Accounting Information Systems, 6 t h edition

James A. Hall

COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western
are trademarks used herein under license
Objectives for Chapter
8 disadvantages of various coding
 Features, advantages, and

schemes
 Operational features of the GLS, FRS,
and MRS
 Principle operational controls
governing the GLS and FRS
 Factors that influence the design of
the MRS
 Elements of a responsibility
accounting system
 Uses of Coding in
AIS
Concisely represent large amounts of
complex information that would otherwise
be unmanageable
 Provide a means of accountability over
the completeness of the transactions
processed
 Identify unique transactions and
accounts within a file
 Support the audit function by providing
an effective audit trail
Sequential
Codes
 Represent items in sequential order
 Used to prenumber source documents
 Track each transaction processed
 Identify any out-of-sequence
documents
Disadvantages:
arbitrary information
hard to make changes and insertions
Block
Codes
 Represent whole classes by assigning each class
a specific range within the coding scheme
 Used for chart of accounts
The basis of the general ledger
 Allows for the easy insertion of new codes
within a block
Don’t have to reorganize the coding structure
Disadvantage:
arbitrary information
Group
Codes
 Represent complex items or events involving
two or more pieces of data using fields with
specific meaning
 For example, a coding scheme for tracking
sales might be 04-09-476214-99, meaning:
Store Number Dept. Number Item Number Salesperson
04 09 476214 99

• Disadvantages:
– arbitrary information
– overused
Alphabetic
Codes
 Used for many of the same purposes as
numeric codes
 Can be assigned sequentially or used in block
and group coding techniques
 May be used to represent large numbers of
items
Can represents up to 26 variations per field
Disadvantage:
arbitrary information
Mnemonic
Codes
Alphabetic characters used as abbreviations,
acronyms, and other types of
combinations
Do not require users to memorize the
meaning since the code itself is
informative
– and not arbitrary
NY = New York
Disadvantages:
limited usability and availability
 IS Functions of
GLSGeneral ledger systems should:
 collect transaction data promptly and accurately
Input
 classify/code data and accounts
 validate collected transactions/ maintain
accounting controls (e.g., equal debits and credits)
 process transaction data
Process
post transactions to proper accounts
update general ledger accounts and transaction files
record adjustments to accounts
 store transaction data
Output  generate timely financial reports
 Financial

Reporting
System Management
Billings
Reporting
System

Sales Inventory
Control
General
Ledger
Cash Payroll
Receipts System
(GLS)

Cost Cash
Accounting Disbursements

Accounts
Payable
THE JOURNAL VOUCHER
The source of input to the general ledger is the
journal voucher.
A journal voucher identifies the financial
amounts and affected general ledger (GL)
accounts.

11
 GLS
1.Database
General ledger master file
-principal FRS file based on chart of accounts
2. General ledger history file
- used for comparative financial support
3. Journal voucher file
-all journal vouchers of the current period
4. Journal voucher history file
-journal vouchers of past periods for audit trail
5. Responsibility center file
-financial data by responsibility centers for MRS
6. Budget master file
Record Layout for a General Ledger
Master File

14
GLS PROCEDURES
The Financial Reporting System
• The law dictates management’s responsibility for
providing stewardship information to external
parties.
• Much of the information provided takes the form of
standard financial statements, tax returns, and
documents required by regulatory agencies such as
the Securities and Exchange Commission (SEC).
• The primary recipients of financial statement
information are external users, such as stockholders,
creditors, and government agencies.
15
 Source Journal Trial balance
entries in the Post entries to
documents
journal the ledger

Financial
Adjusting and
statements
closing
FINANCIAL REPORTING PROCEDURES
Financial reporting is the final step in the overall
accounting process that begins in the transaction
cycles. From this point, the following steps occur:
Capture the transaction.
Record in special journal.
Post to subsidiary ledger.
Post to general ledger.
Prepare the unadjusted trial balance.
Make adjusting entries.
Journalize and post adjusting entries.
Prepare the adjusted trial balance.
Prepare the financial statements.
Journalize and post the closing entries.
Prepare the post-closing trial balance.
17
Financial Reporting Process
Flowchart
GLS
a. General ledger analysis:
Reports
1.listing of transactions
2. allocation of expenses to cost centers
3. comparison of account balances from prior
periods
4. trial balances
Financial statements:
5. balance sheet
6. income statement
7. statement of cash flows
Managerial reports:
8. analysis of sales
9. analysis of cash
10. analysis of receivables
Chart of accounts: coded listing of accounts
Real-Time General Ledger and Financial Reporting System

