AIS REVIEWER

TRANSACTION PROCESSING SYSTEM

• TPS applications process financial transactions.

Expenditure Cycle

• Incurs expenditures in exchange for resources.

• Are based on a credit relationship between the trading parties.
✓ A physical component (the acquisition of the goods)
✓ A financial component (the cash disbursement to the supplier)

Conversion Cycle

• Provides value added through its products or services.

• The production system involves the planning, scheduling, and control of
the physical product through the manufacturing process.
• The cost accounting system monitors the flow of cost information related
to the production.

Revenue Cycle

• Receives revenue from outside sources.

• Also have physical and a financial component, which are processed
separately.

ACCOUNTING RECORDS (MANUAL SYSTEMS)

Documents

• Source documents – used to capture and formalize transaction data that

the transaction cycle needs for processing.
• Product documents – the result of transaction processing rather than the
triggering mechanism for the process.
• Turnaround documents – product documents of one system that become
source documents for another system.

Journals

• A record of chronological entry.

• Special journals – used to record specific classes of transactions that
occur in high volume.
✓ The term “register” is often used to denote certain types of special
journals.
• General journal – record nonrecurring, infrequent and dissimilar
transactions.

Ledgers

• Book of accounts that reflects the financial effects of the firm’s

transactions after they are posted from the various journals.
• Indicates the increases, decreases and current balance of each account.
• 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.
• Subsidiary ledgers – contain the details of the individual accounts that
constitute a particular control account.
- Kept in various accounting departments of the firm.
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Audit Trail

• Tracing transactions from source documents to financial statements. Most

important to the accountants is the year-end audit.

ACCOUNTING RECORDS (COMPUTER-BASED SYSTEMS)

Types of Files

1. Master files – generally contains account data

2. Transaction files – temporary file of transaction records
3. Reference files – stores data used as standards for transaction processing
4. Archive files – records of past transactions

DOCUMENTATION TECHNIQUES

Data Flow Diagram

• Used to represent systems at different levels of detail from very highly to

highly detailed.

Entity Relationship Diagram

• Used to represent the relationship between entities.

• Entities are physical resources, events, and agents about which the
organization wishes to capture data.
• Cardinality – numerical mapping between entities
✓ 1:1 (one to one)
✓ 1:M (one to many)
✓ M:M (many to many)

Flowcharts

• Graphical representation of a system that describes the physical

relationships between its key entities.
• Document flowchart – used to depict the elements of a manual system.

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• System flowcharts – portray the computer aspects of a system.

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• Flowcharting Guide:
✓ Layout the physical areas of the activity
✓ Transcribe the written facts into visual format
• Program Flowchart – provides the operational details that a system
flowchart may not provide.

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Record Layout Diagrams

• Used to reveal the internal structure of the records that constitute a file or
database table.

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ETHICAL ISSUES IN BUSINESS

Ethics

• Principles of conduct that individuals use in making choices and guiding

their behavior in situations that involve the concepts of right and wrong.

Manager’s Ethical Responsibility (Proportionality)

• The benefit from a decision must outweigh the risks.

1. Justice – benefits of the decision should be distributed fairly to those
who share the risks. Those who do not benefit should not carry the
burden of the risk.
2. Minimize risk – even if judged acceptable by principles, the decision
should be implemented so as to minimize all of the risks and avoid any
unnecessary risks.
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Computer Ethics

• Privacy
• Security (Accuracy and confidentiality)
• Ownership of Property
• Equity in Access
• Environmental Issues
• Artificial Intelligence
• Unemployment and displacement
• Misuse of computers

Sarbanes-Oxley Act & Ethical Issues

The SEC has rules that compliance with Section 406 necessitates a written code
of ethics that addresses the following ethical issues:

✓ Conflict of interest
✓ Full and fair disclosures
✓ Legal compliance
✓ Internal reporting of code violations
✓ Accountability

