Accounting Information Systems in business

processes
• The Revenue Cycle
• The Expenditure Cycle
• The Production Cycle
• The Human Resource Cycle
• The Financing Cycle
 Introduction
• Information is a business resource that:
– needs to be appropriately (correct) managed
– is vital to the survival of contemporary (uptodate)
businesses.
• System Decomposition
– the process of dividing the system into smaller subsystem parts
• System Interdependency
– distinct parts are not self-contained
– they are reliant upon the functioning of the other parts of the
system
– all distinct parts must be functioning or the system will fail
 An information system is the set of formal
procedures by which data are collected,
processed into information, and distributed to
users.
 An information system is an organized
combination of information resources and its
activities
Information system activities
 Transactions
• A transaction is a business event.
• Financial transactions
– economic events that affect the assets and
equities of the organization

• Nonfinancial transactions
– all other events processed by the organization’s
information system
 Transactions
• Accounting Information Systems (AIS) process
– financial transactions; e.g., sale of goods
– and nonfinancial transactions that directly affect the
processing of financial transactions; e.g., addition of newly
approved vendors
• Management Information Systems (MIS) process
– nonfinancial transactions that are not normally processed
by traditional AIS; e.g., tracking customer complaints
 AIS Subsystems
There are basically three types of AIS Subsystems. Namely
• Transaction processing system (TPS)
– Processes daily business operations
• General Ledger/ Financial Reporting System (GL/FRS)
– produces financial statements and reports
• Management Reporting System (MRS)
– produces special-purpose reports for internal use
• Each subsystem/ activity requires different types
of decisions and each decision requires different
types of information.
 Transaction processing system (TPS)
TPS has five major transaction cycles
1. The revenue cycle: involves activities of selling goods or services
and collecting payment for those sales.
2. The expenditure cycle: involves activities of buying and paying for
goods or services used by the organization.
3. The production cycle: involves activities converting raw materials
and labor into finished goods.
4. The financing cycle: involves activities of obtaining necessary funds
to run the organization, repay creditors, and distribute profits to
investors.
5. The human resources/payroll cycle: involves activities of hiring and
paying employees.
 Transaction processing system (TPS)
• For each of the above cycles, the accounting information
system should able to
 Identify major business functions in each cycle
 Identify the accounts that might be affected in each
cycles and the nature of the effect
 Major threats/risks with in the cycle and internal control
to ensure the proper recording of the transactions.
• Subsequent sections deals with major business functions
and accounts in each of the major cycles and threats and
the internal control mechanism of the cycles.
 1-The Revenue Cycle
• This cycle involves activities of selling goods or
services and collecting payment for those sales.
• Thus the cycle is also called sales to cash
collection cycle.
• This business cycle provides goods and services
to customers and collects cash in payment for
those sales
• Primary Objective:
– Provide the right product; in the right place; at the
right time for the right price.
1-The Revenue Cycle
 The Revenue Cycle
Business functions /Revenue Cycle Activities:
• It refers to basic business activities and related
information processing operations performed in the
revenue cycle. There are four main activities with in
revenue cycle.
1. Sales order entry (Processing customer orders,
generating sales orders and granting credit)
2. Shipping
3. Billing
4. Cash collection
 The Revenue Cycle
Sales Order Entry: Sales order threats:
1. Take order • Incomplete/inaccurate
2. Check and approve orders
credit • Invalid orders
3. Check inventory
• Uncollectible accounts
availability
• Stock outs or excess
inventory
• Loss of customers
 The Revenue Cycle

Shipping: Shipping Threats:

• Picking the wrong items or the
1. Picking and
wrong quantity
packing the order • Theft of inventory
2. Shipping the order • Shipping errors (delay or failure to
ship, wrong quantities, wrong items,
wrong addresses, duplication)

Billing: Billing Threats:

