1. Write the Principles of an Accounting Information System?

Three basic principles of accounting information system are cost-effectiveness, useful output,
and flexibility. Efficient and effective accounting information system depends on these basic
principles.

Cost Effectiveness

Accounting information must be cost-effective.

It must outweigh information cost. If the accounting information system is cost-effective, it can
provide desired output and if flexible, it can contribute much in achieving the objective of a
person or an organization.

Useful Output / Necessity

Accounting information system must be able to provide a necessary result.

Working information must be understandable, relevant, reliable, timely and accurate. The
designer of information system will always take the necessity and knowledge of accounting
information users into consideration.

Flexibility

In accounting information system there must be provision for inclusion of changed information
needed by different users.

This system must be adequately flexible so that it can meet changed demand.

2. Explain the Phases of an Accounting System Development?

4 Steps of Developing Accounting System

The system that collects and processes transaction-data and disseminates financial information to
interested parties is known as the accounting system or accounting information system.

This system includes every step of the accounting cycle. It also includes documentary evidence
of transactions. Therefore, the transaction with documentary evidence, journal, ledger, trial
balance, worksheet, financial statements determining results, etc. are included in the accounting
information system.

Recording of a business transaction, ledger preparation, trial balance preparation, analyzing the
process of financial Statements are similar in all business organizations. The speed and
efficiency of the system depend on accounting information systems in practice.

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For example, a student decides to go home after attending an accounting class. His roads to his
home are two-one is side road and the other is a superhighway.

Now it is up to the student which road he will take to go home. But his intention is one i.e. to
reach home.

He can go home driving a car using either of the roads. But it is expected that he will drive the
car to go home by the super highway because this road is very much speedy.

It is also true in case of an accounting information system. If a particular accounting system is

comparatively speedy and efficient, it can be used for the accounting process.

In this stage identification of various accounting systems and their characteristics will be
discussed.

Processing transactions through a general journal and general ledger manually is one type of
accounting system.

Another accounting system is to add a special journal and subsidiary ledger to the above-
mentioned system.

Accounts keeping through machine i.e. computer can be done more speedily and efficiently in
comparison to manual operating of accounting activities.

Developing an Accounting System

An ideal accounting system does not come into force automatically. It is to be very much
carefully planned, designed, arranged, managed and modified.

In developing an ideal accounting system the following four steps are necessary;

Analysis.

Design.

Implementation.

Follow-up.

Analysis

At first, it is to be ascertained what information is necessary for internal and external users. An
information analyst is to identify sources of the necessary information for collecting data and
prepare reports and preserve them properly.

Strength and weakness of an existing information system are to be identified for its analysis.

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Design

For formulating a new accounting system designing of forms and documents, sorting of the
method and working process, preparing a statement of work, collecting techniques of control,
preparing reports and selecting equipment are necessary.

Slight changes are required for redesigning existing accounting information system.

Implementation

For the implementation of a new or modified accounting information system, necessary

documentary evidence of information, the process of methods and installation of necessary
equipment, etc. are to be activated.

Employees concerned are to be given training and they are to be monitored closely.

Follow-up

After the implementation of the accounting information system and making it workable, its
weakness and breakdown are to be monitored very closely and its effectiveness and design are to
be compared with organizational objectives.

3. Compare and contrast manual accounting system VS computerized accounting system

by enumerating their advantages and disadvantages and describe the different
computer based information systems?
Definition of Manual Accounting

Manual Accounting, as the name signifies, is the paper-based accounting system, in which
journal and ledger registers, vouchers, account books are used to store, classify and analyse
financial transactions of an organization. It is often used by small businessmen, such as sole
proprietors, shopkeepers, etc. to maintain the record of the business transactions, due to lower
cost.

One of the advantages of the manual accounting system is its easy accessibility. It is also
characterised by confidentiality, which makes the sensitive information hacking free.
Nevertheless, manual accounts can only be prepared correctly if the accountant possesses good
knowledge of bookkeeping and accounting.

