MODULE 1: THE INFORMATION SYSTEM: AN
ACCOUNTANT’S PERSPECTIVE
Contextualization
● San Miguel Corporation, a PH corporation,
manufacturer of beer
● Information System: focused on corporation
and manufacturing companies
● Perspective of an Accountant
Information Objectives
1. Support the firm’s day to day operations
2. Support management decision making
3. Support the stewardship function of
management
Types of Information Flow
1. Internal Flows - within the company
● Horizontal
○ happens at operation level (e.g.,
accepting sales order and relaying it to
the inventory dep.)
○ Needed info is more detailed
● Vertical
○ operation to top management
○ Vertical upwards – Needed for more
aggregated info (trends, total pictures)
○ Vertical downwards (e.g., relaying
budgets)
2. External Flow
● Trading Partners – involved in day-to-day
business
○ Customers
○ Suppliers
● Other Stakeholders
○ Government
○ Stockholders
○ Creditors
Performance Information
● Need for more aggregated info; trends; total
picture
Operating Personnel
● Need for more detailed info
Information System
● The set of formal procedures by which data
are collected, stored, processed into
information and distributed to users
● Data comes from:
○ Financial transactions – events that
affect assets, liabilities, and owner’s
equities (e.g., payment of accounts)
● Non-financial transactions – do not
qualify as a financial transaction (e.g.,
showing customers the products)
Subsystems of AIS
● General Ledger/Financial Reporting
System (GL/FRS) – responsible for
generation of general financial reports
● Transaction Processing System (TPS) –
capturing all financial transactions
● Expenditure Cycle – acquisition of factors of
production
● Purchase System
● Cash Disbursement System
● Payroll Processing System
● Fixed Asset System
○ Conversion Cycle – converting labor
into products
● Cost Accounting System
● Production Planning and Control
○ Revenue Cycle – sales
● Sales Processing System
● Cash Receipts System
Characteristics of Useful Information
1. Relevance – has to serve a purpose
2. Timeliness – present or available when
needed
3. Accuracy – free from material errors or
misstatements
4. Completeness – none is missing
5. Summarization – aggregated with user needs
Organizational Structure
● Hierarchical arrangement of lines of authority,
communications, rights, and duties of an
organization
● Determines how the roles, power, and
responsibilities are assigned, controlled, and
coordinated
● Determines how information flows between the
different levels of management
Segmentation by Business Function
● A common method of organizing a business
entity
● Functional areas are maintained for the
purpose of operating the business
The Accounting Function
1. Captures and records financial transactions
2. Distributed transaction information to
personnel
Hence, it is important for such information to be
reliable and to be valuable. > ACCOUNTING
INDEPENDENCE: Accounting Activities must be
separate and independent from the functional areas
that manage and maintain the physical resources.
Information Technology
● Data Processing - Centralized Data
Processing or Distributed Data Processing
● Systems Development & Maintenance
● Database Administration
● Network Administration
IT Outsourcing
● Selling of hardware and software (IT
resources) to a third party
● Leasing of IT resources
Cloud Computing
● Consumers and online retailers
● Scalability and Flexibility
● Easier to adjust during expansion
● Secured data
● Accessibility
● Private - cloud services is delivered by a single
organization
● Public - third party providers deliver services
over the internet
● Hybrid - mixed
● Software as a Service (SaaS) - most popular
among shopping retailers (Shoppee)
● Infrastructure as a Service (IaaS) - providing
data center structure in demand (Amazon Web
Services used by Netflix)
● Platform as a Service (PaaS) - used for
applications and developments which run
applications (Java)
THE ROLE OF ACCOUNTANTS IN AIS
Accountants as System Designers
● 2 Components of System Design: 1)
Conceptual System - requires knowledge
regarding financial systems, internal controls,
specific accounting goals and procedures;
domain of accountants, 2) Physical System -
domain of IT professionals
● Collaborative work between Accountants and
IT professionals
● Can one person be both an accountant and IT
professional? Yes!
Accountants as System Auditors
All require a thorough understanding of AIS Functions
and Internal Controls
● External or Financial Audit (Attestation)
> performed only by CPA; an independent
examination of a company’s FS to express an
opinion on the fairness of the FS presentation
(BOA accredited CPAs in public practice)
> 1) Test of Controls - Review of Internal
Controls;
> 2) Substantive Test - verification of FS
accounts by examining the related data that
are in the databases
> Final Output: Audited FS;
> MUST BE INDEPENDENT, CAN OFFER
ADVISORY SERVICES ONLY TO
NON-AUDIT CLIENTS
● Internal Audit (Operational Audit)
> internal auditors work for the company
(Certified Internal Auditor/CIA or Certified
Information System Auditor/CISA)
> includes a wide range of functions: financial
audits, examination of obligations; evaluation
of operational efficiency; detecting fraud, etc.
> AUDIT COMMITTEE is required for publicly
listed companies (Members of the Board who
serves as an Independent check and balance)
● Fraud Audit
> investigates when there is an expected theft
of the assets or financial fraud (Certified Fraud
Examiners/CFA)
Designer of AIS/Auditor of AIS Duality
● Common Skill Set: Knowledge of Systems and
Audit Risks
● An auditor cannot audit properly if he does not
understand systems design
● A system designer cannot perform his task if
he does not understand audit risks, audit
issues, and concerns
THE INFORMATION SYSTEM: AN ACCOUNTANT’S
PERSPECTIVE
External users
● The reporting requirements of external users
such as lending institutions, BIR, Internal
Revenue and stockholders are subject to
stringent reporting standards. Thus firms have
historically placed a very high emphasis on the
accuracy of the AIS and the reports they
produce for external agencies since failure to
provide accurate and timely information carries
heavy penalties.
Internal Users
● Internal users, such as managers, also need
vital information to make good decisions.
Firms are beginning to realize that the needs
of these internal users are also very important
to efficiently and effectively operate and plan
for the future.
Comment On The Level Of Detail Necessary For
Operations Management, Middle Management And
Stockholders
 ● The level of detail necessary for the
stockholders is highly aggregated and typically
follows the format prescribed by the SEC and
GAAP.
● Much more detailed information is necessary
for middle management to plan and control
operations.
● Highly detailed information is necessary at the
operations management level in order to run
the day-to-day business processes and
operations.
● Top Management - goal (e.g 1.5B income)
● Middle Management - general, aggregated
information/goal
● Operations Management - there are already
plans (more detailed)
● Operations Personnel - highly detailed
● Becomes Highly detailed (going down)
Distinguish Between Financial And Non Financial
Transactions
Give Three Examples Of Each
● Financial transactions - affect the accounts
in the financial statements in some manner.
Three examples are (1) use of equipment –
depreciation, (2) payment of payables and (3)
receipt of cash from a customer for a sale
previously made on account
● Non-financial transactions - include
business events that do not impact the
financial statements. Three examples are (1)
a book checked out by a student in a school
library, (2) the recording of a customer
complaint via a hotline and (3) status reports
of research and development projects
● The information system is the set of formal
procedures by which data is collected,
processed into information, and distributed to
users.
● A transaction is an event that affects or is of
interest to the organization and is processed
by its information system as a unit of work.
● A financial transaction is an economic event
that affects the assets and equities of the
organization, is reflected in its accounts and is
measured in monetary terms.
● A nonfinancial transaction is an event that
doesn’t meet the definition of a financial
transaction.
An Information System must meet Three
Fundamental Objectives. Discuss Why These
Objectives Cannot Effectively Be Met by a
Common Set of Information
● Three functions of information systems are (1)
to support the stewardship function of
management, (2) to support management
decision making, and (3) to support the firm’s
day-to-day operations. Managers of all areas
typically need data from both AIS and MIS. If
the data needed by the managers for decision
making processes are located in two or more
datasets, the preparation of reports is both
inefficient and expensive. Further, a lack of
coordination between the two datasets can
result in data that is not consistent and is
unreliable.
● Nasa quiz
Do You Think Transaction Processing Systems
Differ Significantly Between Service And
Manufacturing Industries? Are They Equally
Important To Both Sectors
● The transaction processing systems only
differ in the types of data elements collected.
Both service and manufacturing industries
need to collect data regarding business
processes.
● While a manufacturing firm may collect data
regarding the amount of scrap generated at a
particular workstation, a service firm, such as
a public accounting firm, needs to collect data
regarding the number of hours spent by staff to
verify cash balances. Transaction processing
systems are equally important to both types of
industries.
Discuss the difference between the financial
reporting system and the general ledger system
● The General Ledger System (GLS)
summarizes all of the transaction cycle activity
and general journal entries. The GLS provides
most of the input in the Financial Reporting
System (FRS).
● The FRS communicates information from the
GLS to the external users. The FRS often
collects additional pieces of information other
than that which is found in the GLS. An
example of this is when a pending lawsuit is
likely to be settled in the next year. The GLS
would not have this information.
Examine Figure 1-4 and discuss where and how
problems can arise that can cause the resulting
information to be bad or ineffective.

