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167 Cards in this Set

  • Front
  • Back
Internal Information Flow
 Horizontal flow: operations-level tasks with highly detailed information about business transactions
 Vertical flow
• Downward: distribution of information (instructions, quotas, and budgets) from senior managers to junior managers and operations personnel
• Upward: summarized information pertaining to operations and other activities that flows upward from operations personnel all the way up to senior managers
External information flow
 Trading partners: customer sales and billing information, purchase information for suppliers, and inventory receipts information
 Stakeholders (stockholders, financial institutions and government): financial statements, tax returns, and stock transaction information
• Based on generally accepted accounting principles (GAAP)
System
group of two or more interrelated components or subsystems that serve a common purpose
Elements of a system
 Multiple components (more than one part)
 Relatedness (common purpose relates components)
 System versus subsystem (interchangeable)
• Called a subsystem when viewed in relation to the larger system of which it is a part)
 Purpose (fundamental justification)
• When a system ceases to serve a purpose, it should be replaced
• Can serve one or several purposes
Types of systems
artificial/natural
System Decomposition
dividing a system into smaller subsystem parts
 Allows presentation of the overall system as a hierarchy and a view of the relationships between subordinate and higher-level subsystems
System Interdependency
a system’s ability to achieve its goals depends on the effective functioning and harmonious interaction of its subsystems
 Failure of a vital subsystem results in a failure of the overall system
 Failure of a nonvital subsystem will not result in a failure of the overall system
Information system
the set of formal procedures by which data are collected, processed into information, and distributed to users
Transaction
an event that affects or is of interest to the organization and is processed by its information system as a unit of work
Financial Transaction
an economic event that affects the assets and equities of the organization, is reflected in its accounts, and is measured in monetary terms
 Nonfinancial transaction
events that do not meet the narrow definition of a financial transaction (no legal obligation to process)
AIS
process financial and nonfinancial transactions that directly affect the processing of financial transactions
AIS Substems
Transaction processing system (TPS). General Ledger/Financial reporting system (GL/FRS), Management reporting system (MRS)
Transaction processing system (TPS)
supports daily business operations (reports, documents and messages)
o Converts economic events into financial transactions
o Records financial transactions in the accounting records (journals and ledgers)
o Distributes essential financial info to operations personnel
o Transaction cycles: revenue, expenditure, and conversion
• General ledger/financial reporting system (GL/FRS):
measures and reports the status of financial resources and the changes in those resources
o Input from transaction cycles
o Produces traditional financial statements
o Communicated to external users
o Nondiscretionary reporting
• Management reporting system (MRS)
provides internal financial information needed to manage a business
o Budgets, variance reports, etc.
o Discretionary reporting (choose what info/how to report)
Management Information System (MIS):
processes nonfinancial transactions that are not normally processed by traditional AIS
o End users
users for whom the system is built
External end users
 External (creditors, stockholders, potential investors, regulatory agencies, tax authorities, suppliers and customers)
Internal end users
(management at every level, operations personnel)
 Data
facts, which may or may not be processed (edited, summarized, or refined) and which have no direct effect on the user
 Information
facts that cause the user to take an action that he or she otherwise could not, or would not, have taken  processed data
o Data sources
financial transactions that enter the information system from both internal and external sources
o Data collection
first operational stage in the information system
Purpose of data collection
 Ensure that event data entering the system are valid, complete, and free from material errors
two rules of data collection
relevance and efficiency
o Data processing
group that manages the computer resources used to perform day-to-day processing of transactions
 Database
physical repository for financial data
• Data hierarchy
Data attribute, record, file
Data attribute
a logical and relevant characteristic of an entity about which the firm captures data
o Record
a complete set of attributes for a single occurrence within an entity class
File
a complete set of records of an identical class
• Database management
Storage, Retrieval, Deletion
