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Chapter 1 – Information System: An Accountant’s Perspective

ACCOUNTING INFORMATION SYSTEM

It lacks a well-defined body of knowledge.

What is the difference between IS and IT?

Sub-topic
•Information environment
•Impact of organizational structure on AIS
•Evolution of Information systems
•Accountants as users, designers, and auditors of AIS

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Information environment

Flows of
information

What is the
difference
between data
and information?

Information environment

System
* Natural System: systems of electrons, galaxies, planets etc.

* Artificial System: clocks, airplanes, information system, etc.

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Information environment

System A system is a group of two

or more interrelated
components or subsystems
that serve a
common purpose.

Information environment

Artificial System

1. Automobile
a. System
decomposition
b. System
interdependency

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Information environment

Artificial System Information system is

the set of formal
2. Information procedures by which
system data are collected,
processed into
information, and
distributed to users.

Information environment
Information System Framework

A transaction as an event that affects

or is of interest to the organization
and is processed by its information
system as a unit of work.

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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.

Nonfinancial transactions are events that

do not meet the narrow definition of a
financial transaction.
Example:
adding a new supplier of raw materials to the list of valid
suppliers
Important as this information obviously is, it is not a financial transaction, and
the firm has no legal obligation to process it correctly—or at all.

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Accounting Information
System
AIS subsystems process financial
transactions and nonfinancial
transactions that directly affect the
processing of financial
transactions.
Example: changes to customers’ names and
addresses
(still recorded as it is directly related to financial
transactions)

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Transaction processing system (TPS)

supports daily business operations with

numerous reports, documents, and
messages for users throughout the
organization

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general ledger/financial reporting

system (GL/FRS)
produces the traditional financial
statements, such as the income
statement, balance sheet, statement of
cash flows, tax returns, and other reports
required by law

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management reporting system (MRS)

provides internal management with

special-purpose financial reports and
information needed for decision making
such as budgets, variance reports, and
responsibility reports.

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Management Information
System
processes
nonfinancial
transactions that are
not normally processed
by traditional AIS.

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Why is it Important to Distinguish between AIS and

MIS?
In Philippines, FS audit engagement requires
the auditor to provide audit opinion on the FS.

However, the auditor is not necessarily

required by the PSA to provide an opinion on
the effectiveness and efficiency of an entity’s
operation. Hence, the need to distinguish AIS
from MIS.
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Transaction Processing System

The transaction processing system deals

with business events that occur
frequently.
Similar transactions are grouped together
into transaction cycles.
Revenue, expenditure, and conversion cycles.

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General Ledger/Financial Reporting Systems

These two are closely related.
Majority of inputs to GL comes from transaction cycles
(routinary transactions).

Routinary transactions
(e.g. sales, purchases, production, purchase
return, sales return, factory overhead
General
Ledger
allocation, salaries expense)

Non-routinary
(e.g. stock transactions,
mergers, lawsuit settlements,
dividend declaration, bond
System
issuance, etc.)

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General Ledger/Financial Reporting Systems

Financial reporting system measures and reports the
status of financial resources and changes in those
resources.

Financial Communicates primarily External

Users
Reporting
to external users.
e.g. stockholders,
government,

System
investors

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Management Reporting System

It provides the internal information needed to manage
a business. (e.g. budgets, variance reports, cost-
volume profit analyses, etc.)

Management Communicates primarily to Internal

Users
external users.

Reporting e.g. stockholders,

government,
Discretionary
System (no legal obligation)
investors

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GENERAL MODEL for AIS

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END USERS General Model

External
- Creditors, stockholders, investors, governments,
suppliers, and customers, etc., they receive info like of FS,
tax returns, purchase orders, billing statements, and
shipping documents.

Internal
- the organization has discretion and flexibility in
making reports based on the needs of internal users.
It poses a less structed and generally more difficult
challenge than external reporting.

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Data versus Information General Model

Data are facts, which may or may not be processed

and have no direct effect on user.

Information causes the user to take an action that he

or she otherwise could not, or would not have taken.

Daily raw materials list – has information content for the purchasing
agent.