Discuss how the element of efficiency,
effectiveness, and flexibility are crucial to the
design of an information system
● Efficiency is crucial to an AIS. The cost of
collecting and producing information should
not outweigh its benefits. Further, the
applications should be run in a manner that
places the least strain on the overall system.
For example, the printing of checks to vendors
should not be done during the day if it slows
down the online sales order processing
system in a multi-tasking environment.
● In order for a system to be effective, the
appropriate data should be processed, and the
resulting information disseminated to the
appropriate users. For example, an accounts
receivable delinquent report should be sent to
the collection department in a timely fashion,
so that measures can be taken to collect the
funds. The ability to react to a change
(flexibility) is very important, especially in an
FRS where reporting requirements and
standards change frequently.
Discuss: The Accounting System is a conceptual
flow of information that represents physical
personnel, machinery, and flows of raw materials
and cash through the organization.
● This statement means that the accounting
system is a representation of the operations of
a firm. As machines operate, workers perform
their duties, raw materials are transferred into
finished goods and cash flows are exchanged
between suppliers and customers, the
accounting system must be continuously
updated to accurately reflect these actions.
This conceptual flow is crucial because it
allows management to view in summary and in
detail the financial effects of these operations
on the firm.
Discuss the Importance of Accounting
Independence in Accounting Information Systems.
Give an example of Where this concept is
important
● Accounting independence is important
because the separation between the
record-keeping functions and the physical
resources is crucial. This concept is extremely
important for cash receipts operations. The
person in charge of deposits of currency and
check receipts should not be allowed to
reconcile the sales records to the cash
deposits and/or the bank account. If these
duties are not separated, then the cash
receipts clerk can steal money and cover it up
during the reconciliation process.
○ You have to be independent
everywhere.
Discuss why it is crucial that internal auditors
report solely to the audit committee of the BOD
and answer to no other group.
● The internal auditors are responsible for
detecting and pursuing fraud within the firm. If
management-level employees are involved,
the internal auditors may fear losing their jobs
if they blow the whistle on such activities.
Thus, the internal auditors should report to the
board of directors so that they do not fear any
repercussions of their actions from top
management.
○ Internal auditors report to the BOD
(Board of Directors) only and not to
the President.
Contrast centralized data processing with
distributed data processing. How do the roles of
end users differ between the two approaches?
● In a centralized data-processing environment,
the computer services personnel are all
housed in one department where all of the
systems development and maintenance takes
place. End users must formally request any
additions or enhancements to the current
system. In a distributed data processing (DDP)
system, the systems professionals may still be
housed together or they may be located
throughout the various segments of the
organization. End users gain more control over
their data and applications. DDP is becoming
more and more popular as networking
computers is becoming easier and more
commonplace.
- Central Corporate Data - most important