Database management- Storage
assigning keys to new records and storing them in their proper location
Database management- Retrieval
locating and extracting an existing record for processing
Database Management- Deletion
permanently removing obsolete or redundant records from the database
o Information generation
the process of compiling, arranging, formatting, and presenting information to users
Characteristics of information
• Relevance: must serve a purpose
• Timeliness: no older than the time of action it supports
• Accuracy: free from material errors
• Completeness
• Summarization: should be aggregated in accordance with the user’s needs
o Feedback:
a form of output that is sent back to the system as a source of data (internal/external) and is used to initiate or alter a process
o Information System Objectives
 To support the stewardship function of management
 To support management decision making
 To support the firm’s day-to-day operations
• Acquisition of Information Systems (two ways)
System Development life cycle

and
 Purchase preprogrammed commercial systems from software vendors
 System development life cycle
develop customized systems from scratch through in-house systems development activities
Commercial software types (3)
o Turnkey systems: completely finished and tested systems that are ready for implementation (general-purpose systems)
o Backbone systems: basic system structure on which to build (primary processing logic is preprogrammed)
o Vendor-supported systems: customized systems that client organizations purchase commercially rather than develop in-house (costly)
o Business segments
o Segments: fictional units of a business
 Geographic location
 Product line
 Business function
o Functional segmentation
o Segmentation by business function (most common)
o Titles of functions and functions themselves greatly vary between businesses
Types of functional segmentation
Materials managemnt, production, marketing, distribution, personell, finance
The Accounting Function
• Manages the financial information resource of the firm
o Captures and records the financial effects of the firms transactions
o Distributes the transaction information to operations personnel
• The Value of Information
o Reliability: property of information that makes it useful to users
• Accounting independence
o Independence: separation of the record-keeping function of accounting from the functional areas that have custody of physical resources
• Centralized data processing model
all data processing is performed by one or more large computers housed at a central site that serve users throughout the organization
o Database administration
a special independent group headed by the database administrator, which is responsible for the security and integrity of the database
o Data processing
manages the computer resources used to perform the day-to-day processing of transactions
 Data control
 Data conversion
 Computer operations
 Data library
Three types of transaction cycles
Expenditure, Conversion, Revenue
Expenditure cycle, and its two components
business activities begin with the acquisition of materials, property, and labor in exchange for cash (most based on a credit relationship)
• Two parts:
o Physical component: the acquisition of the goods
o Financial component: the cash disbursement to the supplier
Conversion cycle, and some different takes
composed of two major subsystems: the production system (planning, scheduling, and control of the physical product through the manufacturing process) and the cost accounting system (monitors the flow of cost information related to production)
• Manufacturing firms convert raw materials into finished products through formal conversion cycle operations
• Merchandising companies do not process activities through formal conversion cycle subsystems
Revenue cycle and 2 primary systems
processing cash sales, credit sales, and the receipt of cash following a credit sale
• Primary subsystems:
o Sales order processing
o Cash receipts
Manual systems (three types)
Documents, Journals, Ledgers
Documents
provide evidence of an economic event and may be used to initiate transaction processing
Three types of documents
Source, Product, Turnaround
o Source documents
documents created at the beginning (the source) of a transaction
 Used to capture and formulate transaction data that the transaction cycle needs for processing
o Product documents
result of transaction processing rather than the triggering mechanism for the process
o Turnaround documents
product documents of one system that become source documents for another system
 Contains important information about a customer’s account tot help the cash receipts system process the payment
• Journal
a records of a chronological entry
o Documents are the primary source of data for journals
o Often a time lag between initiating a transaction and recording it in the accounts
types of journals (2)
Special, general
Special journal
o Special journal: used to record specific classes of transactions that occur in high volume (specialized format)
