Information Technology 2

The need to study information Technology

1. Role of accountants with respect to AIS:
a. User
b. Systems Analyst or Developer
- One of the services that can be rendered by an accountant is systems development; this is an
excellent career path as a systems analyst or project manager.
c. Auditor or Evaluator
- To ensure the reliability of the accounting information generated from the AIS.
2. The importance of information to modern organization
a. Valued resource
- Information is needed to make sound plans and decisions and to control operations
b. Effective and efficient AIS is a competitive advantage
3. The trends in information and information systems
a. Focus on strategic information as a strategic resource.
- Market share, new products to be marketed, price changes made by competitors, expected long
term interest rates.
b. Focus on continuous improvement
c. Fusion of information and service
- The use of methods and technologies for strategic advantage
o Total quality management, JIT, inventory management, EDI networks, CIM, electronic
on-line/real time transaction processing particularly for service oriented industries and
organizations
d. Globalizations of organization and services.
- Dealing with diverse consumer demands, complex logistical problems, accommodate local
customers and legal obligations.
- These create the need for a rapid and reliable information and communication network
e. Business process outsourcing (BPO’s)
f. User involvement
- End- users are involved in systems development in order to ensure that their requirements are
met
- Transactions are processed where they happen and when it happens.
4. CPA licensure examination syllabus

Auditing in Computerized Information Systems (CIS) Environment

- Internal control in a CIS environment
- Basic approach to the audit of CIS environment

Differences between in-house or user

Developed software and application package
The different phases of the SDLC are generally similar, following are some differences:
 Distinction In-House Application package
Who develops Project team (employees of Employees of 3rd party
the user company) software provider
Owner The user company 3rd party software provider.
License to use is given to the
user company.
Systems requirements All business requirements of General business
covered the company requirements of the intended
user companies
System test and acceptance Use of prototype installation Same as in-house plus the
need to do gap analysis and
resolutions to address the
specific business needs not
covered by the package.
End-user training and Project management team Project management team
orientation assisted by the software
provider
Implementation and Project management team Project management team
optimization assisted by the software
provider
Refinements Project management team Project management team if
allowed, else, the software
provider.

WHAT IS A SYSTEM?
- A regularly interacting or interdependent group of elements forming a unified whole
- A collection of related parts treated as a unit where its components interact.
Business Systems
- A collection of:
o Policies
o Procedures
o Methods or techniques
o People
o Machines
o And other elements that interact and enable the organization to reach its goals
Information systems
- A business system that process data and make it available to users for decisions making.
Accounting Information systems
- Accounting transaction data is collected and processed into financial information
- A structure that a business uses to collect, store, manage, process, retrieve and report its financial
data so that it can be used y accountants, consultants, business analysts, managers, CFOs,
auditors and regulatory and tax agencies.
- In general, can be either manual or computerized
- For purposes of this course, the study is focused on computerized information system (CIS)
 - On top of the previously described components or parts of a business systems, we need to
include:
1. Data and all the information that goes into the AIS
2. Software: consist of a computer programs used for processing data
3. Information technology infrastructure including communication facilities
4. Internal controls

Basic Principles of a Reliable AIS

5 basic principles
1. Security – Limited access
2. Confidentiality – protection of sensitive information
3. Privacy – non-disclosure of personal information
4. Processing integrity – accuracy, completeness, timeliness of processing with proper authorization
5. Availability – meeting of operational and contractual obligations
The business environment and the AIS