Discuss how conceptual and physical systems
differ and which functions are responsible for
these systems
● The conceptual system represents the logic
and decision rules to be applied, while the
physical system represents the means of
accomplishing the tasks. Many different
possibilities (physical systems) may be
available to accomplish the conceptual
system. The accountant is important in the
design of the conceptual system; however,
system designers may dominate in the tasks
of physical design because of the technical
nature of the solution. The accountant should
still be involved in the process, although
he/she may only participate in an advisory
role.
Why is an active BOD audit committee important to
an organization?
● To be effective, the audit committee must be
willing to challenge the internal auditors (or the
entity performing that function) as well as
management when necessary. Part of the role
of committee members is to look for ways to
identify risk. For instance, they might serve as
a sounding board for employees who observe
suspicious behavior or spot fraudulent
activities. In general, they become an
independent guardian of the entity’s assets by
whatever means is appropriate. Corporate
frauds often have some relationship to audit
committee failures. These include lack of
independence of audit committee members,
lack of experienced members on the audit
committee, inactive audit committees, and the
total absence of an audit
The term IT auditor should be considered obsolete
because it implies distinction between regular
auditors and auditors who examined computerized
AIS, do you agree?
● Yes and No. Virtually all publicly traded firms
have computerized AISs as well as most
small- and medium-sized firms. Audits of
non-computerized systems are becoming rare.
Thus, one may say that virtually all auditors
must deal with electronic processing of data.
However, certain auditing personnel, known as
IT auditors, have special skills, which allow
them to focus on the computer “processing.”
Thus, distinguishing these auditors from
auditors who do not have such skills may still
be appropriate.
Describe cloud computing and explain how it is
similar to obtaining a commodity product.
● Cloud computing is location-independent
computing whereby shared data centers
deliver hosted IT services over the Internet.
The concept can be equated to the way in
which electricity is delivered to a private home.
The homeowner enters into a contract with the
local public utility company to deliver electricity
as needed. The public utility company may
generate some of this electricity, but during
high demand periods it will go to the national
electric grid to tap into the production of other
electricity generators across the country.
● Similarly, an organization pursuing cloud
computing signs a contract with an IT service
provider to provide computing resources.
When demand exceeds the provider’s IT
capacity, it acquires additional capacity from
data centers in the “cloud” that are connected
via the Internet. A potential risk to the client
firm is that it does not necessarily know where
its data are actually being processed, just as
the homeowner does not know where his or
her electricity is being generated. The
advantage to the client organization is access.
Why is it important to organizationally separate the
accounting function from other functions of the
organization?
● The accounting function provides
record-keeping services for all of the
operations and day-to-day activities of other
departments, which affect the financial position
of the organization. Record-keeping tasks
must be kept separate from any area that has
custody over assets. Thus, the accounting
function must remain independent so that the
protection of the firm’s assets is carried out in
an environment with minimum possibilities for
theft.
What is an external financial audit and what are the
sources of evidence?
● An external audit is an independent attestation
performed by an expert—the auditor—who
expresses an opinion regarding the
presentation of financial statements. This task,
known as the attest function, is performed by
CPAs who work for public accounting firms
that are independent of the client organization
being audited. The audit objective is always
 associated with assuring the fair presentation F. Finance
of financial statements. These audits are, 1. Portfolio management
therefore, often referred to as financial audits. 2. Treasury
The evidence auditors gather comes from two 3. Credit
types of tests that they perform: (1) tests of 4. Cash disbursement
controls and (2) substantive tests. 5. Cash receipt
G. Accounting
Why do firms outsource their IT functions? 1. Inventory control
explain the options of traditional IT outsourcing 2. Cost accounting
and cloud computing and how do they differ? 3. Payroll
● Corporate management has long complained 4. Accounts payable
about the administrative burden and high cost 5. Accounts receivable
associated with managing and maintaining IT 6. Billing
functions. In an effort to bring costs under 7. Fixed-asset accounting
control and to escape their IT headaches, 8. General ledger
many corporate executives look to IT H. Computer Service
outsourcing. Under this practice the 1. Data processing
organization sells its IT resources (hardware, 2. Systems development and maintenance
software, and facilities) to a third-party 3. Database administration
outsourcing vendor such as HP Enterprise
Services (formally EDS).