 Register: often used to denote certain types of special journals – denote a log
General Journal
: used to record nonrecurring, infrequent and dissimilar transactions
 Columns are nonspecific, allowing any type of transaction to be recorded
 Recorded chronologically
Journal Voucher
special source document that contains a single journal entry specifying the general ledger accounts that are affected
• Companies are replacing their general journal with journal vouchers
• Used to record summaries of routine transactions, nonroutine transactions, adjusting entries, and closing entries
• Ledger
book of accounts that reflects the financial effects of the firm’s transactions after they are posted from the various journals
o Show activity by account type
o Used to prepare financial statements, support daily operations, and prepare internal reports
two types of ledgers
General, Subsidiary
 General ledgers
contain the firm’s account information in the form of highly summarized control accounts
• Provides a single value for each control account
• Not useful for supporting daily business operations
 Subsidiary ledgers
contain the details of the individual accounts that constitute a particular control account
• Mechanism for verifying the overall accuracy of accounting data that separate accounting departments have processed
Audit trail
accounting records that trace transactions from their source documents to the financial statements
o Types of files
Master, Transaction, Reference, Archieve
Master File
account data that is updated from transactions
Transaction File
a temporary file of transaction records used to change or update data in a master file
 Reference file:
stores data that are used as standards for processing transactions
 Archive file
contains records of past transactions that are retained for future reference
o The Digital Audit Trail
How computer files provide an audit trail
• 1. Capture economic event
• 2. Convert the source documents to digital form
• 3. Update the various master file subsidiary and control accounts that the transaction affects
• 4. Records that are rejected for credit problems are transferred to the error file
 Allows transaction tracing
• 1. Compare AR balances
• Reconcile AR control figure with the AR subsidiary account total
• 3. Select sample of update entries made to AR subsidiary ledger and trace to transaction in the sales journal (archive file)
• 4. Identify specific source documents that can be pulled and verified
Documentation techniques
• DFD and ER Diagrams
o Data flow diagram (DFD):
uses symbols to represent the entities, processes, data flows, and data stores that pertain to a system (represent systems at different levels of detail)
Data flow diagram parts
 Entities: external objects at the boundary of the system being modeled (represent sources and destinations for data) – labeled as nouns
 Processes: should be labeled with a descriptive verb
 Data flows: labeled arrows connecting the process objects (each should be unique)
o Entity relationship (ER) diagram
a documentation technique used to represent the relationship between entities
ER diagram parts
ENtities, cardinality, data model
ER Entities
 Entities: physical resources (automobiles, cash, or inventory), events (ordering inventory, receiving cash, shipping goods), and agents (salesperson, customer, or vendor) about which the organization whishes to capture data
Cardinality
numerical mapping between entity instances (maximum number of records in one file that are related to a single record in the other file and vice versa). Reflects normal business rules as well as organizational policy
• One-to-one (1: 1)
• One-to-many (1: M)
• Many-to-many (M: M)
 Data model
the blueprint for what ultimately will become the physical database
• System flowchart
: graphical representation of the physical relationships among key elements of a system
o Objective: to provide an unambiguous description of the system
o Reflects the physical system
System flow chart areas of activity (4)
sales department, credit department, warehouse, shipping department
o Batch Processing
 Batch: group of similar transactions that are accumulated over time and then processed together
 Advantages: time efficiency and control
• Program flowchart
diagram providing a detailed description of the sequential and logical operations of the program
o Connector lines between the symbols establish the logical order of execution
• Record layout diagrams
used to reveal the internal structure of the records that constitute a file or database table. The layout diagram usually shows the name, data type, and length of each attribute (or field) in the record
o Each data attribute and key field is shown in terms of its name and relative location
• Batch systems
assemble transactions into groups for processing (time lag)
o Require fewer organizational resrouces
o Certain records are processed after the event to avoid operational delays
o Use computer capacity only when the program is being run
• Real-time systems
