ACCOUNTING INFORMATION SYSTEM - deals with business events that occur frequently

PRIMARY INFO FLOWS WITHIN THE BUSINESS - activities include:

ENVIRONMENT  converting economic events into financial
The Information Environment transactions
Information is a business resource. Like other business  recording financial transactions in the
resources of RM, capital, and labor, info is vital to the survival accounting records
of the contempo bus orgn.  distributing essential financial information
Three Management Tiers: to operations personnel to support their
1. Operations management – responsible for controlling daily operations
day to day opns Three transaction cycles:
2. Middle management –short-term planning a. Revenue cycle
- coordination of activities b. Expenditure cycle
3. Top management – long term plans c. Conversion cycle
- setting orgn’l objectives 2. General ledger/ fin reporting system (GL/FRS)
External users: - produces traditional FS
1. Trading partners – GRS - most transactions come from the transaction
2. Stakeholders – entities with direct or direct interest in cycle
the firm FRS - measures and reports status of fin resources and
the changes in those resources
System - communicates this info to external users (NON-
– generates mental images of computers and programming DISCRETIONARY REPORTING)
- Natural systems and Artificial systems - orgn has few or no choice in the info it provides
Elements of a System: - much of this information consists of:
1. Multiple components – a system must contain more  traditional FS
than one part  tax returns
2. Relatedness – a common purpose relates the multiple  other legal documents
parts of the system 3. Management reporting system (MRS)
- all parts serve a common - provides internal mgt with special-purpose fin reports
objective and info needed for decision making
3. System vs. Subsystem – interchangeable - provides internal info needed to manage a business
System – called subsystem when it is viewed in relation - DICRETIONARY REPORTING
to the system in which it is a part - orgn can choose what info to report and how to
Subsystem – called a system when it is the focus of the present it
attention - typical reports include:
4. Purpose – a system must serve at least one purpose  budgets
- when a system ceases to serve a  variance reports
purpose, it should be replaced  cost-volume-profit analyses
System Decomposition  reports using current cost data
Decomposition – the process of dividing system into small
subsystem parts Management Information System
- by decomposing, the overall system - often requires info that goes beyond the capability of AIS
as a hierarchy can be presented - processes non-fin transactions that are not processed by
Subsystem interdependency – a system’s ability to achieve traditional AIS
its goal depends on the effective functioning and harmonious
interaction of its subsystems Why is it important to Distinguish between AIS and MIS?
- designers of all types of systems need to recognize the  Because of the highly integrative nature of modern IS,
consequences of subsystem failure and provide the mgt and auditors need a conceptual view of the info that
appropriate level of control distinguishes key processes and areas of risk and legal
- control should be provided on a cost-benefit basis responsibility from the other aspects of the system.

Info System Framework GENERAL MODEL FOR INFO SYSTEM

Info system – set of procedures by which data are collected, 1. End users
processed into info, and distributed to customers a. External users
- info system accepts input called transactions b. Internal users – management at every level of the
- convert these inputs thru various processed into orgn and the operations personnel
output info that goes to users 2. Data sources
- distinction between the AIS and MIS - fin transactions that enter the info system from both
centers on the concept of a transaction internal and external sources
Transactions – event that affects or is of interest to the orgn a. External fin transactions – most common source
and is processed by its info system as a unit of work of data
Two classes of transactions: - economic changes
1. Financial transaction – economic event effecting the b. Internal fin transactions exchange or movement
assets and equities of the orgn of resources within the orgn
2. Non-financial transaction – residual definition Data vs Information:
Data – facts which may or may not be processed and
Accounting Information System have no direct effect on the user
 AIS subsystems process fin transactions and non-fin Info – causes the user to take an action that they could
transactions that directly affect the processing of fin not and would not have taken
transactions - allows users to take action to resolve conflicts
Three Major Subsystems: reduce uncertainty and make decisions
1. Transaction processing system (TPS) 3. Data collection - first opn’l system
- support daily bus opns - most important system in the
- central to overall function of the info system system
 Objective: to ensure that the event data entering the
system are valid, complete, and free from material
errors
Two rules governing the design of data collection
procedures:
a. Relevance - info system should only capture
relevant data
- system designer to
determine what is and what is not relevant
b. Efficient – designed to collect data only once
- to make the data available to
multiple users
4. Data processing
5. Database management
Database – physical repository for fin and non-fin data
Data hierarchy: (ARF)
a. Attribute – most elemental piece of potentially
useful data in the database
- logical and relevant characteristic of an
entity about which the
firm captures data
a. Record – complete set of attributes for a single
occurrence within an entity class
- every record in the database
must be unique in at least one attribute
b. Files – complete set of records of an identical
class
Database management task
Three fundamental tasks:
a. Storage – assigns keys to new records - store
them in proper location in the database
b. Retrieval – task of locating and extracting an
existing record from database for processing
c. Deletion – permanently removing obsolete or
redundant records from the database
6. Information generation – process of compiling
arranging, formatting, and presenting info to users
Useful info has the ff. characteristics:
a. Relevance – contents of a report must serve a
purpose
- irrelevant info waste
resources and may be counterproductive to the
user
b. Timeliness – info must be no older than the time
period of the action it supports
c. Accuracy – info must be free from error
- there is material error when
the amt of inaccuracy causes the user to make
poor decisions or to fail to make necessary
decisions
- info designer seek a balance bet info that
is accurate as possible, yet timely to be
useful
d. Completeness – no piece of info is essential to a
decision or task should be missing
e. Summarization – info should be aggregated in
accordance to the user’s needs
7. Feedback – form of output that is sent back to the
system as a source of data
- used to initiate or alter a process
Info System Objectives
Three fundamental objectives common to all systems:
1. To support the stewardship function of management
2. To support mgt decision making
3. To support the firm’s day to day opns
Acquisition of Info System
How orgns obtain info system:
1. organizations develops customized systems from
scratch thru in-house dev’t activities
2. they purchase preprogrammed commercial systems
Three basic types of commercial software:
1. Turnkey system – completely finished and tested
systems that are ready for implementation
- general-purpose systems
2. Backbone system – consist of a basic system structure
which is to build
- between a customs system and a
turnkey system
3. Vendor-supported systems – customized system
purchased by client commercially
FUNCTIONAL AREAS AND PRINCIPAL ACTIVITIES OF A
BUSINESS
Organization Structure
 The structure of an organization reflects the distribution
of responsibility, authority, and accountability throughout
the organization.
 Understanding the distribution pattern of responsibility,
authority, and accountability is essential for assessing
user information needs.
Business Segments
 Business organizations consist of functional units or
segments.
 Firms organize into segments to promote internal
efficiencies through the specialization of labor and cost-
effective resource allocations.
Three most common approaches include segmentation
by:
1. Geographic location – Many orgs have opns dispersed
across countries to gain access to resources, markets,
or lines of distribution.
2. Product line - Product segmentation allows the
organization to devote specialized management, labor,
and resources to segments separately, almost as if they
were separate firms.
3. Business function
- Functional segmentation divides the organization into
areas of specialized responsibility based on tasks.
Functional Segmentation - most common method of
organizing
1. Materials management
- Every dollar invested in inventory is a dollar that is not
earning a return.