Functional Segmentation

IDENTIFICATION: I – Internal User; T – External

User (Trading partner); and S – External user
(stakeholder)
A. Bureau of internal Revenue - E
B. Inventory control manager - I
C. Board of directors - I
D. Customers - E
List five functional areas and their sub-functions. E. Lending institutions - E
A. Materials Management F. SEC - E
1. Purchasing G. Stockholders - E
2. Receiving H. CEO - I
3. Stores I. Supplier - E
B. Production J. Bondholder - E
1. Production planning
2. Quality control IDENTIFICATION: TPS – Transaction processing
3. Maintenance system; FRS – Financial reporting system; and
C. Marketing MRS – Management reporting system
1. Advertising A. preparation of balance sheet
2. Market research B. capture customer sales order
3. Sales order processing C. preparation of variance reports
D. Distribution D. preparation of budgets
1. Warehouse E. purchase order preparation
2. Shipping F. summary of inventory purchases by vendor
E. Personnel G. preparation of comparative sales report by division
1. Recruiting H. preparation of cash disbursements to vendors
2. Training I. annual report preparation
3. Benefits J. customer billing process
4. Counseling K. cost volume profit analysis
______________________________________
PPT 01: ○
The transaction processing system
(TPS) which supports daily business
The Information Environment: operations.
● Information is a business resource. ○ The general ledger/financial
● Operations management directly responsible reporting system (GL/FRS) which
for controlling day-to-day operations. produces reports.
● Middle management accountable for ○ The management reporting system
short-term planning and coordinating activities (MRS) which provides information for
to accomplish organizational objectives. decision making.
● Top management responsible for longer-term ● Management information system (MIS)
planning and setting organizational objectives. processes nonfinancial transactions not
● Two groups of external users: trading partners processed by the AIS.
and stakeholders.
Table 1-1
Information Objectives: Examples of MIS Applications in Functional Areas
● The goal of an information system is to Function Examples of MIS Applications
support: Finance Portfolio management systems
● The firm’s day to day operations. Capital budgeting systems
● Management decision making. Marketing Market analysis
● The stewardship function of management. New product development
Product analysis
An Information Systems Framework Distribution Warehouse organization and
scheduling
Delivery scheduling
Vehicle loading and allocation models
Personnel Human resource management
systems
● Job skill tracking system
● Employee benefits system

AIS Subsystems:
● The transaction processing system (TPS):
○ Converts economic events into
financial transactions.
○ Records financial transactions in the
accounting records.
○ Distributes essential financial
information to support operations.
● The general ledger/financial reporting
system (GL/FRS) takes information from the
TPS and other input and:
○ Updates general ledger control
accounts.
○ Handles nondiscretionary reporting
requirements.
● The management reporting system (MRS)
provides the internal information needed to
manage a business and handles
discretionary reporting.

