a paper document/ digital image
* Report objectives
= Reports must have (value) informational content
= Reduce level of uncertainty & influence the decision maker in a positive way
* Report attributes
(a) Relevance = useful to decision making
(b) Summarization = appropriate level of detail
(c) Exception orientation = identify risks
(d) Accuracy = free of material errors
(e) Completeness = essential information
(f) Timeliness = in time for decisions
(g) Conciseness = understandable format
* Types of reports:
(a) Programed reports
= Provides information to solve problems that users have anticipated.
(1) Scheduled reports = produced at intervals, i.e., weekly
(2) On-demand reports = triggered by events. i.e, inventory levels drop to a
certain level
(b) Ad-hoc reports
= designed and created as needed
5. Responsibility accounting
* Implies that every economic event that affects the organization is the
responsibility of and can be traced to an individual manager
* Setting financial goals: budgeting
= flows downward
* Measuring and reporting perfomance
= flows upward (responsibility reports)
* Responsibility centers:
(a) Cost centers = keeps costs within budgetary limits
(b) Profit centers = cost control & revenue generation
(c) Investment centers = authority over costs, revenue, and investments in assets
6. Behavioral considerations
(a) Goal congruence
(b) Information overload
* Causes managers to disregard their formal information and rely on informal cues
to help them make decisions
(c) Inappropriate performance measures
* Appropriate performance measures
= Stimulate behavior consistent with the objectives of the firm
= Managers consider all relevant aspects, not just one
* Examples of inappropriate measures:
(1) Price variance
(2) Quotas
(3) Profit measures

_________________________________________________________

CHAP11: Enterprise Resource Planning Systems

Problems w/ Non-ERP Systems:

1. In-house design limits external connectivity
2. Tendency towards separate infromational systems within firm
3. Strategic decision-making not supported
4. Long-term maintenance costs high
5. Limits ability to engage in process reengineering

CLOSED-DATABASE ARCHITECTURE
* Similar in concept to flat-file appraoch
* Existence of numerous distinct and independent databases
* Paper-based

ERP SYSTEM
* A multi-module application software that helps a company manage the important
parts of its business in an integrated fashion
* Key features:
1. Smooth and seamless flow of information
2. Standardized environment w/ shared databse independent of appplications and
integrated applications

TWO MAIN ERP APPLICATIONS

1. Core applications
* "On-line Transaction Processing" (OLTP)
* Operationally support the day-to-day activities of the business
* Support mission-critical tasks thru simple queries of operational databases
2. Business analysis applicaitons
* "Online analytical processing" (OLAP)
* Decision support tool for management-critical tasks thru analytical investigation
of complex data associations
* Supplies management w/ real-time information
* Data warehouses:
(a) Consolidation
= aggregation of roll-up data
(b) Drill-down
= allows uses to see data in selective increasing levels of details
(c) Slicing and dicing
= enables the user to examine data from different viewpoints
= often performed to depict trends and patterns

ERP SYSTEM CONFIGURATIONS

1. Two-tier model (Ref: James hall pp. 522)
* Common server handles both application and database duties
* Used especially in LANs
* For small population
2.Three-tier model (Ref: James hall pp. 523)
* Client links to the application server w/c then initiates a second connection to
the database server
* Used especially in WANs
* For large population

DATABASE CONFIGURATION
* Selects specific database from thousand tables and processes by setting switches
in the system.
* Company changes its processes to accommodate the ERP

BOLT-ON-SOFTWARE
* Third-party vendors provide specialized functionality software
* Least-risky approach
* Supply chain management (SCM) links vendors, carriers, third-party logistics
companies, and information systems providers

DATA WAREHOUSE
* A relational or multidimensional database that may consume hundreds of gigabytes
or even terabytes of disk storage
* Consturcted for quick-searching, retrieval, ad-hoc queries, and ease of use
* Central archive
* Data mart
= Organized for a single department or function
## An ERP system could exist without having a data warehouse

DATA WAREHOUSE PROCESS

1. Modeling data for the data warehouse
* Normalizing data
= Operational database is necessary to reflect accurately the dynamic interactions
among entities
= Eliminates three anomalies: Update, insertion, deletion anomalies
* Warehouse consists of denormalized data
= Due to the vast size of a data warehouse
= Relational theory does not apply to a data warehousing system
= Normalized data may be consolidated into denormalized data
2. Extracting data from operational databases
* Process of collecting data from operational databases. flat-files, archives, and
external data sources
* Operational databases typically need to be out of service when data extraction
occurs to avoid inconsistencies
* Changed data capture
= Dramatically reduce the extraction time by capturing only newly modified data.
* Key feature of a data warehouse
= Data are in a nonvolatile (stable) state.
3. Cleansing extracted data
* Involve filtering out/ repairing invalid data prior to being stored
* Dirty data
= Clerical, data entry, computer program errors, mispelled names, and blank fields
* Involves transforming data into standard business terms w/ standard data values
4. Transforming data into the warehouse model
* To improve efficiency, data is transformed into summary views before they are
loaded
* Data warehouse views = physical tables
Operational views = virtual in nature w/ underlying base tables
5. Loading the data into that data warehouse
* Data warehouses must be separate from operational databases:
(a) Internal efficiency
(b) Integration of legacy systems
(c) Consolidation of global data