FRAUD & FRAUD SCHEMES

Fraud and the Accountants

• Fraud denotes a false representation of a material fact made by one

party to another party with the intent to deceive and induce the other
party to justifiably rely on the fact to his or her detriment.
• According to common law, a fraudulent act must meet the following 5
conditions:
1. False Representation – there must be a false statement or
nondisclosure.
2. Material Fact – a fact must be substantial factor in inducing someone
to act.
3. Intent – there must be an intent to deceive or the knowledge that
one’s statement is false.
4. Justifiable reliance – the misinterpretation must have been a
substantial factor on which the injured party relied.
5. Injury or loss – the deception must have caused injury or loss to the
victim of the fraud.
• Fraud in the business environment has a more specialized meaning. It is
a(n):
1. Intentional deception
2. Misappropriation of a company’s assets
3. Manipulation of its financial data to the advantage of the perpetrator
• Auditors encounter fraud at two levels:
1. Employee fraud
2. Management fraud
• Factors that contribute to fraud:
1. Situational pressures
2. Opportunities
3. Personal characteristics (ethics)
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Fraud Schemes:

1. Fraudulent Financial Statements (Underlying problems)

• Lack of auditor independence
• Lack of director independence
• Questionable executive compensation schemes
• Inappropriate accounting practices

The Sarbanes-Oxley Act

• Creation of an accounting oversight board (PCAOB)

• Author independence
• Corporate governance and responsibility
• Disclosure requirements
• Penalties for fraud and other violations
2. Corruption
• Bribery
• Illegal gratuities
• Conflicts of interest
• Economic extortion
3. Asset Misappropriation
• Charges to expense account – the most common way to conceal
misappropriation.
• Lapping – the use of a customer check, received in payment of their
accounts, to conceal cash previously stolen by an employee.
• Transaction fraud – involves deleting, altering, or adding false transactions
to divert assets to the perpetrator.
• Computer fraud schemes:
✓ Program fraud (creating illegal programs)
✓ Operations fraud (misuse or theft of computer resources)
✓ Database management fraud (altering, deleting, corrupting)
✓ Scavenging (searching through the trash of the computer)
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✓ Eavesdropping (listening to output transmissions)

INTERNAL CONTROL CONCEPTS & TECHNIQUES

Internal Control

• Organizational plan and all related measures to safeguard assets, ensure

the accuracy and reliability of accounting records, promote operational
efficiency, and encourage adherence to prescribed managerial policies.

Modifying Assumptions

1. Management Responsibility – the establishment and maintenance of a

system of internal control is a management responsibility.
2. Reasonable Assurance – the IC system should provide a reasonable
assurance that the 4 broad objectives of internal control are met in a
cost-effective manner.
3. Methods of Data Processing – internal controls should achieve the 4 broad
objectives regardless of the data processing method used.
4. Limitations – (1) Possibility of errors; (2) circumvention; (3) Management
override; (4) changing conditions

Exposures and Risks

• Exposure – the absence or weakness of a control

1. Destruction of assets
2. Theft of assets
3. Corruption of information or the information system
4. Disruption of the information system

The Preventive-Detective-Corrective Internal Control Model

1. Preventive Controls – are passive techniques designed to reduce the

frequency of occurrence of undesirable events.
2. Detective Controls – form the second line of defense. These are devices,
techniques, and procedures designed to identify and expose undesirable
events that elude preventive controls.
3. Corrective Controls – are actions taken to revers ethe effects of errors
detected in the previous step.

THE REVENUE CYCLE

Revenue Cycle

• Revenue cycle transactions also have a physical and a financial

component, which are processed separately.

Sales Order Processing

• Receive Order
• Credit Check
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• Bill Customers
• Update Inventory Records
• Update Accounts Receivable

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• Pick Goods
• Ship Goods

Sales Return Procedures

• An organization can expect that a certain percentage of its sales will be

returned.
✓ The company shipped the customer the wrong merchandise.
✓ The goods were defective.
✓ The product was damaged in shipment.
✓ The buyer refused delivery because the seller shipped the goods
too late or they were delayed in transit.