A General Model for AIS

● End users fall into two groups :
○ External users include creditors,
● Accounting information system (AIS) stockholders, government agencies,
processes financial and some nonfinancial suppliers and customers.
transactions. Three subsections: ○ Internal users include management
and operations personnel.
 ○ Distributes essential financial
information to support operations.
● Data are facts which may or may not be
processed and have no direct effect on a
user’s actions.
● Information causes a user to take an action
that would otherwise not have been taken.
● Data sources are financial transactions that
enter the information system for internal or
external sources.
● Data collection is the first operational stage
in the information system:
○ Objective is to ensure data are valid,
complete and free from material
errors.
○ Only relevant data should be captured.
○ Efficient collection procedures
designed to collect data only once.
● Data processing tasks range from simple to
complex.
● The organization’s database is its physical
repository for financial and nonfinancial data.
○ Term could apply to a filing cabinet or
computer disk.
The Levels in the Data Hierarchy:
● The levels in the data hierarchy:
● The data attribute is the most elemental piece
of potentially useful data in the database.
● A record is a complete set of attributes for a
single occurrence within an entity class.
● A file (or table) is a complete set of records of
an identical class.
● Database management involves three
fundamental tasks: storage, retrieval and
deletion.
● Information generation is the process of
compiling, arranging, formatting, and
presenting information to users.
● Regardless of physical form, useful
information has:
○ Relevance: Content must serve a
purpose.
○ Timeliness: No older than time frame
of supported action.
○ Accuracy: Free from material errors.
○ Completeness: All essential
information is present.
○ Summarization: Aggregated for the
user’s needs.
● Feedback is a form of output sent back to the
system as a source of data.
The Accounting Function
● Accounting manages the financial resource of
the firm:
○ Captures and records transactions.
○ Distributes transaction information to
operations personnel.
● Value of information is determined by its
reliability.
○ Relevance, accuracy, completeness,
summarization and timeliness.
○ Unreliable information has no value.
● Information reliability requires accounting
independence.
○ Accounting activities must be separate
and independent of the functional
areas maintaining custody of
resources.
○ Accounting supports these functions
with information but does not
participate in the physical activities.
Information Technology
● Many organization employ a combination of
centralized and distributed processing.
● Centralized Data Processing:
○ All data processing performed by large
computer(s) in a common data center
that serves users throughout the
organization.
○ Lends itself to intra-organization
communication and data sharing.
● Distributed Data Processing (DDP):
○ Users process transactions locally with
each user segment possessing IT
needs to support their operations.
○ Users function independently and tend
not to share data and information.
 The Role of Accountants in AIS
● Accounts play a prominent role on system
● Accountants perform audits which typically
● Systems development is the process
organizations use to acquire information
systems.
○ Can be purchased or built from
scratch.
○ Commercial software available for
general accounting and industry
specific applications. Sometimes
called turnkey systems because can
be implemented with little modification.
○ Custom software is developed
through a formal process called the
system development life cycle.
Requires an in-house team of qualified
individuals.
● Systems maintenance may be trivial or
significant.
○ Between 80% - 90% of system’s total
cost may be incurred because of
maintenance activities.
● Centrally organized companies with shared
data use database administration to ensure
security and integrity.
● A network is a collection of computers and
communication devices that allow users to
communicate, access data and applications,
and share information and resources.
○ Network administration responsible
for effective functioning of hardware
and software.
● Due to the highly technical, dynamically
changing and expense of IT, many executives
look to IT outsourcing.
○ Organization sells IT resources and
leases back IT services.
○ With cloud computing data centers
deliver hosted IT services over the
Internet: Software as a service
(SaaS), infrastructure as a service
(IaaS) and platform as a service
(PaaS).
development teams as domain experts,
responsible for many aspects of the
conceptual system including specifying rules,
reporting requirements and internal control
objectives.
○ IT professionals determine the most
economical and effective technologies
for the physical system, including
data storage.
involve the AIS.
○ External audit is an independent
attestation and opinion (audit report)
regarding financial statement
presentation.
■ Requires auditors
(independent CPAs) to test
internal controls and perform
substantive tests of data.
■ Critical element is auditor
independence, which means
the auditor is free from factors
that might influence the audit
report.
● Prior to Sarbanes-Oxley Act (SOX),
accounting firms were permitted to provide
both advisory and attest services to clients.
● SOX legislation restricts non-audit services
that auditors may provide and prohibits
auditors from providing these services:
○ Other accounting services including
bookkeeping, financial information
systems design and implementation,
appraisal or valuation, actuarial, and
internal audit outsourcing.
○ Management or human resources,
broker or dealer, investment adviser,
or investment banking services.
○ Legal services and expert services
unrelated to the audit.
○ Any other service that the Board
determines, by regulation, is
impermissible.
● Internal auditing is an independent appraisal
function within an organization to examine and
evaluate activities.
○ External auditors represent outsiders
and internal auditors represent the
interests of the organization.
● Fraud audits have increased in popularity as a
corporate governance tool.
○ May be initiated by managers to
investigate employees or the board to
investigate management.
 ● Audit committees serves an independent
“check and balance” for internal audit functions ● Source Documents – are used to capture
and a liaison with external auditors. and formalize transaction data needed for
○ Usually three people, one of which transaction processing.
must be a “financial expert”. ● Product Documents – are the result of
transaction processing.
● Turnaround Documents – product
documents of one system that become source
MODULE 2: INTRODUCTION TO TRANSACTION documents for another.
PROCESSING ● Journals – are chronological records of
transactions.
An Overview of Transaction Data Processing ○ Special Journals are used to record
● A financial transaction is an economic event specific classes of transactions that
that affects the assets and equities of the firm, occur in high frequency.
is reflected in its accounts, and is measured in ○ Register denotes certain types of
monetary terms special journals.
● 3 transaction cycles: the expenditure cycle, the ○ General Journal is used to record
conversion cycle and the revenue cycle. nonrecurring, infrequent, and
Every business: dissimilar transactions.
○ Incurs expenditures in exchange for
resources (1.expenditure cycle). Accounting Records: Manual System
○ Provides value added through its
products or services (2. conversion
cycle).
○ Receives revenue from outside
sources (3. revenue cycle).