Objective: to plan and control the materials inventory of
the company.
Three subfunctions:
a. Purchasing - responsible for ordering inventory
from vendors when inventory levels fall to their
reorder points.
b. Receiving - task of accepting the inventory
previously ordered by purchasing.
c. Stores - takes physical custody of the inventory
received
- releases these resources into the
production process as needed.
2. Production - occur in the conversion cycle
Two broad classes:
a. Primary manufacturing activities
- shape and assemble RM into FG
b. Production support activities
- ensure that primary mftg activities operate
efficiently and effectively
Includes the ff. activities:
a. Production planning - involves scheduling the
flow of materials, labor, and machinery to
efficiently meet production needs
b. Quality control - monitors the manufacturing
process at various points to ensure that the
finished products meet the firm’s quality
standards
c. Maintenance - keeps the firm’s machinery and
other manufacturing facilities in running order
- key to maintenance:
PREVENTION
3. Marketing - The marketing function deals with the
strategic problems of product promotion, advertising,
and market research
4. Distribution – activity of getting the product to the
customer after sale
5. Personnel – competent and reliable employees
- objective: to effectively manage resources
6. Finance – manages the fin resources of the firm
- financial planners seek lucrative investments in
stocks and other assets and low-cost lines of
credit from banks
7. Accounting function – manages fin info resources of
the firm
Plays two important role in transaction processing:
a. accounting captures and records the financial
effects of the firm’s transactions
b. accounting function distributes transaction
information to operations personnel to coordinate
many of their key tasks
Value of information
- the value of information to a user is determined by its
RELIABILITY
- information must possess certain attributes—
relevance, accuracy, completeness, summarization, and
timeliness.
Accounting independence
- accounting activities must be separate and
independent of the functional areas that maintain
custody of physical resources
8. IT Function
a. Centralized database system
- all data processing is performed by one or more
large computers housed at a central site that
serve users thru out the org
Key functions:
i. Database administration - data resources
in a central location that is shared by all
end users
ii. Data processing – this group manages the
computer resources used to perform the
day to day processing of transaction
Consists the ff. functions:
1. Data control
2. Data conversion - transcribes
transaction data from source
documents to digital media
- those suitable for computer
processing by the central
computer, which is managed
by the computer operations
group
3. Data library – room often adjacent
to the computer center that
provides safe storage for the offline
data files
iii. Systems dev’t and maintenance
Information needs of users are met by two
related functions:
1. Systems dev’t – responsible for
analyzing user needs and for
designing new systems
2. Systems maintenance
Participants:
1. System professional – gather
facts about the user’s problem,
analyze the data, and formulate a
solution
2. End users – those whom the
system is built
3. Stakeholders
b. Distributed data processing
- involves reorganizing the IT function into small
information processing units (IPUs) that are
distributed to end users and placed under their
control
Disadvantages:
i. Mgt of org-wide resources
ii. Hardware and software incompatibility –
can result to uncoordinated and poorly
conceived decisions
iii. Redundant tasks – autonomous systems
dev’t activities distributed thru out the firm
can result in each user area reinventing
the wheel
iv. Consolidating incompatible activities
v. Hiring qualified professionals - end-user
managers may lack the knowledge to
evaluate the technical credentials and
relevant experience of candidates applying
for a position as a computer professional
vi. Lack of standard
Advantages:
i. Cost reduction
1. data can be entered and edited at
the IPU, thus eliminating the
centralized tasks of data conversion
and data control; and
2. application complexity can be
reduced, which in turn reduces
development and maintenance
costs.
ii. Improved cost control responsibility
iii. Improved user satisfaction
iv. Backup – ability to back up computing
facilities to protect against potential
disasters
STAGES OF THE EVOULTION OF IS MODELS
1. Manual process model – oldest and most traditional
form of acctg systems
- simply a training aid
Merit in studying manual process before computer-
based systems:
a. Helps establish an important link bet AIS course
and other acctg courses
b. The logic of a business is more easily understood
when it is not shrouded by technology
c. Manual procedures facilitate understanding
internal control activities
2. Flat-file model – legacy systems
- describes environment in which individual data files
are not related to other files
- end user use own their own data files
- stand-alone applications
Three significant problems in the flat-file
environment:
a. Data storage - To meet the private data needs of
users, organizations must incur the costs of both
multiple collection and multiple storage
procedures
b. Data uploading – orgs have great deal of data in
files that require periodic updating to reflect
changes
c. Currency info – problem of multiple updates:
problem of failing to update all the user files
affected by a change in status
Task-data dependency – another problem of flat file
approach
- users’ inability to obtain add’l info as their needs
changes
Flat-file limit data integration
- FFM is a single-view model
- files are structured, formatted, and arranged to suit the
specific needs of the owner or primary user of the data
Users presented with 3 options:
a. Do not use acctg data to support decisions
 b. Manipulate and massage the existing data
structure to suit their unique needs
c. Obtain add’l private sets of data and incur the
costs and opn’l problems associated with data
redundancy
3. Database model
- special software system that is programmed to know
which data elements each user is authorized to access
- diff of FFM and DBM: pooling of data into a common
database that all orgn’l users share
Through data sharing, the following traditional
problems associated with the flat-file approach may
be overcome:
a. Elimination of data redundancy – data are
stored in a generic format that supports multiple
users
b. Single update
c. Current value
4. REA Model
- a framework for modeling an org’s critical resources,
events and agents (REA) and the relationship between
them
- requires the acctg phenomena be characterized in a
manner consistent with the dev’t of multiple user views
- under this, bus orgs prepare FS directly from the event
database
a. Resources – asset of org
b. Events – phenomena that affect changes in
resources
c. Agents – individuals and departments
participating in an economic event
5. Enterprise resource planning (ERP)
- enables an org to automate and integrate its key bus
processes
- breaks down traditional functional barriers by
facilitating data sharing, information flows, and the
introduction of common business practices among all
organizational users

RELATIONSHIP BETWEEN EXTERNAL AUDITING,

INTERNAL AUDITING, AND IT AUDITING
Accountants as Users
- accounting function is the single largest user of IT
- accountants must provide a clear picture of their needs to the
professional who design their system

Accountants as System Designer

Accounting function: responsible for conceptual system
IT function: responsible for physical system

Accountants as System Auditors

External auditing – attest to the fairness of FS
- assurance services: professional services
designed to improve the quality of info
- represent third party outsiders
IT auditing – usually performed as part of a broader fin audit
Internal auditing – appraisal function housed within the
-represent interest of the management

TRANSACTION PROCESSING
TPS applications process financial transactions.