DECISIONS SUPPORTED BY THE DATA WAREHOUSE

* Drill-down capability is a useful data analysis technique associated with data
mining.
* Standard reports and queries (summary views) = answer what questions
Drill-down capability = answer the why and how questions.

RISKS
1. Pace of implementation
* Big-bang = switch operations from legacy systems to ERP in a single event
* Phased-in = independent ERP units installed over time, assimilated and integrated

2. Opposition to changes to business culture

* User reluctance and inertia
* Need of (upper) management support
3. Choosing the wrong software
* Goodness of fit: No ERP system is best for all industries
* Scalability: System's ability to grow
4. Choose the wrong consultant
* Common to use a third-party (the Big Five)
* Be thorough in interviewong potential consultants
* Establish explicit expectations
5. High-cost and cost overruns
* Common-areas w/ high costs:
(a) Training
(b) Testing and integration
(c) Database conversion
6. Disruptions to operations
* ERP is reengineering-expect major changes in how business is done

IMPLICATIONS FOR INTERNAL CONTROLS AND AUDITING

1. Transaction authorization
* Controls are needed to validate transactions before they are accepted by other
modules
* ERPs are more dependent on programmed controls than on human intervention
2. Segregation of duties
* Manual processes that normally require segregation of duties are often eliminated

* User role: Predefined user roles limit a user's access to certain functions and
data
3. Supervision
* Supervisors need to acquire a techinical and operational understanding of the new
system
* Employee-empowered philosophy should not eliminate supervision
4. Accounting records
* Corrupted data may be passed from external sources and from legacy systems
* Loss of paper audit trail
5. Independent verification
* Need to shift from transaction level to overall performance level
6. Access controls
* Critical concern w/ confidentiality of information
* Who should have access to what?
7. Access to data warehouse
* Data warehouses often involve sharing information w/ suppliers and customers
8. Contingency planning
* How to keep business going in case of disaster
* Key role of servers requires backup plans: redundant servers or shared servers

ERP Products
1. SAP: Largest ERP vendor
* Modules can be integrated/ used alone
* New features include SCM, B2B, e-commerce, XML
2. J.D Edwards
* Flexibility: Users can change features; less of a pre-set structure than SAP's
* Modularity: Accept modules (bolt-ons) from other vendors
3. Oracle
* Tailored to e-business focus
* Internet based vs. client-server based applications
4. PeopleSoft
* Open, modular architecture allows rapid integration w/ existing systems
5. Baan
* Use of "best-of-class" applications

________________________________________________________

CHAP12: Electronic Commerce System

ELECTRONIC COMMERCE (E-commerce)

* electronic processing and transmission of data. This broad definition encompasses
many diverse activities
* includes:
(a) electronic buying and selling of goods and services
(b) online delivery of digital products
(c) electronic funds transfer (EFT)
(d) electronic trading of stocks
(e) direct consumer marketing
(f) electronic data interchange (EDI)

INTERNET TECHNOLOGIES
1. Packet switching
* Messages are divided into small packets for transmission
* Each packet of the same message may take different routes
2. Virtual private network (VPN)
* A private network within a public network
3. Extranets
* A password controlled netwrok for private users
* Intended for private consumption
4. World wide web
* Internet facility that links user sites locally and around the world.
5. Internet addresses
(a) E-mail address
(b) URL address
(c) IP address

PROTOCOLS
* Rules and standards governing the design of hardware and software that permit
users of networks
* Functions:
1. Facilitate the physical connection between the network devices
2. Synchronize the transfer of data between physical device
3. Provide a basis for error checking and measuring network performance
4. Promote compatibility among network devices
5. Promote network designs that are flexible, expandable, and cost-effective

INTERNET PROTOCOLS
1. Transfer control protocol/ Internet protocol (TCP/IP)
* Basic protocol that permits communication between Internet sites
* Controls how individual packets of data are formatted, transmitted, and received
2. Hypertext transfer protocol (HTTP)
* Controls web browsers
3. File transfer protocol (FTP)
* Used to transfer text files, programs, spreadsheets, and databases across the
Internet.
4. Simple network mail protocol (SNMP)
* Most popular protocol for transmitting e-mail messages
5. Secure sockets layer (SSL)
* Low-level encryption scheme used to secure transmissions
6. Secure electronic transmission
* Encryption schemes developed by a consortium of technology firms and banks
7. Private communication technology (PCT)
* Provides authentication and encryption to secure privacy in Internet transactions