process transactions individually at the moment the event occurs (no time lag)
o More resources required
o Use direct access files that require more expensive storage devices  cost differentials are disappearing
o Must be friendly, forgiving, and easy to work with
o Require dedicated processing capacity/use computer capacity 24 hrs/day
o Operational inefficiencies and processing delays created with large volumes of transactions
Computer-Based Accounting Systems
Batch and Real Time
Data Coding Schemes
• Data coding involves creating simple, numeric or alphabetic codes to represent complex economic phenomena that facilitate efficient data processing
• Sequential codes
represent items in some sequential order (ascending or descending)
Sequential code advantages
 Supports reconciliation of a batch of transactions
 Management can eventually determine the cause and effect of an error
Sequential code disadvantages
 Codes carry no information content beyond their order in the sequence
 Difficult to change
• Block codes
coding scheme that assigns ranges of values to specific attributes such as account classifications
Block code advantages
 Allows for insertion of new codes within a block without having to reorganize the entire coding structure
Block code disadvantages
 No information content readily apparent
Group codes
codes used to represent complex items or events involving two or more pieces of related data
Group code advantages
 Facilitate representation of large amounts of diverse data
 Allow complex data structures to be represented in a hierarchical form that is logical and more easily remembered
 Permit detailed analysis and reporting both within an item class and across different classes of items
Group code disadvantages
 Tend to be overused
 Unrelated data may be linked simply because it can be done
• Leads to unnecessarily complex group codes that cannot be easily interpreted
• Alphabetic codes
alphabetic characters assigned sequentially
Alphabet code advantages/disadvantages
o Advantages:
 Capacity to represent large numbers of items is increased dramatically through the use of pure alphabetic codes or alphabetic characters embedded within numeric codes (alphanumeric codes)
o Disadvantages
 Difficulty rationalizing the meaning of codes
 Users tend to have difficulty sorting records
Mnemonic codes
alphabetic characters in the form of acronyms that convey meaning
Mnemonic code advantages/disadvantages
o Advantages:
 Do not require user to memorize meaning
 Code itself conveys a high degree of information
o Disadvantages
 Limited ability to represent items within a class
Ethics
Ethics standards are derived from societal more and deep-rooted personal beliefs about issues of right and wrong that are not universally agreed upon
Ethics: the principles of conduct that individuals use in making choices
Business ethics (finding answers to two questions)
1. How do managers decide what is right in conducting their business?
2. Once managers have recognized what is right, how do they achieve it?
Four areas of ethical issues
equity, rights, honesty, and the exercise of corporate power
• Ethical responsibility
finding a balance between the consequences of major decision-making that affect employees, shareholders, customers, and the public
o Justice: the benefits of the decision should be distributed fairly to those who share the risks
o Minimize risk
Computer ethics
the analysis of the nature and social impact of computer technology and the corresponding formulation and justification of policies for the ethical use of technology
• Pop computer ethics
the exposure to stories nad reports found in the popular media regarding the good or bad ramifications of computer technology
• Para computer ethics
taking a real interest in computer ethics cases and acquiring some level of skill and knowledge in the field
• Theoretical computer ethics
interest to multidisciplinary reserachers who apply the theories of philosophy, sociology, and psychology to computer science with the goal of bringing some new understanding to the field
Privacy
people desire to be in full control of what and how much information about themselves is available to others, and to whom it is available
• Ownership issues in the personal information industry
Security
an attempt to avoid such undesirable events a a loss of confidentiality or data integrity
Fraud
denotes a false representation of a material fact made by onep arty to another party with the intent to deceive and induce the other party to justifiably rely on the fact to his or her detriment
Fraud's five conditions
o 1. False representation
o 2. Material fact
o 3. Intent
o 4. Justifiable reliance
o 5. Injury or loss
• Fraud in the business environment
an intentional deception, misappropriation of a company’s assets, or manipulation of its financial data to the advantage of the perpetrator
Employee fraud and steps
designed to directly convert cash or other assets to the employee’s personal benefit
 Steps
• 1. Stealing something of value (an asset)
• 2. Converting the asset to a usable form (cash)