Moreover, human error, such as incorrect recording of the transaction, the omission of the
transaction, figure transposition and so forth, is likely to occur while the preparation of manual
accounts which cannot be ignored.

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 Definition of Computerized Accounting

Computerized Accounting can be described as the accounting system that uses the computer
system and pre-packaged, customised or tailored accounting software, to keep a record of
financial transactions and generate financial statements, for analysis.

Computerized Accounting system relies on the concept of a database. The accounting database is
systematically maintained, with active interface wherein accounting application programs and
reporting system are used. The two primary essentials are:

Accounting framework: The framework comprises of principles and grouping structure for
maintaining records.

Operating procedure: There is a proper procedure for operating the system so as to store and
process the data.

Further, it requires front-end interface, back-end database, database processing and reporting
system to store data in a database-oriented application.

The merits of computerized accounting rely on its speed, accuracy, reliability, legibility, up-to-
date information and reports etc.

4. Discuss the Evolution of Information System Models?

Over the past 50 years, a number of different approaches or models have represented accounting
information systems. Each new model evolved because of the shortcomings and limitations of its
predecessor. An interesting feature in this evolution is that the newest technique does not
immediately replace older models. Thus, at any point in time, various generations of systems
exist across different organizations and may even coexist within a single enterprise. The modern
auditor needs to be familiar with the operational features of all AIS approaches that he or she is
likely to encounter. This book deals extensively with five such models: manual processes, flat-
file systems, the database approach, the REA (resources, events, and agents) model, and ERP
(enterprise resource planning) systems. Each of these is briefly outlined in the following section.

The Manual Process Model

The manual process model is the oldest and most traditional form of accounting systems. Manual
systems constitute the physical events, resources, and personnel that characterize many business
processes. This includes such tasks as order-taking, warehousing materials, manufacturing goods
for sale, shipping goods to customers, and placing orders with vendors. Traditionally, this model
also includes the physical task of record keeping. Often, manual record keeping is used to teach
the principles of accounting to business students. This approach, however, is simply a training
aid. These days, manual records are never used in practice.

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 Nevertheless, there is merit in studying the manual process model before mastering computer-
based systems. First, learning manual systems helps establish an important link between the AIS
course and other accounting courses. The AIS course is often the only accounting course in
which students see where data originate, how they are collected, and how and where information
is used to support day-to-day operations.

Finally, manual procedures facilitate understanding internal control activities, including

segregation of functions, supervision, independent verification, audit trails, and access controls.
Because human nature lies at the heart of many internal control issues, we should not overlook
the importance of this aspect of the information system.

The Flat-File Model

The flat-file approach is most often associated with so-called legacy systems. These are large
mainframe systems that were implemented in the late 1960s through the 1980s. Organizations
today still use these systems extensively. Eventually, modern database management systems will
replace them, but in the meantime accountants must continue to deal with legacy system
technologies. The flat-file model describes an environment in which individual data files are not
related to other files. End users in this environment own their data files rather than share them
with other users. Thus, stand-alone applications rather than integrated systems perform data
processing. The data redundancy demonstrated in this example contributes to three significant
problems in the flat-file environment: data storage, data updating, and currency of information.

Data Storage

An efficient information system captures and stores data only once and makes this single source
available to all users who need it. In the flat-file environment, this is not possible. To meet the
private data needs of users, organizations must incur the costs of both multiple collection and
multiple storage procedures. Some commonly used data may be duplicated dozens, hundreds, or
even thousands of times.

Data Updating

Organizations have a great deal of data stored in files that require periodic updating to reflect
changes. For example, a change to a customer’s name or address must be reflected in the
appropriate master files. When users keep separate files, all changes must be made separately for
each user. This adds significantly to the task and the cost of data management.

Currency of Information

In contrast to the problem of performing multiple updates is the problem of failing to update all
the user files affected by a change in status. If update information is not properly disseminated,

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the change will not be reflected in some users’ data, resulting in decisions based on outdated
information.