Financial transaction - economic event that affects the assets
and equities of the firm, is reflected in its accounts, and is
measured in monetary terms
Examples:
(economic exchanges with external parties)
 sale of goods or services
 purchase of inventory
 discharge of financial obligations
 receipt of cash on account from customers
(internal events)
 depreciation of fixed assets
 application of labor, raw materials, and overhead to the
production process
 transfer of inventory from one department to another
THREE TRANSACTION CYCLE – exist in all businesses
1. Expenditure Cycle
Business activities begin with the acquisition of
materials, property, and labor in exchange for cash
Two parts:
a. physical component (the acquisition of the goods)
b. financial component (the cash disbursement to
the supplier)
Major Subsystems:
a. Purchases/accounts payable system.
recognizes the need to acquire physical inventory
(such as raw materials) and places an order with
the vendor
purchases system records the event by
increasing inventory and establishing an account
payable to be paid at a later date.
b. Cash disbursements system.
authorizes the payment, disburses the funds to
the vendor, and records the transaction by
reducing the cash and accounts payable
accounts.
c. Payroll system.
collects labor usage data for each employee,
computes the payroll, and disburses pay checks
to the employees
d. Fixed asset system.
processes transactions pertaining to the
acquisition, maintenance, and disposal of its fixed
assets are relatively permanent items that
collectively often represent the organization’s
largest financial investment
2. Conversion Cycle
Two Major Subsystems:
a. production system - involves the planning,
scheduling, and control of the physical product
through the manufacturing process
b. cost accounting system - monitors the flow of
cost information related to production
- Information produces is used for inventory
valuation, budgeting, cost control, performance
reporting, and management decisions, such as
make-or-buy decisions
3. Revenue Cycle
- involves processing cash sales, credit sales, and the
receipt of cash following a credit sale
- also have a physical and a financial component, which
are processed separately
Major Subsystems:
a. Sales order processing.
The majority of business sales are made on
credit and involve tasks such as preparing sales
orders, granting credit, shipping products (or
rendering of a service) to the customer, billing
customers, and recording the transaction in the
accounts (accounts receivable, inventory,
expenses, and sales)
b. Cash receipts.
For credit sales, some period of time (days or
weeks) passes between the point of sale and the
receipt of cash. Cash receipts processing
includes collecting cash, depositing cash in the
bank, and recording these events in the accounts
(accounts receivable and cash).
ACCOUNTING RECORDS
1. Documents - provides evidence of an economic event
and may be used to initiate transaction processing.
Three types of documents:
a. Source documents - economic events result in
some documents being created at the beginning
(the source) of the transaction
- used to capture and formalize transaction data
that the transaction cycle needs for processing.
b. Product documents - result of transaction
processing rather than the triggering mechanism
for the process
c. Turnaround documents - product documents of
one system that become source documents for
another system
- contains important information about a
customer’s account to help the cash receipts
system process the payment
2. Journals - record of a chronological entry
- documents are the primary source of data for journals.
- holds a complete record of transactions and thus
provides a means for posting to accounts
Two primary types of journals:
a. special journals - used to record specific classes
of transactions that occur in high volume
- processed more efficiently than a general
journal permits
- provides a specialized format for recording only
sales transactions
b. general journals – used to record nonrecurring,
infrequent, and dissimilar transactions
- most organizations have replaced their general
journal with a journal voucher system for
practicality
Journal Voucher - actually a special source document
that contains a single journal entry specifying the
general ledger accounts that are affected
Register - used to denote certain types of special
journals, or to denote a log
3. Ledgers - book of accounts that reflects the financial
effects of the firm’s transactions after they are posted
from the various journals
- show activity by account type
- indicates the increases, decreases, and current
balance of each account
Two basic types of ledgers:
a. general ledgers - contain the firm’s account
information in the form of highly summarized
control accounts
- summarizes the activity for each of the
organization’s accounts
- provides a single value for each control
account, such as accounts payable,
accounts receivable, and inventory
- this highly summarized information is
sufficient for financial reporting, but it is not
useful for supporting daily business
operations
- mechanism for verifying the overall
accuracy of accounting data that separate
accounting departments have processed
b. subsidiary ledgers - contain the details of the
individual accounts that constitute a particular
control account
- kept in various accounting departments
of the firm, including inventory, accounts
payable, payroll, and accounts receivable
- provides better control and support of
operations
 - by periodically reconciling summary 1. Data flow programs – uses symbols to represent
balances from subsidiary accounts, entities, processes, data flows, and data stores that
journals, and control accounts, the pertain to a system
completeness and accuracy of transaction - entities: external objects
processing can be formally assessed : represent sources of and destination for data
- processes should be labelled with a descriptive
The Audit Trail objective verb
- The accounting records described provide an audit trail for - used by system analysts to represent logical elements
tracing transactions from source documents to the financial of the system
statements. - shows what logical tasks are being done but not how
- The most important to accountants is the year-end audit. they are done and who is performing it
- The external auditor periodically evaluates the financial 2. Entity relationship diagrams
statements of publicly held business organizations on behalf of - documentation technique used to represent
its stockholders and other interested parties. relationship between entities
Three types of entities:
COMPUTER-BASED SYSTEMS o physical resources (cash, RM)
Types of Files: o events (RM to production process)
1. Master File. o agents (invty control clerk, vendor, pdn worker)
- generally contains account data Cardinality:
- example: general ledger and subsidiary ledgers - degree of relationship
- data values in master files are updated from - numerical mapping between entity instances
transactions - reflects normal business rules and orgnl policy
2. Transaction File. o one to one (1:1)
- temporary file of transaction records used to change or o one to many (1:M)
update data in a master file o many to many (M:M)
- examples: sales orders, inventory receipts, and cash Relationship between the ER and the Data Flow Diagrams:
receipts are examples of transaction files. They depict different aspects of the same system but are
3. Reference File. related and can be reconciled.
- stores data that are used as standards for processing DFD= model of system processes
transactions ER= models the data used in or affected by the system
- may include: price lists used for preparing customer Flowchart – graphical repn of a system
invoices, lists of authorized suppliers, employee rosters, - describes physical relationship between its key entities
and customer credit files for approving credit sales 3. Document flowchart
4. Archive File. - used to depict elements of manual system
- contains records of past transactions that are retained - includes:
for future reference o acctg records
- inclusions: journals, prior-period payroll information, o orgl depts. involved in processes
lists of former employees, records of accounts written o activities performed in depts
off, and prior-period ledgers. Certain rules and conventions to be observed:
a. labelled properly
The Digital Audit Trail b. correct symbols used
1. sales are recorded manually on source documents c. all symbols labelled
2. conversion of source documents to digital form (done in d. lines have arrowheads
the data input stage) e. if complex process, text description
- input data stage = where the transactions are edited 4. System flowchart
and a transaction file of sales orders is produced - portray computer aspects of a system
3. updating of the various master file subsidiary and - depicts relationship between input data, transaction
control accounts that the transaction affects (additional files, computer programs, master files, and output
editing of transactions) reports
- any records that are rejected for credit problems are - describes type of media being used in the system
transferred to the error file 5. Program flowchart
- the remaining good records are used to update the - shows relationship between two computer programs,
master files (added to the archive file that serves as the the files they use, and the outputs they produce
sales journal) - sometimes used to verify correctness of logic
- after copying the valid transactions to the journal, the - provides essential details for conducting IT audits
original transaction files can now be deleted (not 6. Record layout diagrams
needed anymore for audit trail purposes) - used to reveal internal structure of records constituting
An auditor attempting to evaluate the accuracy of the accounts a file or database table
receivable figure published in the balance sheet could do so - usually shows name, data type, and length of each
via the following steps: attribute
1. AR in balance in the balance sheet VERSUS the master
file AR control account balance.
