Electronic Data Processing

Systems
CHAPTER 6

Objectives
1. Describe how application controls
are used in data processing systems
to ensure accuracy and integrity.
2. Characterize the various types of
electronic
systems
used
for
transaction processing.
3. Describe the basic functions and
operation
of
a
computerized
accounting application.

THE INPUT SYSTEM

A.Paper-Based Input System
B. Paperless Input System

THE INPUT SYSTEM

A.Paper-Based Input System
. In
some
computerized
accounting systems, inputs to
the
system
are
based
on
handwritten or typed source
documents.
. These
documents
are
then
collected
and
forwarded
to

THE INPUT SYSTEM

A.Paper-Based Input System
i. Preparation and Completion of
the Source Document
ii. Transfer of Source Documents
to Data Processing
iii.Data Entry
iv. Program Data Editing

i. Preparation and Completion

of the Source Document
Source documents such as sales
orders are prepared manually.
Errors are minimized
if source
documents are well designed and
easy to understand.
Completed source documents are
collected periodically and transferred
to the data processing department
for entry into the computer system.

ii. Transfer of Source

Documents to Data Processing
Batch control totals and data transfer
registers are fundamental controls
over data transfer between user
departments and data processing.
The
absence
or
inadequacy
of
procedures for the control of data
transmitted represent a significant
weakness because it presents an
opportunity for unauthorized and/or
fraudulent
transactions
to
be
introduced
into
the
processing
system.

ii. Transfer of Source

Documents to Data Processing
Submission of input data should be
accompanied by the completion of an
input document control form.

Input Document Control Form

Document counts are a simple
form of batch control.
Provides batch control totals for
batches
of
input
data
transmitted between user and
data processing departments to
monitor the completeness of
processing.
Information
in
the
input
document control form typically

Data Transfer Log

Batch totals may be taken for all
or several numeric fields in the
original data file.
Provides
control
over
the
disposition
and
use
of
transferred data.

Use of Batch
Control Totals

Data Entry
After the source documents such
as invoices are received by data
processing, they are manually
key-transcribed or keyed.
By using a data terminal or
personal computer (PC) and then
stored on disk.
The input file is key-verified.

Data Entry
Key
verification
is
a
control
procedure that detects errors in
the keying operation and to ensure
accurate data entry.
This involves typing in the data
twice.
As the data is typed in a second
time, key verification software
verifies that the second keying
matches the previous input already
on the disk file.

Program Data Editing

Verification does not edit data.
It is essential that data be
thoroughly edited after entry to
ensure valid content.
Program data editing is a
software technique
used to
screen data for errors prior to
processing.

Program Data Editing

It should be used in addition to
verification for several reasons :
i.

Input errors can occur that will pass

verification. Incorrect recognition of
a character on a source document is
one possibility;
ii. The simple omission of a necessary
input
item
by
the
individual
preparing the source document.
Data editing at the programming
level is a control over the initial
verification function.

Program Data Editing

It should be used in addition to
verification for several reasons :
iii. The volume of data in EDP
operations, coupled with the fact
that once data are entered in the
system they may be used without
reconversion,
necessitates
a
methodology screening all input
data.

Program Data Editing

Techniques
Data editing routines may be applies
to each of the basic data structures:
character, field, records, and files
The most basic editing technique
ensures that all data fields contain
only valid characters.
For example,
numeric data items should contain
only digits, and
alphabetic data items should not
contain any digits.

Program Data Editing

Techniques
i. Table Lookup
.Establish a table file that contains a
list of acceptable values for each field.
.The edit program then compares the
actual value of each field with the
acceptable values in the table.
.For example, an actual value of the
customer account field might be
compared with the master list of
customer account numbers stored in a
table.

Program Data Editing

Techniques
ii. Limit Test
.Numeric data values should fall
within certain ranges and not exceed
an extreme value.
.Thus, checking numeric data as being
within certain limits requires a check
only against extreme value of the
range.

Program Data Editing

Techniques
ii. Limit Test
.For example,
The field payroll hours typically may
not be less than zero or more than
100 for 2 week pay period.
Sales in a certain department
generally should be within a range
of zero to some upper limit based
on historical data.

Program Data Editing

Techniques
iii. Continuous operations auditing
.Unacceptable entries are separated
and held in suspense until verified or
corrected for audit after processing.
.For example, a payroll field may
contain a value that is acceptable but
so high or low as to warrant
investigation. This item may be
accepted for processing but flagged
for a subsequent audit.