20
XBRL—Reengineering Financial Reporting
XBRL (extensible Business Reporting Language) is
an XML-based language that was designed to provide
the financial community with a standardized method for
preparing, publishing, and automatically exchanging
financial information, including financial statements of
publicly held companies.
The objective of XBRL is to facilitate the publication,
exchange, and processing of financial and business
information.
XML (extensible Markup Language) is a
metalanguage for describing markup languages that can
be used to model the data structure of an organization’s
internal database. 21
XML
XML is a metalanguage for describing markup
languages.
XML can be used to model the data structure of
an organization’s internal database.

22
Comparison of HTML and XML
Documents

23
XBRL
XBRL taxonomy are classification schemes that
are compliant with the XBRL Specifications to
accomplish a specific information exchange or
reporting objective such as filing with the
Securities and Exchange Commission.
XBRL instance documents (the actual financial
reports) are the mapping of the organization’s
internal data to XBRL taxonomy elements.

24
Overview of XBRL Reporting Process

25
Internal Corporate Database

26
GL to Taxonomy Mapper

27
Database Structure with XBRL Tag

28
XBRL Instance Document

29
A BRIEF HISTORY OF XBRL
REPORTING
Since October 2005, U.S. banking regulators have required quarterly
“Call Reports” to be filed in XBRL.
In April 2005, the SEC began a voluntary financial reporting
program that allows registrants to supplement their required filings
with exhibits using XBRL.
In September 2006, the SEC announced its new electronic reporting
system to receive XBRL filings. The new system is called IDEA,
short for Interactive Data Electronic Application.
In May 2008, the SEC issued rules requiring large publicly held
companies to adopt XBRL by December 15 to meet financial
reporting requirements.

30
Controlling the GL/FRS
SOX legislation requires that management design
and implement controls over the financial
reporting process.
Potential risks to the FRS include the following:
A defective audit trail
Unauthorized access to the general ledger
GL accounts that are out of balance with subsidiary accounts
Incorrect GL account balances because of unauthorized or incorrect journal
vouchers

31
COSO CONTROL ISSUES
Transaction Authorization
Segregation of Duties
Access Controls
Accounting Records
Independent Verification
• The journal voucher listing is a listing that provides relevant details about each
journal voucher received by the GL/FRS.
• The general ledger change report presents the effects of journal voucher
transactions on the general ledger accounts.
IT Application Controls

32
Journal Voucher Listing

33
General Ledger Change Report

34
INTERNAL CONTROL
IMPLICATIONS OF XBRL
Taxonomy Creation
Taxonomy Mapping Error
Validation of Instance Documents

35
Potential Risks in the
GL/FRS
1. Improperly prepared journal entries
2. Unposted journal entries
3. Debits not equal to credits
4. Subsidiary not equal to G/L control
accounts
5. Inappropriate access to the G/L
6. Poor audit trail
7. Lost or damaged data
8. Account balances that are wrong because
of unauthorized or incorrect journal
vouchers
GL/FRS Control
Issues
Transaction authorization - journal
vouchers must be authorized by a
manager at the source dept
Segregation of duties – G/L clerks
should not:
 have recordkeeping responsibility for
special journals or subsidiary ledgers
 prepare journal vouchers
 have custody of physical assets
GL/FRS Control
Issuescontrols:
Access
Unauthorized access to G/L can result in
errors, fraud, and misrepresentations in
financial statements.
Sarbanes-Oxley requires controls that limit
database access to only authorized individuals.
Accounting records - trace source
documents from inception to
financial statements and vice versa
GL/FRS Control
Issues
Independent verification
G/L dept. reconciles journal vouchers and
summaries.
Two important operational reports used:
journal voucher listing – details of each
journal voucher posted to the G/L
general ledger change report – the effects
of journal voucher postings on G/L
accounts
GL/FRS Using Database
Technology
GL/FRS Using Database
Technology
Advantages:
immediate update and reconciliation
timely, if not real-time, information
Removes separation of transaction authorization and
processing
Detailed journal voucher listing and account activity
reports are a compensating control
Centralized access to accounting records
Passwords and authorization tables as controls
Management Reporting
Systems
 Produce financial and nonfinancial
information needed by management
to “plan, evaluate, control”
 Usually seen as discretionary
reporting
 Can argue that Sarbanes-
Oxley requires MRS
-MRS provide a formal means for
monitoring the internal controls
FACTORS THAT INFLUENCE THE MRS
Management Principles
• The formalization of tasks is the subdivision of
organizational areas into tasks that represent full-
time job positions. An organizational chart shows
typical job positions in a manufacturing firm.
• Responsibility refers to an individual’s obligation to
achieve desired results. Authority is the right to make
decisions pertaining to areas of responsibility.
• Span of control refers to the number of subordinates
directly under a manager’s control.
• The principle of management by exception is a
concept that managers should limit their attention to
potential problem areas rather than being involved
with every activity or decision. 43
Organizational Chart for a Manufacturing
Firm