2. Reconcile the AR control figure with the AR subsidiary
account total.
3. Select a sample of update entries made to accounts in
the AR subsidiary ledger and trace these two
transactions in the sales journal (archive file). BATCH AND REAL-TIME PROCESSING
4. From these journal entries, identify specific source DISTINGUISHING BATCH REAL-TIME
documents that can be pulled from their files and FEATURE PROCESSING PROCESSING
verified. If necessary, the auditor can confirm the - permits efficient
accuracy and propriety of these source documents by mgt of large vol.
contacting the customers in question. transactions
Advantages:
DOCUMENTATION TECHNIQUES
 a. Improves
efficiency by
grouping together
large numbers of
batch
b. Provides control
over the
transaction
processes
Info time frame time lag between point No time lag
of occurrence of event
and point of these are - processes
reflected on accts transactions
- assembles individually the
transaction into moment it occurs
groups for processing
Resources Demands fewer orgl Uses direct
resources access files that
require more
- generally simpler expensive
than RTP storage devices
-easier for - 50% of cost
programmers to incurred in
maintain designing the
- computer capacity user interfaces
only when the - computer
program us being run systems cannot
be used for other
purposes
Operational Improves operational Large volumes of
efficiency efficiency by transactions
eliminating each day can
unnecessary activities create
at critical points in the operational
process inefficiency

FUNDAMENETAL TASKS PERFOMED IN THE REVENUE

CYCLE
1. Sales order procedure – includes:
 Receiving and processing customer order
 Filling order and shipping products
 Billing customer
  Correctly accounting  Wrong merchandise delivered
a. Receive order – indicates quantity of  Defective goods
merchandise desired  Damaged goods in shipment
- first task to transcribe into formal sales order  Shipping was late
-copy of sales order placed in customer open a. Prepare return slip – goods returned with the
order file which is updated each time (credit return slip go to the warehouse to be restocked
approval, back order, shipment) b. Approve credit memo – make judgment for
Contents: grant or disapproval of credit
 Customer’s name, address, account c. Update sales journal – transaction is recorded
number in sales journal as contra entry
 Name, number, and description of items - credit memo forwarded to invty control function
sold for posting
 Quantities and unit price of each item d. Update inventory and AR records – inventory
b. Check credit – establishment of customer’s control function to forward credit memo to AR
credit worthiness (where acct is also adjusted) after adjusting
- authorization control inventory
- performed separate from sales activity e. Update general ledger
c. Pick goods JE: Inventory xx
Stock release doc – identifies invty to be located SRA xx
and picked from warehouse shelves COGS xx
- formal authorization for AR xx
warehouse personnel to release the specified 3. Cash receipts procedure – applied for future event
item - involves:
Verified stock release – sent to ships goods task  Receiving and securing cash
Back order file – if there is not enough stock  Depositing cash in the bank
- stays on file until restock  Matching payment with the customer and
Stock records – adjusted by warehouse adjusting the correct amt
employee  Reconciliation of fin details
- ONLY for warehouse a. Open mail and prepare remittance advice
management purpose Remittance advice - contain info needed to
d. Ship goods – important independent verification device individual customer’s acct
control point - form of turnaround doc
Packing slip – will travel to goods to customer to - most apparent in firm
describe contents of the order processing large volumes of cash receipts daily
Shipping notice – will be forwarded to billing - mail room personnel route the checks and
function as evidence that the customer’s order remittance advices to an administrative clerk who
was filled and shipped endorses the checks ―For Deposit Only‖ and
- contents: reconciles the amount on each remittance advice
 Date of shipment with the corresponding check
 Items and quantity actually - then recording each check on a form called a
sold remittance list (or cash prelist)
 Name of carrier - includes:
 Freight charges  Payment date
- reconciliation of physical items with stock release,  Account number
packing slip, and shipping notice to verify that the order  Amt paid
is correct  Customer check number
Bill of lading – formal contract between seller and b. Record and deposit checks
shipping - verifies accuracy and completeness of checks
e. Bill customer – includes: against prelist
 Recording of sales in sales journal - update the cash receipts journal (after
 Ledger copy of SO to update AR reconciliation of prelist with check)
 Stock release doc to update inventory - preparation of bank deposit slip
S.O. pending file – where S.O. is placed until - validation of deposit slip and return to company
receipt of the shipping notice for reconciliation
S.O. – customer’s bill c. Update AR
f. Update Inventory records - remittance advices used to post to the
g. Update AR customers’ accounts in the AR subsidiary ledger
AR subsidiary ledger: d. Update general ledger
 Customer name - reconciles figures
 Customer address - posts to the cash and AR control accounts
 Customer balance - files journal voucher
 Current balance e. Reconcile cash receipts and deposit by
 Available credit comparing:
 Transaction dates 1) Copy of prelist
 Invoice numbers 2) Deposit slips received from bank
 Credit payments, returns, and 3) Related journal vouchers
allowances
h. Post to general journal – requires only Physical Systems
summary figures 1. manual systems serve as a visual training aid to
- supports independent verification control promote a better understanding of key concept
2. manual system flowcharts reinforce the importance of
2. Sales return procedure segregation of duties through clearly defined
Reasons for sales return: departmental boundaries
 3. manual systems are a fundamental component of the
framework for viewing technology innovations
Sales Order Processing
1. Sales Department
- customer contacting the sakes dept
- sales dept records essential details on a sales order
a. Credit Department Approval
- upon approval of credit, SD clerk pulls various
copies of sales order from pending file
- sends the, to warehouse, and to billing
- placement of customer order to open order file
b. Warehouse Procedures
- after credit approval, shipment of goods
- warehouse clerks receives stock release copy
of SO and uses this to locate the invty
- invty and stock release sent to shipping dept
- record reduction of invty
c. Shipping Department
- reconciliation of products recieved form
warehouse with shipping notice copy of SO
- preparation of bill of lading
- products are packaged and shipped
- entry in the shipping log
- send shipping notice to billing dept
d. Billing Department
- compiles relevant info about the transactions
and bills customer
- entry in sales journal
- distribution of docs to AR and invty control
depts
e. AR, Inventory Control, and General Ledger
Departments
- update subsidiary ledgers
- prepare journal vouchers and acct summaries
- acct summaries sent to GL dept for
reconciliation and posting
2. Sales Return Procedures
Receiving Department
- prepares return slip which is forwarded to the sales
dept for processing
Sales Department
- prepares credit memo
Processing the Credit Memo
- objective of SR procedure: to reverse the effect of
the orig sales transaction
3. Cash Receipts Procedure
Mailroom
- where customer payments and remittance advices
arrives
- checks sent to cashier
- remittance advices sent to AR dept
Cash Receipts
- cashier records checks on cash receipts journal and
sends them to bank
- employee prepares journal voucher and sends it to
the GL dept
AR
- uses remittance advuces to reduce customer’s acct
balance
- clerk prepares summary of changes in the acct
balances
General Ledger Department
- reconciles info from journal voucher, and summary
from cash receipts and AR
Controller’s Office
- performs bank recon
RISK AND CONTROL ASSOCIATED WITH REVENUE
CYCLE
Authorization Controls
Objective of transaction authorization: to ensure that only
valid transactions are processed
Authorization should take place when:
a. A sale is made on credit (authorization)
b. A cash refund is requested (authorization)
c. Posting a cash payment received to a customer’s
account (pre-list)
- authorized posting of remittance advice to a
customer’s account
Segregation of Duties
- no single individual or department processes a transaction in
its entirety
Three Rules:
1. Transaction authorization should be separate from
transaction processing
2. Asset custody should be separate from the task of
asset record keeping
3. The organization should be structured so that the
perpetration of a fraud requires collusion between two
or more individuals.