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Cash Receipts Procedures
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REVENUE CYCLE ACCOUNTING RECORDS

Sales Order

• Captures vital information such as the customer’s name, address, and

account number; the name, number, and description of the items sold;
and the quantities and unit prices of each item sold.

Sales Order Processing Accounting Records

1. Customer Order – non-standard document initiated by the customer, may

or may not be a physical document.
2. Sales Order – formal document prepared by the company to process thw
customer order.
3. Customer Open Order File – monitoring file of customer’s open orders
updated for status order changes.
4. Pricing Ticket – or stock release document; identifies inventory items that
must be located and picked from the warehouse shelves.
5. Back Order Record – a record of sales orders pending inventory
availability.
6. Stock Records – used for warehouse management purposes only; not the
formal accounting records for inventory control.
7. Packing Slip – travels with the goods to the customer to describe the
contents of the order.
8. Shipping Notice – forwarded to the billing function as evidence that the
customer’s order was filled and shipped.
9. Bill of Lading – formal contract between the seller and the shipping
company to transport the goods to the customer. This document
establishes legal ownership and responsibility for assets In transit.
10. S.O. Pending File – list of pending orders awaiting receipt of the shipping
notice.
11. Sales Invoice – or customer’s bill; includes unit prices, taxes, and freight
charges.
12. Sales Journal – special journal used for recording sales on account
transactions.
13. Sales Journal Voucher – summary of sales journal entries.
14. Journal Voucher – each voucher represents a general journal entry and
indicates the G/L accounts affected.
15. Journal Voucher File – under a journal voucher system, it replaces the
need for a formal general journal.
16. Inventory Sub-Ledger – updated from information contained in the stock
release documents.
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17. A/R Sub-ledger – customer records updated from information contained
in the sales ledger.
18. Return Slip – document prepared by the receiving department to
describe the returned item(s).
19. Credit Memo – authorization for the customer to receive credit for the
merchandise returned.
20. Inventory Sub-ledger – same document with the sales order processing
system.
21. A/R Sub-ledger – same document with the sales order processing system.

Cash Receipts Procedures Accounting Records

1. Remittance Advice – contains information needed to service individual

customer’s accounts.
2. Remittance List – or cash prelist; a form that lists down all checks received.
3. Deposit Slip – a document forwards to the bank for deposit summary.
4. Cash Receipts Journal – record of cash receipts transactions (cash sales,
miscellaneous cash receipts, collections on account)
5. A/R Sub-ledger – same document with the sales order processing system.
6. Journal Voucher - same document with the sales order processing system.

Revenue Cycle Controls

• Transaction Authorization – to ensure that only valid transactions are

processed.
1. Credit Check:
✓ Is a function of the credit department.
✓ Concern/objectives – creditworthiness of a customer
2. Return Policy:
✓ Processing of sales returns is a function of the credit department.
3. Remittance List:
✓ Provides a means for verifying that customer checks and
remittance advices match in amount.
• Segregation of Duties – no single individual or department processes a
transaction in its entirety.
1. Supervision:
✓ Is a compensating control for companies that have too few
employees where segregation of duties is not adequate.
• Accounting Records – form an audit trail that allows independent auditors
to trace transactions through the various states of processing.
1. Pre-numbered documents:
✓ Sequential numbering of documents to allow transactions to be
uniquely identified and for tracking purposes.
2. Special Journals:
✓ Provides a concise record of an entire class of events.
3. SL/GL:
✓ Source documents captured by journals and subsidiary ledgers flow
into the general ledger for FS preparation – a complete audit trail.
4. Files:
✓ Open sales order file – status of customer orders
✓ Shipping Log – orders shipped
✓ Credit records file – customer credit data
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✓ Sales order pending file – orders not yet shipped or billed
✓ Back-order file – out-of-stock orders
✓ Journal voucher file – list of all JVs posted to the GL.
• Access Controls – prevent and detect unauthorized and illegal access to
the firm’s assets.
1. Independent Verification:
✓ Verify the accuracy and completeness of tasks that other functions
in the process perform.