1. Invoicing
2. Updating accounts receivable
• Failure to bill
• Billing errors
• Posting errors in accounts receivable
• Inaccurate or invalid credit memos
 The Revenue Cycle
Common accounts in the Cycle:
• Sales
• Receivables
• Cash
• Sales returns and allowances,
• Sales discounts
• Transportation/commission expense
• VAT
• Uncollectible Accounts expense/Bad debt expense
• Allowance for doubt full account
 Documents in Revenue cycle
• Customer purchase orders
• Sales orders
• Credit applications
• Shipping documents / bills of lading
• Invoices & remittance advices
• Monthly statements
 Revenue Cycle Threats
• Inaccurate or invalid data
• Unauthorized disclosure of sensitive information.
• Loss or destruction of data
• Poor performance
• Granting credit to un entitled customer
• Inadequate estimation of uncollectible
• Unauthorized write-off
• Lack of segregation of duties ((sales, recording
and cash collection might be made by one person
 Internal controls in Revenue cycle

• Using special journal, Sales journal

• Maintaining Accounts receivable subsidiary ledger
• Segregation of duties (Keep separate from others)
• Separation of sales from accounting and billing from shipping
functions
• Perpetual inventory control system (never ending/change)
• Periodic physical counts of inventory and reconciliation to recorded
quantities
• Restriction of physical access to inventory
• Documentation of all inventory transfers
• Reconciliation of shipping documents with sales orders, picking lists,
and packing slips
 Internal controls in Revenue cycle

• Data processing integrity controls

• Restriction of access to data
• Review of all changes to master data
• Backup and disaster recovery procedures
• Credit limits
• Specific authorization to approve sales to new customers
or sales that exceed a customer’s credit limit
• Aging of accounts receivable
• Estimate of bad debts and write-offs to be made by
management with reasonable basis
 Internal controls in Revenue cycle

• Proper authorization on a write-off form

• Reconciliation of subsidiary accounts to general
ledger accounts.
• Separation of cash handling function from
accounts receivable and credit functions
• Regular reconciliation of bank account with
recorded amounts by someone independent of
cash collections procedures
• Use of cash registers
• Daily deposit of all cash receipts
 Methodology for Testing revenue cycle
controls
1. Understand controls in each of the business
functions within the cycle
2. Test controls for each business function in the cycle
3. Perform substantive(support with evidence) tests of
selected and sensitive accounts balances.
4. Suggest adjustments and additional controls if
necessary.
5. Reassess (reconsider) level of control risk and design
internal controls to reduce/avoid level of control risk
 2-The Expenditure Cycle
Objectives:
• Explain the basic business activities and related
information processing operations performed in
the expenditure cycle.
• Discuss the key decisions to be made in the
expenditure cycle, and identify the information
needed to make those decisions.
• Identify major threats in the expenditure cycle,
and evaluate the adequacy of various control
procedures for dealing with those threats.
• Also called Acquisition and payment cycle:
• This cycle includes procedures for initiating purchases of
inventory, other assets or services , placing purchase orders,
inspecting goods upon receipts and preparing receiving
reports, recording liabilities to vendors, authorizing
payments and making and recording cash disbursements.
• Involves activities and information processing related to
purchasing and payment for goods and services
• Primary objective:
– Minimize the total cost of acquiring and maintaining inventories,
supplies, and the various services the organization needs to
function.
2-The Expenditure Cycle
 The Expenditure Cycle

Major business functions in this cycle:

1. Ordering materials, supplies, and services
2. Receiving materials, supplies, and services
3. Approving supplier invoices
4. Cash disbursements
Detail business functions in acquisition and payment cycle include:
• Initiation of purchase –purchase requisition by user department or unit
• Placing purchase order-by purchasing department
• Inspection of goods upon receipt
• Preparing receiving report
• Recording liabilities to vendor/suppliers upon receipt of invoice
• Authorizing payment
• Recording cash disbursements
 The Expenditure Cycle
Major Accounts in this business cycle
• Purchase account or merchandise inventory
account, or plant asset account
• Accounts payable and Cash
• Purchase returns and allowance
• Purchase discount
• Accrued expense and accrue liability accounts
 The Expenditure Cycle

Threats related to Expenditure Cycle:

• Inaccurate inventory records
• Purchasing items not needed
• Purchasing at inflated prices
• Purchasing goods of inferior quality
• Unreliable suppliers
• Purchasing from unauthorized suppliers
• Kickbacks and bribes
• Accepting unordered items
• Mistakes in counting
• Verifying receipt of services
• Theft of inventory
• Failure to take advantage of discounts for prompt payment
• Paying for items not received
• Duplicate payments
• Theft of cash
• Check alteration
• Cash flow problems
 The Expenditure Cycle
Controls in the Expenditure Cycle
• Price lists
• Competitive bidding
• Review of purchase orders
• Perpetual inventory system (continuous/never ending or changing)
• Periodic physical counts of inventory
• Review and approval of purchase requisitions
• Centralized purchasing function
• Use of budgets
• Purchasing only from approved suppliers
• Review and approval of purchases from new suppliers
• Tracking and monitoring product quality by supplier
• Requiring suppliers to possess quality certification (e.g., ISO 9000)
• Collecting and monitoring supplier delivery performance data
• Maintaining a list of approved suppliers and configuring the system to permit
purchase orders only to approved suppliers
• Review and approval of purchases from new suppliers
 The Expenditure Cycle
Controls in the Expenditure Cycle
• Requiring existence of approved purchase order prior to accepting any
delivery
• Require receiving employees to sign receiving report
• Document transfer of goods to inventory
• Segregation of duties: custody of inventory versus receiving.
• Budgetary controls
• Restriction of physical access to inventory
• Periodic physical counts of inventory and reconciliation to recorded quantities
• Requiring dual signatures on checks greater than a specific amount
• Regular reconciliation of bank account with recorded amounts by someone
independent of cash disbursements procedures.
• Periodic accounting of all sequentially numbered checks by cashier.
• Running petty cash as an imprest fund
• Surprise audits of petty cash fund
 3-Production Cycle
• Involves activities converting raw materials and labor
into finished goods.
• Involves business activities and information processing
activities related to manufacturing of products.
• Includes procedures for storing materials, placing
materials in to production, assigning production costs
to inventories and accounting for the cost of goods
sold.
• Sample production cycle has been depicted below
3-Production Cycle
 Production Cycle
Major business functions in this cycle: This cycle
succeeds the acquisition and payment cycle and the
following are the main business functions in this cycle
• The inspection and receiving function
• The storing function
• The issuing function
• The production function
• The shipping function
• Cost accounting function
 Production Cycle
The Inspection and receiving function:
• To strengthen internal control over inventories, all
goods received should be cleared through a receiving
department that is independent of purchasing,
storing, and shipping departments. The receiving
department is responsible for the following functions:
• Determination of quantities of goods received
• Detection of damaged or defective merchandise
• Preparation of a receiving report and
• Transferring goods received to the stores department.
 Production Cycle
The storing function:
• As goods are delivered to stores, they should be
counted, inspected and received and the stores
department will then notify the accounting
department of the amount received and placed
in stock.
• This provides verification of the receiving
department and in performing these functions;
the stores department makes an important
contribution to overall control of inventories.
 Production Cycle

The issuing function:

• The stores department is responsible for all goods under
its control. Thus it issues goods when a pre- numbered
requisition is presented from user department
• The pre numbered requisition is used as a signed receipt
from the department accepting the goods. To ensure
adequate control, the requisitions should be prepared in
triplicate.
• One copy is retained by the department making the
request, another is used as the stores department receipt
and the third is notice to the accounting department for
cost distribution.
 Production Cycle
The production function:
• Responsibility for the goods must be fixed
usually on factory supervisors.
• Thus from the time materials are delivered to
the factory until they are completed and
routed to a finished goods storeroom, a
designated supervisor should be in control
and be prepared to answer for their location
and disposition (nature).
 Production Cycle
Costing function
• Job-Order Costing
– Assigns costs to specific production batches, or
jobs
• If the product or service is uniquely identifiable
• Process Costing
– Assigns costs to each process, or work center, in
the production cycle, and then calculates the
average cost for all units produced.
• If the product or service is similar and produced
in mass quantities
• Activity-Based Costing
—Traces costs to the activities that create them
 Production Cycle
The shipping function:
• After production is completed, shipments of goods should be
made only after proper authorization has been received.
• This authorization will normally be a sales order
approved by the credit department.
• The shipment has to be made in triplicate and one copy shall
be maintained with the stores department; second copy will
be retained with the shipping department as evidence of
shipment and a third copy will be enclosed as a packing slip
with the goods when they are shipped.
• All these forms should be pre-numbered and kept
under accounting control and the control procedure
in this regard can be considered as strong.
 Production Cycle
Production Cycle General Threats:
• Inaccurate or invalid master data
• Unauthorized disclosure of sensitive information
• Loss or destruction of data
• Inaccurate cost data
• Inappropriate allocation of overhead costs
• Misleading reports
• wrong mix of Raw materials
• Lack of employees commitment
• Obsolete technology, lack of procedure
• Over- or underproduction
• Theft of inventory
• Disruption (trouble) of operations
• Misstatement of the cost of inventory
 Production Cycle
Production cycle Controls:
• Data processing integrity controls
• Restriction of access to data and inventory
• Access controls and encryption (convert into code)
• Backup and disaster (a sudden event can damage) recovery procedures
• Production planning systems
• Review and approval of production schedules and orders
• Restriction of access to production orders and production schedules
• Segregation of duties—custody of assets from recording and
authorization of removal.
• Periodic physical counts of inventory and reconciliation of those counts to
recorded quantities.
• Training , physical safeguards and insurance
• Performance reports
• Training
 The Financing Cycle
• The financing cycle: involves activities of obtaining
necessary funds to run the organization, repay creditors,
and distribute profits to investors.
• Also called capital acquisition and repayment cycle
• This cycle includes procedures for authorizing, executing,
and recording transactions involving bank loans, leases,
bonds and capital stock
• Relatively few transactions affect the account balances,
but each one is often highly material in amount.
• The exclusion of a single transaction could be material in
itself.
 The Financing Cycle
Functions in this cycle
• Indentify source of finance
• Searching for underwriting
• Issuance of securities
• Collection of resources/cash
• Repayment to creditors,
• Distribute profits to investors.
 The Financing Cycle