 SO processing:
a. Credit authorization separate from SO processing
b. Invty control separate from warehouse
c. AR sub-ledger separate from GL control acct
 Cash receipts processing:
a. Cash receipts separate from acctg records
b. AR sub-ledger separate from GL control acct
Supervision
- firms must rely on supervision as a form of compensating
control
- can also provide control in systems that are properly
segregated
Accounting records
1. Prenumbered docs – permits isolation and tracking
of single event
2. Special journals - inventory and AR subsidiary
ledgers
- provide links back to JE and
source docs that captured the events
3. General ledgers – basis for fin statement preparation
- affected GL accounts:
 sales
 inventory
 cost of goods sold
 AR
 Cash
4. Files – RC has several temporary and permanent
files that contribute to the audit trail
Access Controls
- prevent and detect unauthorized illegal access to firm’s
assets
- restricting access to documents that control physical assets
including source documents, journals, and ledgers
- physical assets at risk in the revenue cycle are inventories
and cash
Independent Verification
- verifies the accuracy and completeness of tasks that other
functions in the process perform
Independent verification controls in the revenue cycle exist at
the following points:
1. shipping verifies that the goods sent from the
warehouse are correct in type and quantity
2. warehouse reconciles stock release docs and packing
slip
3. billing reconciles the original sales order with the
shipping notice
4. general ledger reconciles journal vouchers and
summary reports
OPERATIONAL AND CONTROL IMPLICATIONS OF
TECHNOLOGY USED TO AUTOMATE AND REENGINEER
THE REVENUE CYCLE
Automating the Revenue Cycle
- authorizations and data access can be performed through
computer screens
- decrease in amt of paper
- manual journals and ledgers changed to disks or tape
transactions and master files
 - input in hard copy doc and goes through computerized - update program posts the transaction to the corresponding
processes invty and AR subsidiary records using SK to locate records
- store data in electronic files or in hard copy report directly
- may include: - recorded in journal
 formatted screens for collecting data - GL updated after every batch
 edit checks on data entered - generate nnumberous numbers of reports
 instructions for processing and storing the data
 security procedures (pw or user IDs) II. Reengineering Sales Order Processing with Real-Time
 steps for generating and displaying output Technology
- consideration of record design and layout - interactive computer terminals replaced many of manual
- docs and files used as input sources must contain data procedures and physical document of the prev system
necessary to generate output reports 1. Transaction Processing Procedures
a. Sales Procedures
Computer-Based Accounting Systems 1) The system accesses invty
CBAS can be viewed as a continuum of two extremes: subsidiary file and checks the
a. automation – using tech to improve the efficiency availability of invty
and effectiveness of a task 2) If credit is approved, the system
b. reengineering – rethinking business process and the updates customer’s current balance
work flow (reflect sale and reduce invty)
- objective: to improve opnl 3) The system automatically transmits
performance and reduce costs by identifying and digital stock release doc to the
eliminating NVA task warehouse, digital shipping notice
I. Automating Sales Order Processing With Batch to the shipping dept, and records
Technology the sale in the SO file.
Three fields of SO file: b. Warehouse Procedures
a. SO number -PK - immediately produces hardcopy print-out of
b. Account number - SK the electronically transmitted stock release
c. Inventory number – SK doc
Purpose of the three keys: to locate the corresponding - clerks picks goods and sends them to the
records in the AR and invty files shipping dept
Note: c. Shipping Department
 Each sales order is a single item of inventory - reconciles goods, stock release doc, and
 Greatest impact for low-end tech seen in: (manual hardcopy packing slip
bookkeeping tasks have been automated) - selection of carrier and preparation of
 Billing goods
 Inventory - clerk transmits shipping notice
2. General Ledger Update Procedures
 AR
- the ff GL accts marked closed and updated:
 General ledger
 Inventory
 Advantage of automation:  AR
 Cost saving  COGS
Advantages of Real –Time Processing – reduces operating
 Error detection
costs while increasing revenues
1. Sales Department
1. Shortens cash cycle of the firm
- customer contacts sales dept and place order
2. Can give competitive advantage
- sales clerk records essential details
3. Manual procedures tend to produce clerical errors
- preparation of multiple SO
4. Reduces the ant if paper docs in a system
2. Credit Department Approval
- release copies of SO to the billing, warehouse,
III. Automated Cash Receipts
and shipping depts.
1. Mail Room – separates checks and the remittance
- customer order and credit approval placed in open
list and prepares remittance list
order file
2. Cash Receipts Department – reconciles checks and
3. Warehouse Procedures
the remittance list and prepares deposit slips
- receives stock release of sales which is used for
- via terminal, creation of
picking goods
journal voucher record of total cash received
- invty and stock release sent to shipping dept
- filing of remittance list and one copy of deposit
4. Shipping Department
record of total cash received
- reconciles products received from warehouse with
- deposit cash in the bank
shipping notice
3. Accounts Receivable Department – clerk receives
- bill of lading preparation
and reconciles the remittance advices and remittance
- products packaged and shipped
list
- shipping notice to computer dept
- filing of remittance
Keystroke
advices and remittance list
- arrival of batches of shipping notices from shipping dept
4. Data Processing Department – batch program
- these are verified SO
reconciles the journal voucher with the transaction file
- keystroke clerk converts hardcopy shipping notices to digital
receipts and update the AR subsidiary and the GL
form
accts (AR and cash)
Edit Run
IV. Reengineered Cash Receipts Procedure
- compose of series of program runs
- machine automatically opens unopened envelopes
- edit program validates all transaction records in the batch by
- this machine separates their contents into remittance
preforming clerical and logical tests
advices and checks
- recalculates the batch control totals
- this system uses special transaction valid software
- edited SO file passed to the file update run
Update Procedures
 - this system prepares computer-readable file of cash - there are risks for both sellers and buyer
recepts - internet exposes an org to threats from computer hacker,
V. Point of Sale Systems viruses, and transaction fraud
- used in grocery stores, department stores, and other
types of retail orgns Control Considerations for Computer-Based Systems
- only cash, checks, and bank credit card sales are valid 1. Authorization – correctness of computer
- no AR programmed decision rules and quality of data used
- invty kept on store’s shelves in this decision
1. Daily Procedures - in POS systems, authorization process involves
- checkout clerk scans the universal product code validating credit card charges and establishing that
(UPC) with laser light scanner the customer is the valid user of the card
- this system is connected online to the invty file from 2. Segregation of Duties – tasks in manual systems
which it retrieves product price data and displays this are often consolidated within computer programs
on the clerk’s terminal - quality of the general controls over segregation of
- invty quantity on hand is reduced in real time duties related to the design, maintenance, and
- system automatically calculates taxes, discounts, operation of computer programs