8. Privacy enhanced email (PEM)

* Standard for secure e-mail on the Internet
9. Open system interface (OSI)
* A layered set of protocols developed by International standards organization
* Purpose: To provide standards by which the products of different manufacturers
can interface w/ one another

BENEFITS FROM INTERNET COMMERCE

1. Access to a worldwide customer and/or supplier base.
#2. Reductions in inventory investment and carrying costs.
#3. The rapid creation of business partnerships to fill market niches as they
emerge.
#4. Reductions in retail prices through lower marketing costs.
#5. Reductions in procurement costs.
#6. Better customer service

INTERNET BUSINESS MODELS

1. Information level
* Uses internet to display information about the company, its products, services,
and business policies
2. Transaction level
* Uses the Internet to accept orders from customers and/or to place them with their
suppliers
3. Distribution level
* Uses the Internet to sell and deliver digital products to customers
* i.e, subscriptions

DYNAMIC VIRTUAL ORGANIZATIONS

* Ability to forge dynamic business alliances with other organizations to fill
unique market niches as opportunities arise.

AREAS OF GENERAL CONCERN

1. Data security
2. Business policies
3. Privacy
4. Business process integrity

INTRANET RISKS
1. Intercepting network messages
* Sniffing
= Unauthorized interception of this information by a node on the network
2. Accessing corporate databases
* Connections to central databases increase the risk that the data will be
accessible by employees
3. Priveledged employees
* Override priveleges may allow unathorized access to mission-critical data
4. Reluctance to prosecute
* Fear of negative publicity leads to such reluctance but encourages criminal
behavior

INTERNET RISKS TO CONSUMERS

* How serious is the risk?
= National consumer league: internet fraud rose by 600% between 1997 and 1998
= SEC: e-mail complaints alleging fraud rose from 12 per day in 1997 to 200-300 per
day in 1999
1. Risks to consumers:
(a) Theft of credit card numbers
(b) Theft of passwords
(c) Consumer privacy
= use of cookies w/c are files containing user information
(d) Cookies and consumer security
= Cookies are text (.txt) files that can be read with any text editor
2. Risks to businesses
(a) IP spoofing
= Form of masquerading to gain unauthorized access to a Web server and/or to
perpetrate an unlawful act without revealing one’s identity
(b) Denial of service (DOS) attack
= Assault on a Web server to prevent it from servicing its legitimate users.
= Three common types:
(1) SYN Flood attack
= Accomplished by not sending the final acknowledgment to the server’s SYN-ACK
response
(2) Smurf attack
= Involves three parties: the perpetrator, the intermediary, and the victim.
= Accomplished by exploiting an Internet maintenance tool called a ping w/c is used
to test the state of network congestion & determine if the host is connected and
available on the network
(3) Distributed denial service
= May take the form of a SYN flood or smurf attack but distinguished by the vast
number of "zombie" computers hijacked to launch the attacks
= Used to punish an organization with which the perpetrator had a grievance or
simply to gain bragging rights
(c) Other malicious programs
= Viruses, worms, logic bombs, and Trojan horses pose a threat to both Internet and
intranet users

E-COMMERCE SECURITY
1. Encryption
* Conversion of data into a secret code for storage in databases and transmission
over net#works
2. Digital authentication
(a) Digital signature
= Electronic authentication technique that ensures the transmitted message
originated with the authorized sender and that it was not tampered with after the
signature was applied
(b) Digital certificate
= Electronic identification card that is used in conjunction with a public key
encryption system to verify the authenticity of the message sender
3. Firewalls
(a) Network-level firewall
= Basic screening of low-security messages
(b) Application-level firewall
= High-level network security

SEALS OF ASSURANCE
1. Better business bureau (BBB)
2. TRUSTe
3. Veri-Sign, Inc.
4. International computer security association (ICSA)
5. AICPA/ CICA Webtrust
6. AICPA/CICA SysTrust

IMPLICATIONS FOR ACCOUNTING

1. Privacy violation
* 1995 Safe Harbor Agreement
= Establishes standards for information transmittal between US and European
companies
2. Continuous auditing
* Auditors review tranactions at frequent intervals/ as they occur
* Intelligent control agents (computer programs)
= heuristics that search electronic transactions for anomalies \
3. Electronic audit trails
4. Confidentiality of data
* Open system designs allow mission-critical information to be at the risk to
intruders
5. Authentication
6. Nonrepudiation
* Repudiation can lead to uncollected revenues/ legal action
* Use digital signatures & certificates
7. Data integrity
* Determine whether data has been intercepted and altered
8. Access controls
9. Changing legal environment