• 3. Concealing the crime to avoid detection
. Management fraud and characteristcs
usually does not involve the direct theft of assets
 Three special characteristics
• 1. The fraud is perpetrated at levels of management above the one to which internal controls structures generally relate
• 2. The fraud frequently involves using the financial statements to create an illusion that an entity is healthier and more prosperous than, in fact, it is
• 3. If the fraud involves misappropriation of assets, it frequently is shrouded in a maze of complex business transactions, often involving related third parties
Fraud Triangle
Fraud triangle: three factors that contribute to or are associated with top managemnt


1. Situational pressure: personal or job-related astresses that could coerce an individual to act dishonestly
2. Opportunity: direct access to assets and/or access to information that controls assets
3. Ethics: one’s character and degree of moral opposition to acts of dishonesty
• Red flag checklist
Internal control system
comprises policies, practices, and procedures employed by the organization to achieve four broad objectives:
1. To safeguard assets of the firm
2. To ensure the accuracy and reliability of accounting records and information
3. To promote efficiency in the firm’s operations
4. To measure compliance with management’s prescribed policies and procedures
Modifying assumptions
• The establishment and maintenance of a system of internal control is a management responsibility
• Should provide reasonable assurance that the four broad objectives of internal control are met in a cost-effective manner
• Should achieve the four broad objectives regardless of the data processing method used
• Limitations include: the possibility of error, circumvention, management override, and changing conditions
Exposure
the absence or weakness of a control
Types of risk
o 1. Destruction of assets
o 2. Theft of assets
o 3. Corruption of information or the IS
o 4. Disruption of the IS
Levels of control (3, and definitions)
• Preventative controls: passive techniques designed to reduce the frequency of occurrence of undesirable events
• Detective controls: devices, techniques, and procedures designed to identify and expose undesirable events that elude preventive controls
o Identify anomalies and draw attention to them
• Corrective controls: actions taken to reverse the effects of errors detected in the previous step
o Actually fix the problem
o May be more than one feasible corrective action, but the best course of action may not always be obvious
Statement on Auditing Standards (SAS) No. 78
the current authoritative document for specifying internal control objectives and techniques
SAS 78/COSO Internal Control Framework
Control environment, Risk Assesment, monitoring, control activities
• Control environment and its elements
: sets the tone for the organization and influences the control awareness of its management and employees
o Important elements:
 The integrity and ethical values of management
 The structure of the organization
 The participation of the organization’s board of directors and the audit committee (if one exists)
 Management’s philosophy and operating style
 The procedures for delegating responsibility and authority
 Management’s methods for assessing performance
 External influences (ex: examinations by regulatory agents)
 The organization’s policies and practices for managing its human resources
Risk Assessment and circumstances
: to identify, analyze, and manage risks relevant to financial reporting
o Risks can arise or change from circumstances such as:
 Changes in the operating environment that impose new or changed competitive pressures on the firm
 New personnel who have different or inadequate understanding of internal control
 New or reengineered information systems that affect transaction processing
 Significant and rapid growth that strains existing internal control
 The implementation of new technology into the production process or information system that impacts transaction processing
 The introduction of new product lines or activities with which the organization has little experience
 Organizational restructuring resulting in the reduction and/or reallocation of personnel such that business operations and transaction processing are affected
 Entering into foreign markets that may impact operations  risks associated with foreign currency transactions
 Adoption of a new accounting principle
An effective accounting information system will
 Identify and record all valid financial transactions
 Provide timely information about transactions in sufficient detail to permit proper classification and financial reporting
 Accurately measure the financial value of transactions so their effects can be recorded in financial statements
 Accurately record transactions in the time period in which they occur
• Monitoring
the process by which the quality of internal control design and operation can be assessed