An Overview of Transaction Processing

Expenditure Cycle: Time lag between components

due to credit relationship with suppliers.
● Physical Component (acquisition of goods)
● Financial Component (cash disbursements to
the supplier)

Conversion Cycle:
● the production system (planning, scheduling,
and control of the physical product through the
manufacturing process)
● the cost accounting system (monitors the
flow of cost information related to production)

Revenue Cycle: Time lag between components due to

credit relationship with customers.
● physical component (sales order processing)
● financial component (cash receipts)
Ledger: is a book of accounts that reflects the
financial effects of a firm’s transactions as they are
posted from the various journals.
a. General ledgers contain account information
in highly summarized control accounts.
b. Subsidiary ledgers contain details for each of
the individual accounts that constitute a
particular control account.

● Together the accounting records provide an

audit trail for tracing account balances
contained in the financial statements back to
the source documents and events that created
them.
Digital Accounting Records
● Important in the conduct of a financial
● Master file contains account data.
audit.
● Transaction file is a temporary file of
transaction records used to update data in a
Accounting Records: Manual System
master file.
● Reference file stores data that are used as
standards for processing transactions.
● Archive file contains records of past
transactions retained for future reference
○ Form an important part of the audit
trail.
● Digital record audit trails are less observable
than those between hard-copy documents, but
they still exist.

File Structures
● The flat-file model describes an environment
where individual data files are not related to
other files. Leads to three significant data
redundancy problems:
● Data Storage:
○ Organizations must incur the costs of
multiple collection and storage
procedures.
● Data Updating:
○ Changes or additions must be
performed multiple times which adds
significantly to the task and cost of
data management.
● Currency of Information:
○ If update information is not properly
disseminated, changes will not be
reflected in some users’ data, resulting
in decisions based on outdated
information.
Other problems with the flat-file approach:
● Task-Data Dependency:
○ User’s information set is constrained
by the data the user possesses and
controls. This leads to the inability to
obtain additional information as needs
change.
● Data Integration:
○ Separate files are difficult to integrate
across multiple users.
The Database Model
Documentation Techniques
● Data flow diagram (DFD) uses symbols to
represent entities, processes, data flows and
data stores.
○ Used extensively by systems analysts
to represent the logical elements of
the system but does not depict the
physical system.
● Entity relationship diagram (ER) is a
technique used to represent the relationship
between business entities.
○ The degree of the relationship
(cardinality) is the numeric mapping
between entities: one-to-one (1:1),
one-to-many (1:M) or many-to-many
(M:M).
○ A data model is a blueprint for the
physical database.
● DFDs and ER diagrams document different
system aspects but are related.
○ DFDs model systems processes and
ER diagrams system data.
 ● Program flowchart provides operational
details for every program represented in a
system flowchart.
○ Sometimes used by accountants to
verify the correctness of program
logic.
● Record layout diagrams reveal the internal
structure of digital records in a database table.

● System flowchart is the graphical

representation of the physical relationships
among key elements of a system.
○ Elements include departments,
manual activities, computer programs,
hard-copy and digital accounting
records.
○ Also describe the physical computer
media being employed.
○ Shows the processing of a single
transaction only.
Transaction Processing Models: Batch vs.
Real-Time
● Information time frame:
○ Batch systems assemble
transactions in groups, resulting in a
time lag. Real-time systems process
transactions individually as they occur
with no time lag.
● Resources:
○ Generally fewer required with a batch
system.
● Operational efficiency:
○ Batch processing of noncritical
accounts eliminates unnecessary
activities at critical points in the
process.
● Designer must consider the trade-off between
efficiency and effectiveness.
● Updating master files from transactions:
○ Involves changing the value of one or
more variable fields to reflect the
effects of a transaction (batch and
real-time).
 ● Master file backup is a standard procedure to
maintain file integrity in the event that:
○ An update program error corrupts the
master file being updated.
○ Undetected transaction errors result in
corrupted balances.
○ A disaster physically destroys current
master files.
● Batch processing using real-time data
collection:
○ Popular approach that captures and
processes some aspects of a
transaction when in occurs and other
aspects in batch mode.
● Real-time systems process entire transactions
as they occur.