and total for the transaction 3. Supervision – in POS systems, cash register’s
- clerk prepares credit card voucher for the amt of the internal tape is a form of supervision
sale 4. Access Control – destruction of computer files can
- clerk gives one copy of voucher to customer and the leave a firm with inadequate accounting procedures
other is kept in the cash drawer of register - to implement control that restricts unauthorized
- record of sale is added to sales journal in real time access
- record contains: - computer programs making programmed decisions,
a. Date manipulating acctg records, and permitting access to
b. Time assets are also t risk
c. Terminal number 5. Accounting Records
d. Total amt of sale a. Digital journals and ledgers – accountants
e. Cash or credit care sale should be skeptical about accepting, on face
f. Cost of items sold value, the accuracy of computer produced
g. Sales tax hard copy printouts of digital records
h. Discount b. File backup – essential in preserving
- at the end of shift, supervisor unlocks the register integrity of acctg records
and retrieves the internal tape c. Independent Verification - restored by
- preparation of cash recon and one copy is given to performing batch control balancing after
sales clerk as receipt of cash remitted each run and by producing management
2. End of the Day Procedure reports and summaries for end users to
- three part deposit slip prepared by clerk review
- one copy filed and other two accompany the cash to
the bank PC-Based Accounting System
- summary of sales and cash receipts journal, - custom designed to meet the specific user requirements
preparation of journal voucher, and posting to the GL - general purpose systems serving wide range of needs
accts: - popular with smaller firms
- most PC systems are modular in design
Cash xx - typical business modules include:
Cash over(short) xx  SO processing and AR
AR (credit card) xx  General ledger and fin reporting
COGS xx  Invty control
Sales xx  Payroll
Inventory xx PC Control Issues
1. Segregation of Duties – inadequate
VI. Reengineering Using EDI - requires high degree of supervision, adequate mgt
- EDI has to expedite transactions reports, and frequent independent verification
- customer’s computer: 2. Access Control – provide inadequate control over
 Determines that inventory is needed access to data files
 Selects supplier with whom the business has a - solutions for dealing with this problem:
formal business agreement  data encryption
 Dials the supplier’s computer and places the  disk locks
order  physical devices
- exchange is completely automated (no human 3. Accounting Records – backup copies of data files
intervention) and programs can reduce this threat considerably
VII. Reengineering Using the Internet
- potential customer can access the seller’s product list,
scan the product line, and place the order
- typically credit transactions
- customer’s order and credit card info is attached to the EXPENDITURE CYCLE 1: PURCHASES AND SACH
seller’s e-mail file DISBYRSEMENT PROCEDURES
- an employee review the order, verifies credit and enters
the transaction into the seller’s system for processing in FUNDAMENTAL TASKS AND FUNCTIONAL AREAS
the normal way INVLVED IN THE PURCHASE AND CASH DISBURSEMENT
- turnaround time for processing is sometimes longer than AND RELATED DOCS USED IN THE PROCESS
for phone orders Goals of Expenditure Cycle:
- internet connects an org to the thousands of potential  Purchase from reliable vendors
business partner with whom it has no formal agreement  Purchase high qua items
  Obtain possible price - AP clerk file the CD voucher in the vouchers payable file
 Purchase only items that are properly authorized - GL dept:
 Have resources available when they are needed  Posts from the AP journal voucher to the GL ledger
 Receive only those items ordered  Reconciles the invty amt with the acct summary
 Ensure items are not lost, stolen, or broken received from invty control
 Pay for the items in a timely manner  Approved journal vouchers are then posted to the
journal voucher file
Manual Purchase System
1. Monitor inventory records Cash Disbursement Systems
- inventory control monitors and records finished - processes the payment of obli created in the purchase
goods inventory levels system
Purchase requisition - prepared when inventories - principal objective: to ensure that only valid creditors receive
drop to a predetermined reorder point payment and that amts paid are timely and correct
- sent to: 1. Identify liabs due
a. Purchasing dept - reviewing open AP file for items for items with
b. Open purchase payment due:
requisition file a. send payment approval in the form of voucher
2. Prepare purchase order packet to the CD dept
- purchase order is prepared (PO) which copies are 2. Prepare cash disbursements
sent to the: - CD clerk receives the voucher packet
 vendor - reviews the docs for completeness and clerical
 inventory control (where open purchase accuracy
requisition file is filed) a. Prepare the check
 purchase and accounts payable function (for b. Info recorded in the CD journal
filing in the AP pending file) c. Paid voucher returned to AP, check mailed to
 receive dept – blind copy (where copy is held the supplier
until inventories arrive) d. Journal voucher sent to GL:
3. Receive goods AP xx
- no inventories received yet hence, firm has no Cash xx
financial obli (memo entries ONLY) 3. Update AP record
- upon receipt of goods, they are reconciled with the - AP updates AP sub-ledger
blind copy of PO - voucher packet filed in the closed voucher file
- receiving report (stating the quantity and condition of 4. Post to the GL
the invty) is prepared after the physical count and - receives:
inspection  Journal voucher form CD
- copies of the report are sent to the:  Acct summary from AP
 Within physical inventories storeroom or FG - journal voucher used to update GL ledger
PO - AP control and cash accts updated
 Purchasing dept (reconciled with open PO)
 clerk closes the open PO file by filing EXPENDITURE CYCLE CONTROLS
the ff. in the closed PO file: Control Purchase Cash Disbursement
a. Purchase requisition Activity Processing System
b. PO System
c. Receiving report Transaction  Invty  AP fxn
 Invty control (to update invty records) authorizatio control fxn authorizes
n continually CD via CD
 AP dept (where filed in the AP pending file)
monitors voucher
 receiving dept (final copy)
invty  CD fxn
Blind copy – purpose: to force receing clerk to count
levels should not
and inspect inventories prior to completing the receiving report
 Replenish write checks
4. Update invty records
ment with without
5. Set up AP
purchase explicit
- AP receives and temporarily files copies of PO and
requisition authorization
receiving report
is formally b. to
- AP clerk reconciles the fin info with the receiving
authorized provid
report and PO in the pending file (after receiving
when level e
supplier’s invoice where the accountant estimates first
of invty effecti
the value of the obli)
drops to ve
- AP clerk transfers all source docs to the open AP file
their control
- AP clerk summarizes the entries in the purchase
predetermi over
journal for the period
ned pts the
- AP clerk prepares journal voucher for the GL
 Promotes cash
function
efficient flow
JE:
invty mgt from
(perpetual)
and the
Inventory xx
ensure firm,
AP xx
legitimacy
(periodic)
of
Purchases xx
purchase
AP xx
transactio
ns
Vouchers Payable System
Segregation Segregation of invty Segregation of the GL
- AP also prepares cash disbursement voucher and posts in
of Duties control from and AP from CD
the voucher register
 warehouse  cash = asset on
 primary subject to the
physical exposure in FS
asset invty the CD Access Direct access Indirect access
 invty  records controls  Security of  Proper
control controlling physical security over
keeps cash: assets (cash cash0
detailed a. AP sub- and invty)  Limit access