Yet, it is a mere data for personnel manager.

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Data sources General Model

These are financial transactions that enter the

information system from both internal and external
sources.

Very common sources are external ones.

e.g. sale of goods and services, purchase of inventory,

receipt of cash, and the disbursement of cash
(including payroll).

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Data Collection General Model

First operational state in the information system.

Objective: ensure that data are valid, complete, and

free from material errors.

Garbage-in, garbage-out

Two rule in data collection procedures:

1. relevance: only those data that will constitute
information
2. Efficient: data are not collected repetitively.

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Data Processing General Model

Review:
• Posting and summarizing
• linear programming,
• EOQ,
• sales forecasting
• expected monetary value

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Data Processing General Model

Linear programming

Serendipity island: Lion skin and coconuts

Example:
Max Z = 6S + 3C
Restriction: 25 ≥ 2S + 5C
30 ≥ 4S + 6C

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Data Processing General Model

Annual demand: 5,000 units

Ordering cost: 9 pesos
Carrying cost: 0.25 pesos
EOQ = 600 units
Lead time = 12 days, business days: 200
Compute Re-order point:
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Data Processing General Model

Sales Forecasting
Y = 200 + 0.03x
Where y is sales, and x is advertising expense.

Projected sale if advertising expense is

4,000.

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Database Management General Model

Database is the physical repository for financial and

nonfinancial data.

General term: e.g. filing cabinet, computer disk, google drive,

etc.
Complete set of attributes
for a single occurrence.
Logical and Every record must be
relevant unique in attribute (at least
characteristics one)
of transaction
being captured. Compilation of set of
records.
They can provide
information Database is the collection of
content as a set. files.

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Database Management General Model

Database management involves three fundamental tasks:

1. Storage – assigning keys to new records and
storing them
2.Retrieval – locating and extracting
3.deletion – permanently erase/dispose

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Information Generation General Model

Characteristics of useful information:

Relevance - purposeful
Timeliness – time is of the essence
Accuracy – free from material errors
Completeness – no missing essential information
Summarization – aggregated for user’s need
REVIEW/Relate QUALITATIVE CHARACTERSTIC OF
USEFUL INFORMATION UNDER Revised Conceptual
Framework

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Feedback General Model

Form of output that is sent back to

the system as a source data.
Examples
Info on inventory level may signal purchases.

Info on uncollected accounts signals adjustment in

credit policies

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INFORMATION SYSTEM OBJECTIVES

Three fundamental objectives:

1. To support stewardship (management

of resources)
2. To support decision making
3. To support operations

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Acquisition of Information Systems

1. in-house development (internally

developed)
2. purchased
Three basic types of commercial software

A. TURNKEY system – ready-made, general purpose systems

B. BACKBONE system – customizable system/allows easy
designing and customization
C. VENDOR-SUPPORTED - outsourced from other entities
like IT company

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ORGANIZATIONAL STRUCTURE
The structure of
the organization
reflects the
distribution of
responsibility,
authority, and
accountability.
Among the topics in MS is the
Responsibility Accounting or
decentralization.
For example:
Segmented income statement
highlights the controllability of
costs by behavioral Budget is set by the senior management. The
classification. responsibility centers then follow these budgets as
standards for their costs, revenues, and other expenses.

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ORGANIZATIONAL STRUCTURE
Business Segments consist of functional units or
segments.

Segmentation helps promote efficiency and

accountability. With decentralization, managers can
focus on their specific responsibilities.

Three common approaches for segmentation include the following:

1. GEOGRAPHIC LOCATION – example Nestle, Shell, Apple, and Samsung
2. PRODUCT LINE – Ayala Group of Companies
3. BUSINESS FUNCTION – examples, marketing, production, finance, and
accounting divisions
1. O

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ORGANIZATIONAL STRUCTURE

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ORGANIZATIONAL STRUCTURE
The Accounting Function

It manages the financial information resource of the firm.

Accounting is the language of the business.