Task-Data Dependency

Another problem with the flat-file approach is the user’s inability to obtain additional
information as his or her needs change. This problem is called task-data dependency. The user’s
information set is constrained by the data that he or she possesses and controls. Users act
independently rather than as members of a user community. In such an environment, it is very
difficult to establish a mechanism for the formal sharing of data. Therefore, new information
needs tend to be satisfied by procuring new data files. This takes time, inhibits performance, adds
to data redundancy, and drives data management costs even higher.

Flat Files Limit Data Integration

The flat-file approach 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. Such structuring, however, may
exclude data attributes that are useful to other users, thus preventing successful integration of
data across the organization. For example, because the accounting function is the primary user of
accounting data, these data are often captured, formatted, and stored to accommodate financial
reporting and GAAP. This structure, however, may be useless to the organization’s other
(nonaccounting) users of accounting data, such as the marketing, finance, production, and
engineering functions. These users are presented with three options: (1) do not use accounting
data to support decisions; (2) manipulate and massage the existing data structure to suit their
unique needs; or (3) obtain additional private sets of the data and incur the costs and operational
problems associated with data redundancy.

The Database Model

An organization can overcome the problems associated with flat files by implementing the
database model to data management. With the organization’s data in a central location, all users
have access to the data they need to achieve their respective objectives. Access to the data
resource is controlled by a database management system (DBMS). The DBMS is a special
software system that is programmed to know which data elements each user is authorized to
access. The user’s program sends requests for data to the DBMS, which validates and authorizes
access to the database in accordance with the user’s level of authority. If the user requests data
that he or she is not authorized to access, the request is denied. Clearly, the organization’s
procedures for assigning user authority are an important control issue for auditors to consider.

5. Discuss the steps for designing and implementing a database using REA system?

• The REA data model was developed specifically for use in designing accounting information
systems. It focuses on business semantics underlying an organization’s value chain activities.

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 It provides guidance for identifying the entities to be included in a database and structuring the
relationships among the entities.

• REA data models are usually depicted in the form of E-R diagrams. Therefore, we refer to E-R
diagrams developed with the REA model as REA diagrams.

• The REA data model is so named because it classifies entities into three distinct categories:
resources that the organization acquires and uses; events in which the organization engages; and
agents participating in these events.

• The REA data model prescribes a basic pattern for how the three types of entities (resources,
events, and agents) should relate to one another.

– Rule 1: Each event is linked to at least one resource that it affects.

– Rule 2: Each event is linked to at least one other event.

– Rule 3: Each event is linked to at least two agents.

• Let’s take a closer look at each of these rules.

• Rule 1: Every event entity must be linked to at least one resource entity. Some events affect
the quantity of a resource. If they increase the quantity of a resource, they are called a “get”
event. If they decrease the quantity of a resource they are called a “give” event. Relationships
that affect the quantity of a resource are sometimes referred to as stockflow relationships. But
some events do not directly alter the quantity of a resource. If a customer orders goods but has
not paid and has not received goods, this activity is called a commitment event. Organizations
track the effects of commitments to provide better service and for planning purposes.

• Rule 2: Every event entity must be linked to at least one other event entity. Give and get
events are linked together in what is labeled an economic duality relationship. These
relationships reflect the basic business principle that organizations engage in activities that use
up resources in hopes of acquiring other resources in exchange. Each accounting cycle can be
described in terms of give-to-get economic duality relationships.

– Revenue cycle: Sell goods or services and get cash.

– Expenditure cycle: Buy goods or services and pay cash.

– Production cycle: Use raw materials, labor, and machinery and equipment time; get
finished goods.

– Human Resources/Payroll Cycle: Get labor; give cash.

– Financing Cycle: Give cash; get cash.

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• Not every relationship between two events represents a give-to-get economic duality.
Commitment events are linked to other events to reflect sequential cause-effect relationships.

• Rule 3: Every event entity must be linked to at least two participating agents. For
accountability, organizations need to be able to track actions of employees. They also need to
monitor the status of commitments and exchanges with outside parties. Therefore, each event
links to at least two participating agents.