records of ledger  Areas to docs that
asset, b. Cash acct containing control
while in the GL cash and physical
warehouse  Individual is invty should assets
has prohibited include :
custody from  Locks
performing a  Alarms
combination of  Restric
the ff ted
responsibilities access
: Independen ID by AP ID by GL dept
 Writing t  AP fxn plays  Receives
checks verification vital role in journal
 Posting verification vouchers and
to cash of work summary
acct others in this reports from:
 Maintain system have  Invty
ing AP done control
Supervision Inspection of assets Theft of assets  the AP clerk  AP
- area that  Receiving  Incoming must  CD
most clerks must inventories are reconcile the  GL fxn verifies
benefits inspect exposed to ff before the that:
supervision items for theft until they firm  the total
is the proper are securely recognizes obli
receiving quantities placed in the obli: recorde
dept and warehouse a. PO – d equal
condition  Improper reconcile the total
 Blind PO inspection d with invty
procedures purchas received
coupled with e  total
inadequate requisitio reductio
supervision n ns in the
can create a b. Receivin AP
situation that g report equal
is conducive – total CD
to the theft of reconcili
inventories in ation
transit with PO
Accounting a. AP sub- a. Voucher shows
records ledger payable file that org
- control b. GL b. AP sub- has legit
objective: c. Purchase ledger obli
maintain an requisition c. CD journal c. Supplier’
audit trail file d. GL cash acct s invoice
adequate for d. PO file – AP
tracing a e. Receiving verifies
transaction report file that the
from its prices
source doc on the
to the FS invoice
 Audi are
tors’ reasona
conc ble
ern compare
in d with
EC: the
obli expecte
may d
be process
mat on PO
eriall
y OPERATIONAL FEATURES AND THE CONTROL
und IMPLICATIONS OF TECHNOLOGY USED IN PURCAHSES
erst AND CASH DISBURSEMENTS SYSTEM
ated
Computer-Based Accounting System (CBAS) o Programmed decision rules must be
Automation – includes using technology to the efficiency and debugged
effectiveness of a task o Automating invty in EDI and JIT
Reengineering – involves replacing traditional procedures with o Faulty invty model can lead to over or
innovative procedures that are often very different from those under-purchasing
previously in place  CD may automate check printing and signing
- objective of reengineering: to eliminate non- o Programming logic must be flawless
value-added tasks o Automated signing only below a dollar
Levels of Automating and Reengineering Order threshold
 computer generates purchase requisition 2. Segregation of functions
o purchase manually generates PO  Extensive consolidation by the computer of tasks
 computer generated PO (no PR needed) traditionally segregated
o PO not sent until manually reviewed o Computer programs authorize and
 Computer generated PO is automatically sent without process PO
manual review o Computer programs authorize and issue
 Electronic data interchange (EDI) checks to vendors
o Computer to computer communication 3. Supervision
without PO  Automation often leads to a collapsing of the
Expenditure-Based Database traditional segregation of duties
Master files Transaction and Other files o Requires greater supervision
 Supplier open doc files  Supplier  Supervision takes on new aspects as tech
(vendor)  PO file referenc advances
master file  Open e and o Electronic monitoring
 AP master purchase history  Supervision becomes more difficult as the
file order file file workplace becomes more sophisticated
 Merchandis  Supplier’  Buyer o Employees may have advanced IT
e invty s invoice file training
master file file  AP 4. Accounting records
 Open detail  Rests on reliability and security of stored
voucher’s file digitalized data
file o Accountants to be skeptical about
 CD file accuracy of the hard copy printouts
Computer Based Purchases o Backups- system needs to ensure that
1. Data processing dept performs routine acctg tasks backups of all file are continually kept
2. Purchasing – computer program identified invty reqs  Most automated systems still have a lot of paper
3. The ff methods are used in authorizing and ordering docs
inventories: o Good for audit trail purposes but is often
a. System prepares POs and sends them to inefficient
purchases for review, signing, and o As the system becomes increasing
distributing paperless, maintaining audit trail is
b. System distributes POs directly to the difficult
vendors and internal users, bypassing 5. Access controls
purchases  Magnetic records are vulnerable both authorized
c. System uses electronic data interchange and unauthorized exposure and should be
(EDI) and electronically places the orders protected
without POs o Must have limited file accessibility
4. Other tasks performed automatically by the computer: o Programs must be safeguarded and
a. Updates the invty subsidiary file from the monitored
receiving report 6. Independent verification
b. Calculates the batch totals for GL update  Automating the acctg fxn reduces the need for
c. Closes the corresponding records in the verification by reducing chances of fraud and
open PO file to the closed PO file error in the EC
d. Validates the voucher records against valid  Need for verification shifts to computer program
vendor files and programmers where fraud and error may still
5. Tasks performed automatically by the computer: be present
a. System scans for vouchers currently due
b. Prints checks for these vouchers
c. Records these checks in the check register
d. Batch totals are prepared for the GL update
procedures
Advantages of Real-time Data Input and Processing Over
Batch Processing
 Shortens time lag in record keeping (records are
more current)
 Eliminates much of the routine manual procedures EXPENDITURE CYCLE 2: PAYROLL PROCESSING AND
(like transcribing info onto paper docs) FIXED ASSET PROCEDURES
 Eliminates much of the storage and shuffling of
paper docs FUNDAMENTAL TASKS AND FUNCITONAL DEPTS
 Reduces data entry correction procedures CONSTITUTING THE PAYROLL AND FIXED ASSET
PROCEDURES AND THE DOCUMENTS, JOURNALS,
Computer Based Authorization Controls AND ACCOUNTS USED
1. Authorization controls I. PAYROLL PROCESSING SYSTEM
 Automated Manual Procedure
 I. Personnel department- prepares personnel action Group insurance prem/P xx
forms to prepare payroll fxn to: Pension fund withholdings/P xx
a. Identify employees authorized to receive a Union dues/P xx
paycheck THE EXPOSURE AND CONTROLS ASSOCIATED WITH
b. reflect changes in hourly pay rate PAYROLL AND FIXED ASSETS
c. reflect changes in payroll deductions Payroll Controls
d. reflect changes in job classification 1. Transaction authorization
II. Production dept - prepare two types of time - personnel action form helps payroll keep the
records: employee records current
a. job tickets – captures time that individual - PAF describes
works spend on each pdn job a. Additions;
- used by cost acctg to b. Deletions
allocate DL charges to WIP c. Charges to the employee file
accts 2. Segregation of duties
II. time cards – capture time the employee is at - time keeping fxn and personnel fxn should be
work separated
- sent to prepare payroll - personnel function: provides payroll with pay rate
fxn for calculating amt of info for authorized hourly employees
employee’s check - segregating key aspects of the payroll transaction
- formal record of daily between AP and CD fxns returns control to the
attendance process
3. Update WIP – cost acctg dept: 3. Supervision
a. Allocates labor cost to WIP - supervisors should observe time keeping process
b. Charges are summarized in the labor and reconcile the time cards with actual attendance
distribution summary which is forwarded to 4. Accounting records include:
GL dept a. Time cards, job tickets, and disbursement
4. Prepare payroll – payroll dept receives personnel vouchers
action forms and time cards which they use to: b. Journal info – from labor distribution