Program Data Editing

Techniques
iv. Check digit
.Numeric codes can be verified by
using a check digit.
.Redundant digit added to a code
number.
.The check digit is computed when a
code is initially assigned to a data
element.

Program Data Editing

Techniques
iv. Check digit
.Check
digits
are
computed
by
applying mathematical calculations to
the individual digits in a code number
in such a way as to generate result
that is a single digit.
.This digit becomes the check digit
and is added to the original code.
.This operation can ensure that the
code
has
not
been
recorded
incorrectly.

Program Data Editing

Techniques
iv. Check digit

THE INPUT SYSTEM

B. Paperless Input System
. Sometimes called online input
systems, transactions are input
directly
into
the
computer
network and the need for keying
in
source
documents
is
eliminated.
. Provide

higher

degree

of

THE INPUT SYSTEM

B. Paperless Input System
. Problem:
i. Possible loss of segregation of
duties and audit trail.
ii. Source document preparation
and data entry performed by
the same person, or no person
is involved directly.

THE INPUT SYSTEM

B. Paperless Input System
i. Loss of Internal Controls
ii. Paperless
Input
Systems
Requiring Human Intervention
iii.Paperless
Input
Requiring
No
Intervention

Systems
Human

i. Loss of Internal
Controls
The need for keying in source
documents may be eliminated.
The loss of paper-based internal
controls can be compensated for
by:
a. Transaction logs (registers)
b. Tagging

i. Loss of Internal
Controls
a. Transaction logs (registers)

.Transaction logs or transaction

registers are created by logging
all inputs to a special file that
automatically contains tags to
identify transactions.

i. Loss of Internal
Controls
b. Tagging
.Tagging means that additional.
.Audit-oriented information is
included
with
original
transaction data.
.Provides an audit trail by
including additional audit-type
information
with
transaction
data.
.Audit-type information might

ii. Paperless Input Systems

Requiring Human Intervention

There
are
many
types
of
paperless input systems in which
users enter transactions directly
to the computer.
These systems include :
a. On-line
manual
data-entry
systems
b. Automatic
identification
systems

ii. Paperless Input Systems

Requiring Human Intervention
a. On-line manual data-entry systems
.Users manually type transactions
into the computer system.
.For example, a plant manager might
manually type a purchase requisition
into a data terminal. The requisition
would
then
be
forwarded
automatically
to
purchasing
for
additional processing. The purchase
order would be generated with no
rekeying in of data.

ii. Paperless Input Systems

Requiring Human Intervention
b. Automatic identification systems
.Merchandise and other items such as
credit cards are tagged with machinereadable codes.
.For example, salespersons use an
optical scanner to scan the bar-coded
merchandise for sale. The transaction
information
is
then
forwarded
automatically to the billing and
inventory systems for additional
processing, and no additional human
intervention required.

ii. Paperless Input Systems

Requiring Human Intervention
b. Automatic identification systems
.Another example, electronic tagging
of containers in the shipping industry.
.The tags on incoming cartons can be
scanned,
facilitating
their
identification and matching with the
related purchase order.

ii. Paperless Input Systems

Requiring Human Intervention
b. Automatic identification systems
.Transaction proceed through two
phases :
1. Data entry and data editing
o.Complete program data editing is
often
performed
when
the
transaction is entered.
o.Once the transaction is accepted, it
might
be
processed
either
immediately or at a later time.
o.If it is processed at a later time,

ii. Paperless Input Systems

Requiring Human Intervention
b. Automatic identification systems
.Transaction proceed through two phases :
2. Transfer to the host application system
o. In
centralized
paperless
systems,
transactions usually are input directly
into the central computer through some
type of remote data terminal.
o. In decentralized and distributed systems,
transactions might be entered into one
computer and then either immediately or
later transferred to another computer for
processing.

iii. Paperless Input Systems

Requiring No Human
Intervention

In some systems, transactions

are processed from beginning to
end
without
any
human
intervention:
completely
automated
transaction
processing.
One
application
of
this
technology is the networked
vending machine (NVM).

iii. Paperless Input Systems

Requiring No Human
Intervention

With this system, the customer

inserts
a
credit
card
or
automatic teller machine (ATM)
card into the gas pump. The
pump then delivers the gas, and
the
customers
credit
card
company or bank is billed
electronically.