Transaction Processing Models

Table 2-1
Characteristic Differences Between Batch and
Real-Time Processing
Data Processing Models
Distinguishing Batch Real-Time
Feature
Information time Lag exists No time lag
frame between time exists.
when the Processing takes
economic event place when the Discuss The Flow Of Cash Through The
occurs and when economic event Transaction Cycles. Include The Relevant
it is recorded occurs. Subsystems And Any Time Lags That May Occur
Resources Generally, fewer More resources ● Cash flows into the firm from sales made to
resources (e.g., are required than customers. The sales order processing
hardware, for batch
subsystem of the revenue cycle captures the
programming, processing.
training) are intent of customers to exchange cash for
required services or goods manufactured. Typically
Operational Certain records Operational sales are made on credit. The cash receipts
efficiency are processed delays are not an subsystem of the revenue cycle captures the
after the event to issue. All records actual receipt of cash. Depending on the credit
avoid operational pertaining to the terms and promptness of payment by the
delays event are customer, the lag between the sales order
processed processing subsystem and the cash receipts
immediately.
subsystem may be days, weeks, or months.
● The lag between receiving goods and
disbursement of cash may be days or weeks.
Cash is also disbursed to employees, typically
after services are rendered by the employees.
The lag is usually no more than one-half a
month for salaried employees and as short as
one-half a week for hourly wage earners. The
payroll subsystem of the expenditure system
captures these disbursements to employees.

Explain Whether the Cost Accounting System

Primarily Supports Internal or External Reporting
● Initially, the cost accounting system was used
for the valuation of inventory and cost of goods
sold reported to external users; however, the
 valuable use of cost accounting data for
budgeting, cost control, performance reporting,
and management decision making have
proved to be crucial internal support.
Discuss The Role Of The Conversion Cycle For
Service And Retailing Entities
● The conversion cycle activities for service and
retailing entities include planning the items to
purchase or the services to produce, planning
the workforce to accomplish the necessary
tasks (extremely crucial in service entities),
and directing the workforce in performing the
service or selling the goods.
Can A Turnaround Document Contain Information
That Is Subsequently Used As A Source Document
● Yes. For example, the remittance advice of a
bill that is returned with the payment serves as
a source document for the cash receipts
transaction processing system. Thus, the
product document becomes a source
document.
Would The Writing Down Of Obsolete Inventory Be
Recorded In A Special Journal Or The General
Journal
● This type of transaction is recorded in the
general journal since it is nonrecurring,
infrequent, and not similar to other types of
transactions.
Are Both Registers And Special Journals
Necessary
● Sometimes the terms are used
interchangeably, such as the sales journal is
sometimes called the sales register. The term
journal is appropriate when the information
needs to be ultimately posted to the general
ledger. Registers may be used to keep logs of
information that may support, but do not
specifically get posted to the general ledger,
such as a raw materials receipts register or a
shipping log.
Discuss The Relationship Between Balance In AP
GL Control Account And What Is Found In The AP
SL Account
● The balance in the general ledger is
considered a control account. This amount is
an aggregated number representing the total
amount owed to creditors listed in the
accounts payable journal. The accounts
payable subsidiary ledger details the exact
amount owed to each creditor. The sum of the
amounts owed to each creditor listed in the
accounts payable journal should equal the
corresponding control total in the general
ledger. Thus, the accounts payable subsidiary
ledger is a detailed breakdown of the summary
control in the general ledger.
What Role Does The Audit Trail Play In The Task Of
Confirmation
● Confirmation is most typically used for
confirming the accounts receivable account as
reported on the balance sheet. The audit trail
is used to trace from the general ledger
accounts receivable control account to the
subsidiary account, and then to specific
customer accounts. A sample of the customer
accounts is then selected for confirmation.
Explain the Magnetic Audit Trail Functions
● In theory, the digital audit trail functions the
same as a manual audit trail. In practice, the
steps are slightly different. The archive file that
consists solely of valid transactions is the file
to which the accounts receivable subsidiary
account balances and transactions are traced.
The customers still need to be contacted for
confirmation.
Are Large Batch Sizes Preferable To Small Batch
Sizes
● Small batches have the advantage of fewer
transactions to sort through for error detection,
but they are not processed as efficiently.
Further, computing facilities and constraints
might dictate whether multiple small batches
may be processed throughout the day or
whether a single large batch is processed at
night when the computing facilities have
excess capacity. (Multiple small batches may
still be processed in the evening.)
Discuss Why An Understanding Of The Legacy
System Technologies Is Of Some Importance To
Auditors
● Not all modern organizations use entirely
modern information systems. Some firms
employ legacy systems for certain aspects of
their data processing. When legacy systems
are used to process financially significant
transactions, auditors need to know how to
evaluate and test them.
If An Organization Processes Large Numbers Of
Transaction That Use Common Data Records,
What Type Of System Would Work Best All Else
Being Equal
● Large-scale systems that process high
volumes of transactions often use real-time
data collection and batch updating. Master file
records that are unique to a transaction, such
as customer accounts and individual inventory
 records, can be updated in real time without ○ Supports the audit function by
causing operational delays. Common accounts providing an effective audit trail. a
should be updated in batch mode. Real-time class.
processing is better suited to systems that
process lower transaction volumes and those
that do not share common records.
● Real-time processing is better suited to
systems that process lower transaction
volumes and those that do not share common
records.