Accounts in the Cycle:

 Notes payable  Cash
Mortgages payable
 Capital stock – common
 Bonds payable
 Capital stock – preferred
 Interest expense
 Paid-in capital in excess of par
 Accrued interest
 Donated capital
 Treasury stock
Dividends payable
 Dividends declared
 Proprietorship –capital account
 Partnership – capital account
Stock sub receivable
Subscribed stock
 The Financing Cycle
Major threats:
• Unauthorized issue of stocks/bonds
• Unauthorized payments
• Duplication of payments of interests/dividends
• Theft of cash
• Payment of dividends to unauthorized ones
 The Financing Cycle
Internal Controls
• Restrict access to data
• Segregation of duty
• Proper authorization for the issue of new notes and
stocks
• Adequate controls over the repayment of principal
and interest and dividends
• Proper record keeping and segregation of duties
• Updating the list of outstanding shareholders and
creditors
 HRM and Payroll Cycle
The human resources/payroll cycle involves activities of hiring and
paying employees.
HRM and Payroll Cycle Activities:
1. Managing Employees:
– Recruiting and hiring new employees
– Training
– Job assignment
– Compensation
– Performance evaluation
– Discharge of employees due to voluntary or involuntary termination
2. Validate time and attendance
3. Prepare payroll
4. Distribute payroll
5. Disburse taxes and miscellaneous deductions
HRM and Payroll Cycle
 HRM and Payroll Cycle
• Includes procedures for hiring, determining pay rates,
timekeeping, computing gross payroll, payroll taxes
and amounts withheld from gross pay, maintaining
payroll records and preparing and distributing
paychecks
Common Accounts:
• Salary expense
• Withholding and other deductions
• Payroll tax
• Pension
• Accrued salary
 HRM and Payroll Cycle
HRM and Payroll General Threats:
• Unauthorized disclosure of sensitive information
• Loss or destruction or change of data
• Hiring/promoting unqualified employees
• Violations of employment and appointment laws
• Inaccurate time and attendance data
• Errors in processing payroll
• Theft or fraudulent distribution of paychecks
• Failure to make required payments
• Untimely payments
• Inaccurate or fictitious (untrue) payments etc
 HRM and Payroll Cycle

HRM and Payroll Controls:

• Restriction of access to employs data
• Backup and disaster recovery procedures
• Sound hiring, promotion, appointment procedures, including
verification of job applicants’ credentials, skills, references, and
employment history.
• Thorough documentation of hiring, performance evaluation, and
dismissal procedures
• Segregation of duties: HRM department updates employees data,
but only accounts/payroll department issues paychecks.
• Verification of identity of all employees receiving paychecks.
• Supervisory review of attendance reports
• Verification of identity of all employees receiving paychecks by
immediate bosses.
Thank You