iii. Paperless Input Systems

Requiring No Human
Intervention

Automated slot machine. The

customer inserts an ATM card
into the POS slot machine,
enters a personal identification
number (PIN) code, and pulls the
handle. Losses and gains are
charged or credited immediately
to the customers bank account.

iii. Paperless Input Systems

Requiring No Human
Intervention

Electronic
data
interchange
(EDI).
With
EDI
and
the
appropriate database servers,
incoming purchase orders and
outgoing sales orders can be
handled
with
no
human
intervention.

iii. Paperless Input Systems

Requiring No Human
Intervention

For example, when inventories

are low, the inventory server
sends a purchase order message
to the EDI translation server. The
translation
server
then
translates the message and
sends it to the communications
server.
The
communication
server
then
forwards
it
electronically to the desired

THE PROCESSING
SYSTEM
A.Paper-Based

Processing

Systems
B. Paperless Processing Systems

THE PROCESSING
SYSTEM
A.Paper-Based

Processing

Systems
i. Batch
Processing
with
Sequential File Updating
ii. Batch
Processing
with
Random-Access File Updating

THE PROCESSING
SYSTEM
A.Paper-Based
Processing
Systems
. In
batch-oriented
processing
systems,
transactions
are
entered into the computer in
batches.
. These
batches
are
then
processed periodically.

THE PROCESSING
SYSTEM
A.Paper-Based Processing Systems
. Examples of batch processing
include
Weekly time reports to produce
paychecks
Groups
of
checks
to
update
accounts payable master files
Processing invoices to update an
accounts receivable master file

THE PROCESSING
SYSTEM
A. Paper-Based Processing Systems
. Batch processing is economical when
large numbers of transactions must
be processed.
. It is best suited to situations in which
files do not need to be updated
immediately to reflect transactions
and
reports
are
required
only
periodically.
. For example, payroll is prepared
periodically.

THE PROCESSING
SYSTEM
A. Paper-Based Processing Systems
. Disadvantage:
Files
and
reports
might be out of date between
periodic processing.
. For example, inventory file must be
used frequently to determine the
availability of product for sale. The
file often will be out of date if sales
are processed only periodically in
batches.
. Can
be
performed
with
either

i. Batch Processing with

Sequential File Updating
Many paper-based, batch oriented
systems
use
sequential
file
processing to update the master file.
Processing in such a system involves
the following four steps:
a. Preparing the transaction file
b. Updating the master file (subsidiary
records)
c. Updating the general ledger
d. Preparing general ledger reports

i. Batch Processing with

Sequential File Updating
a. Preparing the transaction file
.Any additional data editing and
validation are performed.
.The records in the transaction
file are sorted into the same
sequence as the master file.

i. Batch Processing with

Sequential File Updating
b. Updating
the
master
file
(subsidiary records)
.Records in both the transaction
and master files (ex, subsidiary
ledgers) are read one by one,
matched, and written to a new
master file that reflects the
desired updates.

i. Batch Processing with

Sequential File Updating
c. Updating the general ledger
.The general ledger is updated to
reflect the changes in the master
files.
.Data
must
be
collected,
recorded, classified properly, and
entered into the appropriate
records
for
further
financial
report summations.

i. Batch Processing with

Sequential File Updating
c. Updating the general ledger
.A general ledger system is the
cornerstone of an accounting
system.
.The general ledger is updated to
reflect the changes in the master
files.

i. Batch Processing with

Sequential File Updating
c. Updating the general ledger
.There are two major aspects to the
operation
of
a
computerized
general ledger system:
1. The direct processing of the general
ledger programs, most of which takes
place on a monthly basis.
2. The processing in other computer
application systems to prepare the
inputs to the general ledger system.

i. Batch Processing with

Sequential File Updating
c. Updating the general ledger
.As they are released by the general ledger,
journal vouchers are used to build a journal
voucher file.
.This file is program data edited to check for
the proper journal and account numbers and
to determine whether the accounts are
correctly
associated
with
their
related
journals.
.Invalid data are reported as exceptions and
returned to their originating sources for
correction and reentry.

i. Batch Processing with

Sequential File Updating
c. Updating the general ledger
.The current journal voucher
transactions
are
processed
against the previous months
general ledger master file.
.The master file is updated and
the current periods general
ledger register is produced.

i. Batch Processing with

Sequential File Updating
c. Updating the general ledger
.Computer
processing
of
accounting data is typically a
two-step procedure :
1. Preliminary
reports
are
produced
2. It is a run that produces the
final listings and financial
schedules.