44
 Management
Principles
Span of control:
the number of subordinates directly under the manager’s
control
detailed reports for managers with narrow spans of control
summarized information for managers with broad spans of
control

Narrow Span of Control Wide Span of Control

Management
Principles
Management by exception:
Managers should limit their attention
to potential problem areas.
Reports should focus on changes in
key factors that are asymptomatic
of potential problems.
Management Function,
Level, and Decision
Type
Management Function, Level,
and Decision Type
Strategic planning decisions:
1. firm’s goals and objectives
2. scope of business activities
3. organizational structure
4. management philosophy
5. long-term, with broad
scope and impact
6. non-recurring , with high
degree of uncertainty
7. need highly summarized
information
8. require external & internal
Management Function, Level,
and Decision Type
Tactical planning decisions:
1. subordinate to strategic decisions
2. short term
3. specific objectives
4. recur often
5. fairly certain outcomes
6. limited impact on the firm
Management Function, Level,
and Decision Type
Management control decisions:
1. using resources as productively as possible in
all functional areas
2. evaluating the performance of subordinates
against standards
Measuring performance is difficult because sound
decisions with long-term benefits may negatively
impact the short- term bottom line.
Management Function, Level,
and Decision Type
Operational control decisions:
1. deal with routine tasks
2. narrower focus, dependent on details
3. highly structured
4. short time frame
Three basic elements or steps:
5. set attainable standards
6. evaluate performance
7. take corrective action
Classification of Decision Types
by Decision Characteristics
FACTORS THAT INFLUENCE THE MRS
(continued)

Management Function, Level, and Decision Type

• Implementation is the carrying out, execution, or practice of a
plan, a method, or any design for doing something. Short-term
planning involves the implementation of specific plans that are
needed to achieve the objectives of the long-range plan.
• Strategic planning decisions is planning with a long-term time
frame that is associated with a high degree of uncertainty.
• Tactical planning decisions is the planning performed by the
middle-level manager to achieve the strategic plans of the
organization.
• Management control decisions are a technique for motivating
managers in all functional areas to use resources as
productively as possible.

53
 Problem
Structure
Information System Management Level
Non-Traditional IS
Problem Structure

Unstructured

Strategic

Management
Partially
Tactical Structured
Traditional IS

Management
Operations Management

Operations
Structured
Problem
Structure
Reflects and affects how well decision
makers understand and solve
problems
Elements of problem structure:
data
procedures
objectives
FACTORS THAT INFLUENCE THE
MRS (continued)
Types of Management Reports
• A management report is a discretionary report used
for internal decision making. Management reports
are not mandated like income statements, balance
sheets, etc.
• Information content is the ability of a report to
reduce uncertainty and influence behavior of the
user.

56
Management
Reports
Report objectives - reports must have value
or information content
They should…
reduce the level of uncertainty associated with
a problem facing the decision maker
influence the behavior of the decision maker in
a positive way
PROGRAMMED REPORTING
Programmed reports provide information to
solve problems that users have anticipated.
Scheduled reports are reports produced
according to an established time frame.
On-demand reports are triggered by events.
• Report attributes are the characteristics of a report. To be effective, a report must
possess the following attributes: relevance, summarization, exception orientation,
accuracy, completeness, timeliness, and conciseness.
• The decision-making process is a cognitive process leading to the selection of a
course of action among variations.