1. Objectives:
- Maximizing profits
o Optimum use of resource
o Reduction human effort
 Uncover duplication or redundancy.
- Effective and efficient AIS is a competitive advantage.
2. Environment
- The surroundings that lies beyond the firm’s boundary: people, facilities, government agencies,
external organizations, e.g banks, customers, suppliers, competitors and the market in general
that surround a system.
3. Constraints
 - Internal or external restrictions, e.g company policies, external rules, government
regulations/state laws
- Systems boundary/restriction in market area
- Funds and trained personnel
4. Controls
- To monitor operations and processes, so as to identify and correct deviations from plans.
- Various internal controls are utilized by both the firm and the AIS.
5. Input-process-outputs
- Includes resources needed to conduct operations and produce outputs
o Raw materials, labor, overheads, merchandise, facilities, funds, etc.
o Raw data or resource documents
6. Feedback
- Needed to increase the degree of control and a tool for continuous improvements
o Choice of suppliers
o Best selling products
o Systems revision
7. Interfaces
- Subsystems are linked to each other through couplings or shared boundaries in order to exchange
inputs and outputs
8. Subsystems
- One of the parts of a system which perform a specified task that is consonant with the goals of a
larger system of which it is a part.
- The formation of separate business units to lessen the complexit of managing the business, home
office and branches (sales offices and factories)

- The means by which the managers of the firm direct and coordinate the set of activities and
operations
- Responsibility centers or cost centers are established where the accountable manager resides
- The structure can be:
o Hierarchical, or:
o Networked
 - A collection of primary physical processes (business processes, operations, or activities) that a
firm provides.
- The collective process is called as each process add value to the final output
- Examples of operational processes:
o Acquiring materials, producing finished goods, storing finished good, shipping finished
goods, selling
- Value of information (economic nature)
o Related to the effectiveness of decision making
- Information qualities
o Relevance, accuracy, timeliness. Conciseness, clarity, quantifiability, consistency

Planning
- Strategic (high level): for example low price, high volume strategy; looking at consumer
preferences, launching of new products
- Tactical or operational: for example, marketing strategies are translated into details selling and
advertising plans.
Control: to ensure that plans are being followed
- Operational control: for example, are shipping schedules followed? Are raw materials uasages
within the allowed standard quantities:
- Management control: e.g., budget control through responsibility centers
Technical level
- To convey accurate and complete information
Semantic level
- To convey information that the user can clearly understand.
Effectiveness level
- To stimulate desired result such as sound decisions

Effects of IT on AIS
1. Faster processing of transactions
2. Greater accuracy; lower cost of processing
3. More timely presentation
4. More concise storage with greater accessibility when needed
5. Larger range of choices for entering data and providing outputs
6. Higher productivity for employees and managers

Information System Architectures

- Broadly defined as the structural; arrangement of hardware and data communications
components of an information system.
 - It also pertains to software, concepts, or capabilities

- Mainframes, minicomputers, microcomputers

- Multiple processors: coupled, parallel, distributed (network)

- Internal computer networks: WAN (centralized or distributed), LAN

Type of networks
Wide-area network
- Links together geographically dispersed computer systems, ie., decentralized computer systems
Local area network
- Functions within a single limited geographical area
 External computer networks: open systems architecture; closed system architecture
Hardware
- Size, speed, storage capacity, reliability, cost, options
Software
- Voice activated software

Data and data-base management

- Database
- Library
- File
- Record
- Field
- Byte (Character
- Bit
Database
- Collected data sets that are organized and stored as integral part of a computer-based information
system
Three major functions:
- File storage
- File maintenance (update)
- Retrieval of data (file access)
Characteristics of the database approach
1. Data independence
 - Separation of data from the various application programs and other accesses of the users
- Changes affecting data need be made in the DBMS alone rather than in all application programs
that use the data
2. Data standardization
- Data elements have a standard definitions, thus, stored data are compatible with all every
application program that access the data
3. One-time data entry and storage
- Consequently, redundancy is eliminated.
4. Data integration
- Enables all affected data sets to be updated simultaneously
5. Shared data ownership
- Users from different function, e.g., accounting, warehousing, production, sales, etc. may draw
from the same data base
6. Centralized data managaement
- A database administrator is in charge of managing the database centrally. This provides security
and integrity to the data/
Benefits of the database approach
- Data redundancies are reduced through the “one time entry” and processing of data
- Inconsistencies are eliminated since all data sets affected by a transaction data are updated
simultaneously.
- Improved security because of centralized data management