o Internal auditors may monitor the entity’s activities in separate procedures and make specific recommendations for improvements to controls
o Judicious use of management reports
 By summarizing activities, highlighting trends, and identifying exceptions from normal performance, well-designed management reports provide evidence of internal control function or malfunction
• Control activities
the policies and procedures used to ensure that appropriate actions are taken to deal with the organization’s identified risks
o IT controls
 General controls: pertain to entity-wide concerns
 Application controls: ensure the integrity of specific systems
o Physical controls
relate primarily to the human activities employed in accounting systems (purely manual). Focus on people, but are not restricted to an environment in which clerks update paper accounts with pen and ink
 Transaction authorization
ensure that all material transactions processed by the information system are valid and in accordance with management’s objectives
 Segregation of duties
to minimize incompatible functions
• The authorization for a transaction is separate from the processing of the transaction
• Responsibility for the custody of assets should be separate from the record-keeping responsibility
• The organization should be structured so that a successful fraud requires collusion between two or more individuals with incompatible responsibilities
 Supervision (compensating control)
• Small organizations/functional areas that lack sufficient personnel, management  must compensate for the absence of segregation controls with close supervision
 Accounting records
consist of source documents, journals, and ledgers
• Audit trail enables the auditor to trace any transaction through all phases of its processing from the initiation of the event to the financial statements
o Organizations must maintain audit trails because:
 1. This information is needed for conducting day-to-day operations
 2. The audit trail plays an essential role in the financial audit of the firm
 Access control
ensure that only authorized personnel have access to the firm’s assets
• Verification procedures
independent checks of the accounting system to identify errors and misrepresentations
o Management can assess
 1. The performance of individuals
 2. The integrity of the transaction processing system
 3. The correctness of data contained in accounting records
o Examples:
 Reconciling batch totals at points during transaction processing
 Comparing pysical assets with accounting records
 Reconciling subsidiary accounts with control accounts
 Reviewing management reports (both computer and manually generated) that summarize business activity
Sales orders tasks
receive order, check credit, pick goods, ship goods, bill customer, update inventory records, update A/R, post to general ledger
Sales returns tasks
prepare return slip, prepare a credit memo, approve credit memo, update sales journal, update inventory and A/R records, update general ledger
Cash receipts taskes
: open mail and prepare remittance advice, record and deposit checks, update A/R, update general ledger, reconcile cash receipts and deposits
End of day procedures tasks
three-part deposit slip, batch program summarizes the sales and cash receipts journals, prepares a journal voucher, and posts to the general ledger
Sales order department flow
salescreditbillingwarehouseshipping billinginventory control A/R G/L
Cash receipts department flow
: mailroom  cash receipts  A/R  G/L  controller
Sales returns department flow
receiving  sales  billing  inventory control A/R  G/L
Sales department purpose
ensure accuracy of sales order
Credit department purpose
: ensure customer’s ability to pay
Warehousing department purpose
inventory selection
Shipping department purpose
box goods, ensure items match order slip
Billing department purpose
invoice to client, create initial journal entry
A/R department purpose
manages subledger (billing, cash receipt, bad debt)
Inventory control department purpose
: creates journal voucher and subledger
Cash Receipt department purpose
: mail room receives check, creates remittance list, deposit check
General ledger department purpose
Postings
o Materials management
plan and control the materials inventory of the company
 Purchasing
 Receiving
 Stores
o Production
conversion cycle in which raw materials, labor, and plant assets are used to create finished products
 Primary manufacturing activities: shape and assemble raw materials into finished products
 Production support activities: ensure that primary manufacturing activities operate efficiently and effectively
• Production planning
• Quality control
• Maintenance
o Marketing
strategic problems of product promotion, advertising, and market research
o Distribution
getting the product to the customer after the sale
 Filing orders accurately in the warehouse
 Packaging goods correctly
 Shipping them quickly to the customer
o Personnel
: to effectively manage employees
 To ensure they are competent and reliable
o Finance
manages financial resources