a. Prepare the payroll register showing: summary and payroll register
i. Gross pay c. Sub-ledger accounts – contain employee
ii. Deductions records and various expense accts
iii. Overtime pay d. GL accts: payroll control, cash, and payroll
iv. Net pay clearing (imprest) acct
b. Enter the payroll register into the employee 5. Access controls
payroll records - assets associated with payroll: labor and cash
c. Prepare employee paycecks - control over access to all journals, ledgers, and
d. Send paycheck to the distribute paycheck source docs in the payroll system is important
fxn 6. Independent verification
e. File time card, personnel action for, and copy a. Verification of time – supervisor must verify
of payroll register accuracy of time cards first before sending it
5. Distribute paycheck to the payroll
- use of paymaster to distribute paychecks to b. Paymaster – used to distribute checks
employees - helps verify existence of
- independent of payroll process employees
6. Prepare AP 1) AP – AP clerk verifies accuracy of
- AP clerk reviews the payroll register for payroll register before creating a
correctness disbursement voucher
- AP clerk prepares copies of CD voucher for the 2) GL – GL dept provides verification of
amt of payroll the overall process
- records the voucher in voucher register and - reconciles labor distribution summary
submits the voucher packet to CP and the payroll disbursement voucher
- copy of CD voucher sent to GL fxn
7. Prepare CD OPERATIONAL FEATURES AND THE CONTROL
- writes single check for the entire amt of payroll IMPLICATIONS OF TECHNOLOGY USED IN PAYROLL
and deposits it in the payroll imprest acct AND FIXED ASSET SYSTEM
- copy of check, with the disbursement voucher and Computer Based Payroll Systems
payroll register, sent to the AP dept - payroll systems is well suited to batch processing
- journal voucher prepared and sent to the GL fxn - data processing dept receives hard copy of personnel
8. Update GL action forms, job tickets, and time cards, which it converts
- receives: to digital file
a. Labor distribution summary from cost acctg - batch computer programs perform check writing, detailed
b. Disbursement voucher from AP record keeping, and GL fxns
c. Journal voucher from CD
- GL clerk make the ff entries: Control Implications
a. From the labor distribution summary - strengths and weaknesses same with batch system for
WIP (DL) xx general expenditure
FOH xx - promotes acctg accuracy and reduces check writing
Wages/P xx errors
b. From disbursement voucher Reengineering the Payroll System
Wages/P xx - payroll system often associated with HRM
Cash xx - HRM: captures and processes a wide range of personnel
Federal inc tax withholdings/P xx related data including:
State inc tax withholdings/P xx  Employee benefits
FICA inc tax withholdings/P xx  Labor resource planning
  Employee relations Expenditure Cycle in Chap 4 vs FA System:
 Employee skills EC FAS
 Personnel actions
 Payroll  Processes  Processes non routine
- HRM system provides real-time access to personnel files routine transactions
for purpose of direct inquiries and recording changes in acquisitions of - require specific mgt
employees as they occur RM and FG invty approval and explicit
- differs from simple automated systems in: authorization
 Various depts. transmit transactions to data  Invty acquisitions procedure
processing via terminals as expense in the  Capitalize FA
 Direct access files are used for data storage current period - include cost
c. Many processes are now performed in real allocation and
time matching procedures
Key feautures of Reengineered HRM:
Three Tasks in the FAS
1. Personnel o Asset acquisition
- makes changes to the employee file in real-time via
- begins when a dept mgr determines the need to
terminals including:
o Additions of new employees acquire a new FA
o Deletions of terminated employees - GR: dept mgrs have the authority to approve
o Changes independents purchases below certain materiality limit (above
o Change sin withholdings limit=higher mgt levels)
o Changes in job status
o Receiving dept delivers asset into custody of
user/mgr
2. Cost Accounting o FA dept performs record keeping fxn
- this dept enters job cost data to create the labor usage o Asset Maintenance
file
- involves adjusting FA sub acct balances as assets
Time-keeping
depreciate
- this dept creates current attendance file
- depn charged to MOH and then allocated to WIP
3. Data Processing – the ff are performed in batch
- depreciation schedule: shows when and how
process:
much depn to record
a. Labor costs distributed to WIP, overhead,
: also shows when to stop taking
and expenses
depn on fully depreciated assets
b. Online labor distribution summary file
- involves adjusting asset accts to reflect cost of
created – copies sent to cost acctg and GL
physical improvements
dept
- must promote accountability by keeping track of
c. Online payroll register created from
the physical location of each asset
attendance file and employee file – copies
3. Asset Disposal
sent to AP and CD depts.
- asset must be removed from FA sub-ledger
d. Employee record file updated
- begins when responsible mgr issues request to
e. Payroll checks signed and prepared – sent to
dispose asset
treasurer for reconciliation with payroll
register and then distributed to employees
Computer Based FAS
f. Disbursement voucher file updated and
1. Acquisition
check is prepared for funds transfer to
- Acctg clerk receives receiving report and CD
payroll imprest acct
voucher
- copies:
- clerk creates records asset in FA sub-ledger
 check and hard copy sent to CD
- FAS automatically updates FA control acct in the
 voucher sent to GL dept
GL and prepares vouchers for the GL dept
 final copy sent to AP
- also produces reports for acctg mgt
7. system retrieves labor distribution summary
- preparation of depn schedule for each asset
file and disbursements voucher file and
- sched stored in computer disk
updates GL file
2. Maintenance
Control Implications of Real Time Payroll Processing
- FAS uses depn sched to record end of the period
- provides benefits such as:
depn transaction automatically including:
 reduction in paper
a. Calculating current period’s depn
 clerical labor
b. Updating AD and BV fields in the sub
 lag time between event occurrence
records
and recording them
c. Posting total amt of depn to the affected
- CBS must produce adequate records for independent
ledger acct
verification and audit process
d. Recording depn transactions by adding
- controls must be implemented to protect against
record in journal voucher file
unauthorized access to data files and computer programs
3. Disposal
- disposal report formally authorizes FA dept to
 FIXED ASSET SYSTEM
remove from the ledge an asset disposed of by the
Fixed assets – permanent items that often collectively
user dept
represent largest fin investment in an org
- system automatically:
Specific objectives of fixed asset system:
a. Posts adjusting entry ot the FA control acct
1. Process acquisition of FA as needed
to the GL
2. Maintain adequate acctg records of asset
b. Records any G/L
acquisition, cost, description, and physical location
c. Prepare journal voucher
in the org
FAS Controls
3. Maintain accurate depn records
Authorization
4. Provide mgt with info to help plan future FA
- FA acquisitions must be formal and explicitly authorized
investments
5. Properly record the retirement and disposal of FA
- each transaction to be initiated by a written req from the
user or dept
- high value items: independent approval evaluating merits
of the request in cost benefit basis
Supervision
- mgt supervision is important in the physical security of
FA
- theft: secure physical locations of assets
- misuse: monitor on the job activities
Independent verification control
- reasonableness of factors used in decisions (UL,
discounts, budgeting models)
- location, condition, and FV of FA records in the sub
ledger
- programming logic for automatic calculations (depn)