• For events that involve transactions with external parties, the internal agent is the employee
responsible for the affected resource, and the external agent is the outside party to the
transaction. For internal events, such as transferring raw materials to the production floor, the
internal agent is the employee who gives up responsibility or custody for the resource, and the
external agent is the one who receives it.

• To design an REA diagram for an entire AIS, one would develop a model for each transaction
cycle and then integrate the separate diagrams into an enterprise-wide model. However, in this
chapter, we focus on the individual transaction cycles.

• Developing an REA diagram for a specific transaction cycle consists of three steps:

– STEP ONE: Identify the events about which management wants to collect information.
– STEP TWO: Identify the resources affected by the events and the agents who
participated.
– STEP THREE: Determine the cardinalities of the relationships.

STEP ONE: IDENTIFY RELEVANT EVENTS

• At a minimum, every REA model must include the two events that represent the basic give-to-
get” economic exchange performed in that transaction cycle. The give event reduces one of the
organization’s resources. The get event increases a resource. There are usually other events that
management is interested in planning, controlling, and monitoring. These should be included in
the model.

• Example: Typical activities in the revenue cycle include:

 Take customer order (commitment event).

 Fill customer order (give event).

 Bill customer (involves an exchange of information but does not affect resources).

 Collect payment (get event).

• While accounts receivable is an asset for financial reporting purposes, it is not represented as a
resource in an REA model. It represents the difference between total sales to a customer and

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total cash collections from the customer. The information to calculate an accounts receivable
balance is already there because the sales and cash receipt information is captured.

• Events that pertain to “entering” data or “re-packaging” data in some way do not appear on the
REA model. They are not primarily value-chain activities. What is modeled is the business
event and the facts management wants to collect about the event, not the data entry process.

• In completing the first step of an REA diagram, the event entities are typically drawn from top
to bottom in the sequence in which they normally occur.

STEP TWO: IDENTIFY RESOURCES AND AGENTS

• In the revenue cycle, as an example, the “give” resource is inventory (or services), and the
“get” resource is cash.

• The agents who participate in each event should also be identified.

 There will always be at least one internal agent (employee).

 In most cases, there will also be an external agent (e.g., customer or supplier) who
participates.

STEP THREE: DETERMINE THE CARDINALITIES OF THE RELATIONSHIPS

• The final step in an REA diagram for a transaction cycle is to add information about the
relationship cardinalities. A cardinality describes the nature of the relationship between two
entities. It indicates how many instances of one entity can be linked to a specific instance of
another entity. For example, the cardinality between the event Sales and the agent Customer
answers the question: for each sale a company makes, how many customers are associated with
that sale?

• There is no universal standard for diagramming cardinalities. In this text, we adopt the
graphical “crow’s feet” notation style because it is becoming increasingly popular and it is used
by many software design tools.

• Using the crow’s feet notation: The symbol for zero is a circle: O. The symbol for one is a
single stroke: |. The symbol for many is the crow’s foot.

• There is typically a minimum and maximum cardinality for each entity participating in a
relationship. The minimum cardinality can be either 0 or 1. In the relationship between sale and
customer shown in the following diagram, the minimum cardinality symbol next to customer is
the symbol for one, meaning that for every occurrence of a sale, there must be a minimum of one
customer involved. The minimum on the sale side is zero, meaning that for every customer,
there is a minimum of zero sales (allows for a prospective customer to be included in the
customer database).

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6. Kick Ice cream is a small ice-cream shop located near the university. Kick Ice Cream
serves walk in customers only. The shop carries 26 flavors of ice-cream. Customer can
buy cones, sundaes, or shakes. When a customer pays for an individual purchase, a
sales transaction usually includes just one item. When customer pays for a family or
group purchases however, single sales transaction includes many different items. All
sales must be paid for at the time the ice cream is served. Joy Ice-cream maintains
several banking accounts but deposits all sales receipts into its main checking account.
You are required to draw an REA Diagram, complete with cardinalities, for Joys Ice-
cream revenue cycle.

Inventory Sales Employe

Cash Receive Customer

Cash Employe

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