i. Batch Processing with

Sequential File Updating
d. Preparing general ledger reports
.Common reports from a general
ledger system would include:
1. Journal voucher in sequence
2. Journal voucher within general
account
3. General ledger by account
4. General ledger summary
5. Working trial balance

Batch
Processing
with
Sequential
File
Updating

ii. Batch Processing with

Random-Access File Updating
In
many
systems,
indexes
are
maintained for both the subsidiary
and general ledger files to allows
users to quickly access a particular
account.
For example, an interactive query
program might use an index file to
help the end user to quickly locate a
customers account.
Random-access
file
updating
is
simpler
than
sequential-access
updating.

ii. Batch Processing with

Random-Access File Updating
Individual records are read one by
one from the transaction file and
used to update the related records in
the master file.
The following steps are used :
1. A record is read from the transaction
file.
2. The key value of the transaction record
is used to randomly access the related
record in the master file.
3. The record in the master file is updated
in memory and then rewritten back to

ii. Batch Processing with

Random-Access File Updating
A backup of the master file should
exist before the updating begins, and
a transaction register must be
generated as the update proceeds.

THE PROCESSING
SYSTEM
B. Paperless Processing Systems
i. Characteristics of Paperless
Processing Systems
ii. Batch Processing in Paperless
Processing Systems
iii.Methods
of
Real-time
Processing
in
Paperless
Processing Systems
iv. Components of Real-Time Sales
Systems

THE PROCESSING
SYSTEM
B. Paperless Processing Systems
. With real-time processing, called
on-line real-time system (OLRS),
transactions
are
processed
immediately as they are input
into the system and can provide
immediate output to users.

THE PROCESSING
SYSTEM
B. Paperless Processing Systems
. With real-time processing, called online
real-time
system
(OLRS),
transactions
are
processed
immediately as they are input into the
system and can provide immediate
output to users.
. The
processing
of
individual
transactions is immediate and direct.
. Advantage: They make possible realtime processing.

i. Characteristics of Paperless
Processing Systems
Two primary characteristics
include:
a. Either
batch
or
real-time
processing is possible.
b. With most types of on-line
real-time processing, master
files are always up to date.

ii. Batch Processing in

Paperless Processing Systems
Differences
between
batch
processing in paperless processing
systems and batch processing in
paper-based systems :
a. Journal vouchers are replaced by
electronic equivalents.
b. Periodic batch runs automatically
update the general ledger.

iii. Real-time Processing in

Paperless Processing Systems
Responses to user inquiries are
immediate because information
in randomly accessible files can
be retrieved quickly.

iii. Real-time Processing in

Paperless Processing Systems
What are some types of realtime processing in OLRS?
a. Inquiry/response systems
b. Data entry systems
c. File processing systems
d. Full processing systems /
Transaction
processing
systems

iii. Real-time Processing in

Paperless Processing Systems
a. Inquiry/response systems
.Users request information but
do not input data for processing.
.Provide quick responses to their
requests for information.
.For example, a bank clerk
wishes to find out if a customer
has sufficient balance to cover
the check he or she wishes to
cash.

iii. Real-time Processing in

Paperless Processing Systems
b. Data entry systems
.Users interactively input data
that is processed periodically in
batches.
.For example, stores may capture
sales transactions in real time
during the day and then process
them at night in batches.

iii. Real-time Processing in

Paperless Processing Systems
c. File processing systems
.Users interactively input data that is
immediately
processed
against
relevant master files.
.For example, a retail store might
collect and process sales transactions
immediately, charging the customers
account within moments of the sale.
The transaction would be incomplete
until the customer is billed at the end
of the month.

iii. Real-time Processing in

Paperless Processing Systems
d. Full processing systems /
Transaction processing systems
. Interactively input transactions but
the entire transaction is completed
when input.
. For example, a retail store might
collect
and
process
sales
transactions immediately, charging
the
customers
account
within
moments of the sale. The customer
would be billed immediately, thus

iv. Real-Time Sales Systems

These
systems
utilize
contemporary
information
technology to maximize system
performance.
Purchase orders for inventory
items are made on a demandpull basis rather than a fixed
interval (monthly or weekly)
push basis to restock inventory
levels.