TRANSACTION PROCESSING CYCLES OBJECTIVES AND

Types of Transactions or Data Sources
1. Routine external transactions
2. Routine internal transactions
3. Non-routine transactions

The Four Main Accounting Transaction Cycles

1. Expenditure cycle
2. Revenue cycle
3. Conversion cycle
4. General ledger or financial reporting cycle

Objectives of the expenditure cycle

1. To ensure that all goods and services are ordered as needed.
2. To receive all ordered goods and verify that they are in good condition.
3. To safeguard goods until needed.
4. To determine that invoices pertaining to goods and services are valid and correct
5. To record and classify the expenditures promptly and accurately.
 6. To post obligations and cash disbursements to proper suppliers’ accounts in the accounts payable
ledger.
7. To ensure that all cash disbursements are related to authorized expenditure.
8. To record and classify cash disbursements promptly and accurately.

Functions of the Expenditure Cycle

1. Recognize the need for goods and services.
2. Place an order for goods and services.
3. Receive and store goods or accept services.
4. Ascertain validity of the payment obligation.
5. Prepare the cash disbursement.
6. Maintain Accounts Payable.
7. Post transactions to the general ledger.
8. Prepare needed financial reports and other outputs.

Other related functions of the expenditure cycle

1. Handling purchase returns and allowances
2. Disbursing cash for other purposes.
3. Processing petty cash disbursements.
Objectives of the revenue cycle
1. To record all sales orders promptly and accurately.
2. Verify that the customers are worthy of credit.
3. Ship the products or perform the services by agreed dates.
4. Bill for products and services in a timely and accurate manner.
5. Record and classify cash receipts promptly and accurately.
6. Post sales and cash receipts to proper customers’ accounts in the accounts receivable ledger.
7. Safeguard products and cash until shipped or deposited.
Functions of the revenue cycle
1. Obtain order from customer
2. Check credit.
3. Enter sales order.
4. Assemble goods for shipment.
5. Ship ordered goods.
6. Bill customer
7. Receive and deposit cash payment.
8. Maintain accounts receivable.
9. Post transactions to general ledger.
10. Prepare needed financial reposrts and other outputs
Other related functions of the revenue cycle
1. Handling sales returns and allowance.
2. Collecting delinquent accounts
 3. Processing back orders
Objectives of the conversion cycle
To ensure that:
1. Adequate raw materials and other resources are available for production, the investment for such
resources is minimized.
2. Production costs are minimized through high labor productivity, full utilization of production
equipment, low levels of scrap and rework, and optimal design of production layouts and procedures.
3. Work-in-progress inventories are transformed into finished goods, which are warehoused or shipped on
schedule
4. Established level of product quality and after-sales service are attained
5. Costs for each order or process are accumulated fully and accurately.
Functions of the conversion cycle
1. Undertake strategic production planning.
2. Obtain and manage the raw materials inventory.
3. Initiate the production process.
4. Maintain and control production operations.
5. Maintain work-in-progress cost records.
6. Complete and transfer finished goods.
7. Prepare financial reports and other outputs.
Other related functions of the conversion cycle
1. Quality control
2. Re-work
3. Scrap
4. Excess materials
Objectives of the general ledger system
1. To record all accounting transactions promptly and accurately.
2. To post these transactions to the proper accounts.
3. To maintain an equality of debit and credit balances among the accounts.
4. To accommodate needed adjusting journal entries.
5. To generate reliable and timely financial reports pertaining to each accounting period.
Functions of the general ledger system
1. Collect transaction data
2. Classify and code transaction data and accounts.
3. Validate collected transactions
4. Update general ledger accounts and transaction files
5. Record adjust ents to accounts.
6. Prepare financial reports
Chart of accounts
A code listing of accounts:
- Assets
 - Liabilities
- Capital
- Revenue
- Expenses
- Equity accounts
Types of transactions posted to the GL
1. Adjusing entries
a. Accruals
b. Deferrals
c. Revaluations
d. Corrections
2. Reversing entries
3. Closing entries
4. Entries recorded at source (from the different transaction cycles)
APPLICATION OF THE PRINCIPLES OF SYSTEMS ANALYSIS AND DESIGNS
Systems Analysis
- the detailed investigation of business or information systems.
- it is the scientific study of the systems process, including investigation of inputs and outputs, in
order to find better, economical, and more efficient means of processing.
The systems Development life cycle
Planning phase
- the analyst recognize, diagnose and define the problem.
Analysis Phase
- the analyst reviews the in-place systems.
Design Phase
- the analyst puts down on paper the elements of a new or improved system.
Development Phase
- the new system is actually built.
Implementation phase
- changeover to the new or improved system.
- For each phase of the SDLC, there is one or more deliverable called work product or work
output.
- It is a finite, measurable amount of work known as milestones that mark the completion of a
phase.
Design Guidelines
Modular structure following the top-down approach
- develop systems in segments, dividing the task into smaller more manageable parts.
 - for example, the AIS can be developed in modules based on the transaction processing cycles.
Modular Approach Transaction Processing Cycles
 Expenditure Cycle
 Revenue Cycle
 Conversion Cycle
 General Ledger and Financial Reporting Cycle
Processing Information for Management Needs