Two important roles in transaction processing:

1. Capturing and recording the financial effects of
financial transactions

2. Distributing information to operations personnel for

coordinated performance of their tasks

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ORGANIZATIONAL STRUCTURE
Information Technology Function
It is also associated with the information resource.
Two common Structures of IT function:
1. Centralized Data Processing – all data processing is
performed by one or more large computers housed at a
central site (IT serves as cost center)
examples:
Database administration – special independent group headed by database administrator
Data processing – group managing computer resources to perform day-to-day
processing of transactions, these are the following groups
Data control (batching), data conversion (transcribing), computer operations (managing
central computer), and data library (room providing safe storage of offline data files)

System development and maintenance – former analyzes user needs

and designs new system, latter keeps it current with user needs

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ORGANIZATIONAL STRUCTURE
Information Technology Function
It is also associated with the information resource.
Two common Structures of IT function:
1. Distributed Data Processing– a structure organizing IT
function into small information processing units (IPUs)
Disadvantages: loss of control, inefficient use of resources,
destruction of audit trails, inadequate segregation of duties,
and higher potential of programming errors and failures
Advantages: cost savings, higher user satisfaction,
operational efficiency.

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Evolution of IS models
Five models of Information System

1.Manual processes
2.Flat-file systems
3.Database approach
4.Resources, Events, and Agents (REA)
Model
5.Enterprise Resource Planning
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Evolution of IS models
1. Manual Processes
There is merit in studying the manual process,

i. it helps establish an important link between the AIS course and other
accounting courses (student can see where data origination, collection,
and usage for day-to-day operations)

ii. Logic of business process is more easily understood, e.g. shipping

notice triggers billing process

iii. Facilitate understanding internal control activities, e.g. segregation of

functions, supervision, independent verification, audit trails, and access
controls

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Evolution of IS models
2. Flat-File Model
End users own their data files
rather than share them with
others. Stand-alone
applications rather than
integrated systems perform
data processing.

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Evolution of IS models
2. Flat-File Model
Hence, it may also result to data redundancy which
contributes to significant problems in flat-file environment
i. data storage – not efficient, data is not captured only once
ii. Data updating – every user makes update
iii. Currency of information – failure to update all the user files

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Evolution of IS models
3.Database Model
In this model, data are pooled into common database that all
organizational users share

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Evolution of IS models
4. Resources, Events, and Agents Model
REA is an accounting framework for modeling an organization’s
critical resources, events, and agents, and their relationship.

Under REA, traditional accounting records like journals, ledgers, and

charts of accounts do not exist as physical files or tables. They can be
generated if needed.

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Evolution of IS models
4. Resources, Events, and Agents Model

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Evolution of IS models
5. Enterprise resource planning
An information system model that enables an organization to
automate and integrate its key business processes.

ERP are commercial products. Leaders in the market are

SAP, Oracle, Baan, JD, PeopleSoft Inc.

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Role of the Accountant

1. System users
Accounting function is the single largest user of IT.

Accountants will have to help to establish the appropriate

design tailored to their need.

Design should consider accounting rules, techniques, internal

control requirements, and depreciation models.

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Role of the Accountant

2. Designers
In developing systems design, the accounting function is
responsible for the conceptual system

The IT function is responsible for the physical system.

For example,
the credit department of a retail business requires information about
delinquent accounts from AR department. This information supports
decisions made by the credit manager regarding the creditworthiness
of customers.

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Role of the Accountant

3. Auditors
Auditing is a form of independent attestation performed by an
expert – the auditor – who expresses an opinion about the
fairness of a company’s financial statements.

External Auditing – conducted by an independent auditor (not internal

nor related to the entity, such as auditing firms), representing the
interest of third-party outsiders (the public). This may also involve IT
audit.

Internal auditing – audit conducted by internal auditor representing

the interests of management.

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Review Questions
The following are subsystems of the
Accounting Information System, EXCEPT

a. Transaction Processing System.

b. Human Resources System.
c. General Ledger/Financial Reporting
System.
d. Management Reporting System.

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Review Questions
The following are subsystems of the
Accounting Information System, EXCEPT

a. Transaction Processing System.

b. Human Resources System.
c. General Ledger/Financial Reporting
System.
d. Management Reporting System.

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