What Is The Most Striking Difference Between The

Database Model And Flat File Model
● The most striking difference between the
database model and the flat-file model is the
pooling of data into a common database that
● Numeric group codes are used to represent
all organizational users share.
complex items or events involving two or more
pieces of related data.
Discuss Some Of The Problems Associated With
○ Zones or fields have specific
General Ledger Systems That Do Not Have Data
meanings.
Coding Schemes
For example, a coding scheme for tracking sales might
● Uncoded data takes a great deal of recording
be 04-09-476214-99, meaning:
space, is time-consuming to record and is
prone to many types of errors. Consider a firm
that manufactures bicycles and carries in its Store Dept. Item Salesperson
Number Number Number
inventory reflector lights. The lights come in six
sizes, 2 colors, and 4 different grades of 04 09 476214 99
material. Thus, 48 different varieties of
reflector light are held (6x2x4). Every time ● Facilitates representation of large amounts of
lights are purchased, the description would diverse data.
need to be included rather than a code. For ● Allows complex data to be logically
example if 100 units of one type of reflector represented.
light were purchased, and 200 units of another ● Permits detailed analysis and reporting.
were purchased from Collins Manufacturer in ● Disadvantages are overuse which can
Roanoke, Virginia, the journal entry would be: increase costs and linking of unrelated data.
● Alphabetic codes are used for many of the
same purposes as numeric codes.
Inventory-2”, yellow metal 75
reflector light ○ May use sequential, block or group
coding techniques.
Inventory-3”, orange, plastic 120
reflector light ○ Dramatically increases the capacity to
represent large numbers of items.
A/P-Collins Mnf-Roanoke, VA 195
○ Disadvantages are it is difficult to
rationalize the meaning of the codes
Data Coding Schemes
and they tend to be difficult for users
● Involves creating simple codes to facilitate
to sort.
efficient data processing.
● Mnemonic codes are alphabetic character
● Business organizations process large volumes
acronyms and other combinations that convey
of transactions with similar basic attributes.
meaning.
○ Uncoded entries require extensive
○ Common application is the two code
recording space, are time consuming
state abbreviations or college course
to record and are error prone.
coding (in combination with numeric
● Advantages of data coding in AIS:
codes).
○ Concisely represents large amounts of
○ Codes convey a high degree of
complex information that would
information.
otherwise be unmanageable.
○ Disadvantage is limited ability to
○ Provides accountability over
represent items within a class.
transaction completeness.
○ Identifies unique transactions and
accounts within a file
Discuss Some Of The Problems Associated With
General Ledger Systems That Do Not Have Data
Coding Schemes
● Some problems this approach may produce
are
○ 1. The sales staff will have a more
tedious job in writing up orders, and
more errors may occur (i.e. what if
they forget to write the color or
material type?),
○ 2. The warehouse personnel will have
a more difficult time locating and
picking the goods for shipment, and
again more errors may occur, and
○ 3. The accounting personnel will also
have a more tedious job posting to the
subsidiary ledgers and errors may
occur.
Should An Auditor Wishing To Assess The
Adequacy Of Separation Functions Examine Data
Flow Diagram Or System Flowchart
● The auditor should examine the system
flowchart since it clearly depicts the separation
of functions and illustrates who is responsible
for performing specific processing steps. The
data flow diagram illustrates the logical system
and is too general since many different
physical designs may be applicable.
could represent warehouse 2, floor 1, row 12,
and bin #25.
f. sales order number — numeric, sequential.
This method allows the sales orders to be
examined to determine if any are missing.
g. vendor code — alpha-numeric. The
alphabetic portion allows more meaningful
codes to be used and found. The numeric
portion allows different firms with similar
names to be distinguished. i.e. ALPH01,
ALPH02 where ALPH01 is the vendor code for
Alpha Hydraulics and ALPH02 is the vendor
code for Alpha Trucking Services. Once the
name of the company is known, finding the
vendor code is much easier than if only
numbers are used.
h. invoice number — numeric, sequential. This
method allows the invoices to be examined
sequentially. Gaps in the sequence may signify
missing invoices.
i. customer number — same as for vendor
code. alpha-numeric
___________________________________________

Indicate Whether A Sequential, Block, Alphabetic

Or Mne-Menic Code Would Be Most Appropriate
a. state codes — alphabetic code, i.e. PA, this
method is appropriate because it corresponds
with the postal services abbreviation and is
meaningful to humans.
b. check number — numeric, sequential. This
method allows the checks to be examined to
determine if any are missing.
c. chart of accounts — block coding since this
method allows a whole class of items to be
restricted to a specific range. i.e. assets
100-199, liabilities 200-299, equity accounts,
300-399.
d. inventory item number — alpha-numeric.
The numeric portion allows the items to be
easily sorted and found. The alphabetic
portion allows more combinations to be made
with fewer digits or characters. i.e. 2000A,
2000B, 2000C could represent virtually the
same inventory item but in three different
sizes.
e. bin number (inv. warehouse location) —
group codes since certain digits may be used
to represent which warehouse, certain digits
may be used to represent floor, certain digits
may be used to represent rows, certain digits
may be used to represent bins. i.e. 211225