Qualities of useful information

1. Relevance
2. Accuracy
3. Timeliness
4. Conciseness
5. Clarity
6. Quantifiability
7. Consistency
Financial reporting to internal & external users
Internal reports
- more details
- not constrained by FRS
- mainly intended for managerial planning and control
External reports
- less details
- should conform with FRS
- compliance with the requirements of external stakeholders and regulatory bodies or state law.
Budgetary Reporting Systems
- Integrated set of reports that aid in planning and controlling a firm’s operations.
- Involves the preparation of long and short-term sales forecast based on a variety of inputs.
- The financial plan serves as the target to be achieved
Responsibility and Profitability Reporting Systems
- it feeds accountability information.
- - the reports contain budgeted amounts (profit or costs or expenses), that are controllable by the
responsible manager representing the performance standards
Data Warehouse
 - a large store of data accumulated from a wide range of sources within a company and used to guide
management decisions.
- data warehousing emphasizes the capture of data from diverse sources for access and analysis rather
than for transaction processing.
Decision Support Systems
- Aids high and middle level managers in making strategic and tactical planning decisions.
- Broader understanding by the decision makers of the array of factors involved in problems requiring
complex decisions and their relationships to each other.
Typical fucntios aidded by DSS
 sales forecasting
 production scheduling
 inventory control
 purchasing
 physical distribution
 investment planning
 cost analysis
 financing
 accounting control
 personnel planning
Analysis techniques using a dss financial model
1. Time based simulation
- projects the values of the key factors and criteria over future time periods given current data values and
expected rate of change.
- e.g., simulation of the firm’s budget over five years with values of sales and net income calculated each
year.
2. What if analysis
- allows the user to ask questions in order to determine how key factors will respond to assumed changes
or conditions.
- e.g., what will be the increase in the labor cost next year if a P20 per hour average wage increase is
granted?
3. Sensitivity analysis
- a special version of the “what-if” analysis technique revealing the sensitivity of the decision model
criteria to changes in the value of key factors.
- e.g., what will be the effect on the net income if unit sales decreased by 10% next year?
4. Goal seeking techniques
- allows the user to determine the levels of key factors needed in order to achieve a desired level in a
model criterion.
- e.g., what volume or level of sales units must be generated in order to achieve a 25% share of the
market.
Expert systems
- simulates the thinking process of one or more human experts in solving a complex problem or in
making decisions.
- it specifically recommends a solution to a problem.