58
Examples of Programmed Reports

59
Report
Attributes
Relevance – useful to decision making
Summarization – appropriate level of detail
Exception orientation – identify risks
Accuracy – free of material errors
Completeness – essential information
Timeliness – in time for decisions
Conciseness – understandable format
 Attributes of Useful Information According
to FASB’s Conceptual Framework
Feedback
Value

Representational Relevant Timely

Faithfulness
Information
Predictive
Reliable Value
Verifiable
Information

Neutral
 PROGRAMMED REPORTING (continued)
Responsibility Accounting
• Responsibility accounting is the concept that every economic event
affecting the organization is the responsibility of and can be traced
to an individual manager.
• SETTING FINANCIAL GOALS: THE BUDGET PROCESS: The budget is a
process that helps management achieve their financial objectives by
establishing measurable goals for each organizational segment.
• MEASURING AND REPORTING PERFORMANCE: Responsibility
reports are reports containing performance measures at each
operational segment in the firm, which flow upward to senior levels
of management.
• RESPONSIBILITY CENTERS: Responsibility centers are the
organization of business entities into areas involving cost, profit, and
investment.

62
Upward and Downward Flow of
Information

63
Top-Down Flow of Budget
Information

64
The Bottom-Up Flow of
Performance Information

65
PROGRAMMED REPORTING (continued)

Responsibility Accounting (continued)

• A cost center is an organizational unit with
responsibility for cost management within budgetary
limits.
• A profit center is an organizational unit with
responsibility for both cost control and revenue
generation.
• An investment center is an organizational unit that
has the objective of maximizing the return on
investment assets.
66
Cost Center Performance Report

67
Profit Center Performance Report

68
Investment Center Performance Report

69
Responsibility
Centers
Cost center – responsible for keeping costs
within budgetary limits
Profit center – responsible for both cost
control and revenue generation
Investment center – has general authority to
make a wide range of decisions affecting costs,
revenue, and investments in assets
Behavioral
Considerations: Goal
Congruence
MRS and compensation schemes help to
appropriately assign authority and
responsibility.
If compensation measures are not carefully
designed, managers may engage in actions
not optimal for the organization.
Short-term v. long-term measures
Behavioral
Considerations:
Information Overload
Occurs when managers receive more
information than they can assimilate
Can cause managers to disregard formal
information and rely on informal—
probably inferior—cues when making
decisions
Behavioral Considerations:
Performance Measures
Appropriate performance measures
Stimulate behavior consistent with firm objectives
Managers consider all relevant aspects, not just one
Example of inappropriate measures:
price variance – can affect the quality of the items
purchased
quotas – can affect quality control, material usage
efficiency, labor relations, plant maintenance
profit measures – can affect plant investment, employee
training, inventory reserve levels, customer satisfaction
Data Analytics
•Data analytics is the science of analyzing raw
data in order to make conclusions about that
information.
•The techniques and processes of data analytics
have been automated into mechanical
processes and algorithms that work over raw
data for human consumption.
•Data analytics help a business optimize its
performance.
Small data analytics characterizes techniques that employ data that are in a
format and of a volume that allows them to be analyzed and acted upon by
traditional technologies.
Big data analytics is characterized and defined by the three Vs: extreme
volumes of data, the rapid velocity at which the data must be processed, and the74
SMALL DATA ANALYTICS
Data warehouse is a database constructed for
quick searching, retrieval, ad hoc queries, and
ease of use.
Data mining is the process of selecting,
exploring, and modeling large amounts of data to
uncover relationships and global patterns that
exist in large databases but are hidden among the
vast amount of facts.
The verification model is a drill-down technique
to either verify or reject a user’s hypothesis. 75
 BIG DATA ANALYTICS
The concept of big data was introduced in 1941, its
current rendition is characterized and defined by the
three Vs:
Volume
• Volume is the “V” most associated with big data, and refers to
terabytes, petabytes, and even exabytes of data.
Velocity
• Velocity refers to the speed at which big data must be analyzed.
Variety
• Variety is the primary driver of volume.

76
BIG DATA ANALYTICS (continued)
Big Data Reporting Systems
• Prescriptive analytics tells the user what actions should be
taken in response to specific questions.
• Predictive analytics encompasses a variety of statistical
techniques that draw upon current and past data to calculate
the statistical likelihood of future scenarios occurring.
• Descriptive analytics is a mathematical process that
describes real-world events and the relationships between
factors responsible for them.
• Diagnostic analytics techniques view past performance to
determine why something happened the way it did.
Big Data Analytics Risks and Controls
77
BIG DATA ANALYTICS (continued)
Data Security
• FIREWALLS
• ACCESS PRIVILEGES
• PASSWORD CONTROL
• SYSTEM AUDIT TRAILS
• OUTSOURCING CONTROLS

78