iv. Real-Time Sales Systems

Orders to vendors are placed on
the basis of actual sales to
quickly replenish stocks of items
that are selling.
Three technologies make realtime retail systems feasible :
a.Point-of-Sale (POS) System
b.Bar-Coding Technology
c. EDI Ordering System

iv. Real-Time Sales Systems

a.Point-of-Sale (POS) System
. The uniform product code (UPC) bar
code scanned by POS technology at
the checkout counter of a retail store
is the initial event in a chain of
events that ends with the right item
being quickly replenished in the
stores inventory so that it can be
sold again.
. POS allow data collection at the point
where the sale is completed.

iv. Real-Time Sales Systems

a.Point-of-Sale (POS) System
. This type of information include
summaries of sales transaction data,
such as
o total sales,
o total sales on cash,
o total sales on credit,
o sales returns,
o total purchases, and
o current inventory status.

iv. Real-Time Sales Systems

a. Point-of-Sale
(POS)
System
providing:
. A variety of timely and detailed
reports concerning operations on the
management of a retail firm.
. Information on stock turnover that is
useful to management in assessing
profitability.

iv. Real-Time Sales Systems

a. Point-of-Sale (POS) System
. Typical reports that may obtained
include
o check settlement,
o deposits and receipts,
o checker cash list,
o department sales,
o stores dollars,
o hourly activity,
o price lookup file, and

Point-of-Sale (POS) System

iv. Real-Time Sales Systems

b. Bar-Coding Technology
. Machine-readable bar codes and
scanner technology such as UPC barcode system are critical components
of real-time retail sales systems.
. When UPC coding is used, all
participants in the real-time system
chain share and process the same
basic data.

iv. Real-Time Sales Systems

c. EDI Ordering System
.Allows direct computer-to-computer
exchange of business information and
documents
via
a
communication
network for placing and processing of
the purchase orders and facilitating
quick shipment.
.The vendor could invoice the retailer
using EDI.

iv. Real-Time Sales Systems

c. EDI Ordering System
.Public
EDI
provide
a
common
architecture for data interchange and
thus eliminate costly and error-prone
cross-referencing.
.EDI can also use to transmit catalogs
with current price information to
retailers electronically.

Vendor

EDI

Retailer

Send customer
electronic
catalog
Forecast
customers sale
order

Receive and
translate
incoming order

Send
acknowledgment
Send order to
inventory or
production

Transmit
advance
shipping notice
Ship goods

Transaction
processing in realtime sales systems

SPECIAL INTERNAL CONTROL

CONSIDERATIONS
i. Customer
orders
may
be
processed
without
human
intervention or approval.
In effect, the customer may have
the ability to generate his or her
own sales order because generation
of the sales order is performed
automatically when a valid EDI
purchase order is received.

SPECIAL INTERNAL CONTROL

CONSIDERATIONS
ii. The traditional separation of
duties
in
transactions
is
completely obliterated ( ).
The
computer
handles
the
transaction from beginning to end.

SPECIAL INTERNAL CONTROL

CONSIDERATIONS
iii.Many traditional documents may be
eliminated in EDI-based systems.
For example, in such systems it is
common practice to dispense with
invoices. The various special control
problems in real-time systems can be
compensated for by careful program
data editing checks and transaction
logs, as well as by good computer
security.

THE OUTPUT SYSTEM

The output system can be paperbased, or paperless.
Paper-based
batch-oriented
systems
with
sequential
file
processing produce very large
volumes of output.
On-line,
real-time
paperless
systems tend to produce very
little output.

The Purpose of Output Controls

To ensure that processing results in
valid output and that outputs are
properly distributed.
Product should be reviewed critically
by supervisor personnel in user
departments
for
general
reasonableness
and
quality
in
relation to previous reports.
Program data editing checks should
be performed on all outputs.

The Purpose of Output Controls

Established to monitor Electronic
Data Processing (EDP) operations.
The EDP control group is frequently
part of the internal audit function.
Procedures should be established to
provide assurance that errors are
reported to the EDP control group.
ensure that such errors are entered
into
controls,
corrected,
and
reentered properly into the system
for further processing.

The Purpose of Output Controls

Corrections should be subject to
the same testing as original
data.
The distribution of output should
be controlled so as to minimize
the danger of unauthorized
access to confidential data.
Output distribution is controlled
through
documentation
and
supervision.

The Purpose of Output Controls

An output distribution register is
maintained
to
control
the
disposition of reports.
This register and its attendant
documentation
should
be
reviewed periodically in the
internal audit function.