‭MODULE 1‬

i‭nformation system‬‭- set of formal‬ ‭ essages for users throughout the‬

m
‭procedures by which data are‬ ‭organization;‬
‭collected, processed into information,‬ ‭(2) the general ledger/financial‬
‭and distributed to users.‬ ‭reporting‬
‭transaction-‬‭event that affects or is of‬ ‭●‬ ‭which produces the traditional‬
‭interest to the organization and is‬ ‭financial statements, such as the‬
‭processed by its information system‬ ‭income statement, balance‬
‭as a unit of work.‬ ‭sheet, statement of cash flows,‬
‭financial transaction-‬‭economic‬ ‭tax returns, and other reports‬
‭event that affects the assets and‬ ‭required by law; and‬
‭equities of the‬ ‭(3) the management reporting‬
‭organization, is reflected in its‬ ‭system‬
‭accounts, and is measured in‬ ‭●‬ ‭which provides internal‬
‭monetary terms.‬ ‭management with‬
‭Non Financial transactions-‬‭events‬ ‭special-purpose financial‬
‭that do not meet the narrow definition‬ ‭reports and information needed‬
‭of a financial transaction.‬ ‭for decision making such as‬
‭AIS subsystems-‬‭process financial‬ ‭budgets, variance reports, and‬
‭transactions and non financial‬ ‭responsibility reports.‬
‭transactions that directly affect the‬
‭processing of financial transactions.‬ ‭Management Information System‬
‭●‬ ‭for example, changes to‬
‭customers’ names and‬ ‭●‬ M
‭ anagement often requires‬
‭addresses are processed by the‬ ‭information that goes beyond‬
‭AIS to keep the customer file‬ ‭the capability of AIS. As‬
‭current.‬ ‭organizations grow in size and‬
‭complexity, specialized‬
‭ IS is composed of three major‬
A ‭functional areas emerge,‬
‭subsystems:‬ ‭requiring additional‬
‭information for production‬
(‭ 1) the transaction processing‬ ‭planning and control, sales‬
‭system‬ ‭forecasting, inventory‬
‭●‬ ‭which supports daily business‬ ‭warehouse planning, market‬
‭operations with numerous‬ ‭research, and so on. The‬
‭reports, documents, and‬ ‭management information‬
‭MODULE 1‬

s‭ ystem (MIS) processes‬ -‭ Managers require different‬

‭nonfinancial transactions that‬ ‭information for the various kinds of‬
‭are not normally processed by‬ ‭decisions they must make. Typical‬
‭traditional AIS.‬ ‭reports produced by the MRS include‬
‭budgets, variance reports,‬
‭ ransaction Processing System-‬
T ‭cost-volume-profit analyses, and‬
‭central to the overall function of the‬ ‭reports using current (rather than‬
‭information system by converting‬ ‭historical) cost data. This‬
‭economic events into financial‬ ‭type of reporting is called‬
‭transactions, recording financial‬ ‭discretionary reporting because the‬
‭transactions in the accounting records‬ ‭organization can choose what‬
‭(journals and ledgers), and‬ ‭information to report and how to‬
‭distributing essential financial‬ ‭present it.‬
‭information to operations personnel‬ ‭End users- two general groups:‬
‭to support their daily operations.‬ ‭external and internal.‬
‭●‬ ‭External users- include‬
‭ PS consists of three transaction‬
T ‭creditors, stockholders,‬
‭cycles:‬ ‭potential investors, regulatory‬
‭●‬ ‭the revenue cycle,‬ ‭agencies, tax authorities,‬
‭●‬ ‭the expenditure cycle, and the‬ ‭suppliers, and customers.‬
‭●‬ ‭conversion cycle.‬ ‭Institutional users such as banks,‬
‭the SEC, and the Internal Revenue‬
g‭ eneral ledger system (GLS) and‬ ‭Service-‬‭receive information in the‬
‭the financial reporting system‬ ‭form of financial statements, tax‬
‭(FRS)-‬‭two closely related‬ ‭returns, and other reports that the firm‬
‭subsystems.‬ ‭has a legal obligation to produce.‬
‭Management Reporting System-‬ ‭Trading partners (customers and‬
‭provides the internal financial‬ ‭suppliers)-‬‭receive‬
‭information needed to manage a‬ ‭transaction-oriented information,‬
‭business.‬ ‭including purchase orders, billing‬
‭- Managers must deal immediately‬ ‭statements, and shipping documents.‬
‭with many day-to-day business‬ ‭Internal users-‬‭include management‬
‭problems, as well as plan and control‬ ‭at every level of the organization, as‬
‭their operations.‬ ‭well as operations‬
‭personnel.‬
‭MODULE 1‬

‭ ata-‬‭are facts, which may or may‬

D o‭ f labor and overhead to WIP, the‬
‭not be processed (edited, summarized,‬ ‭transfer of WIP into finished goods‬
‭or refined) and have no direct effect‬ ‭inventory, and the depreciation of‬
‭on the user. By contrast,‬ ‭plant and equipment.‬
‭information-‬‭causes the user to take‬ ‭Data collection-‬‭is the first‬
‭an action that he or she otherwise‬ ‭operational stage in the information‬
‭could not, or would not, have taken.‬ ‭system.‬
‭Information-‬‭is often defined simply‬ ‭●‬ ‭The objective is to ensure that‬
‭as processed data.‬ ‭event data entering the system‬
‭- determined by the effect it has on the‬ ‭are valid, complete, and free‬
‭user, not by its physical form.‬ ‭from material errors. In many‬
‭Data Sources-‬‭are financial‬ ‭respects, this is the most‬
‭transactions that enter the information‬ ‭important stage in the system.‬
‭system from both internal and‬ ‭Data Processing-‬‭stage range from‬
‭external sources.‬ ‭simple to complex. Examples include‬
‭External financial transactions-‬ ‭mathematical algorithms (such as‬
‭most common source of data for‬ ‭linear programming models) used for‬
‭most organizations.‬ ‭production scheduling applications,‬
‭●‬ ‭These are economic exchanges‬ ‭statistical techniques for sales‬
‭with other business entities and‬ ‭forecasting, and posting and‬
‭individuals outside the firm.‬ ‭summarizing procedures used for‬
‭Examples include the sale of‬ ‭accounting applications.‬
‭goods and services, the‬ ‭database-‬‭is its physical repository‬
‭purchase of inventory, the‬ ‭for financial and nonfinancial data.‬
‭receipt of cash, and the‬ ‭We use the term database in the‬
‭disbursement of cash (including‬ ‭generic sense. It can be a filing‬
‭payroll).‬ ‭cabinet or a computer disk.‬
‭Internal financial transactions-‬ ‭Regardless of the database’s physical‬
‭involve the exchange or movement of‬ ‭form, we can represent its contents in‬
‭resources within the organization.‬ ‭a logical hierarchy.‬
‭●‬ ‭Examples include the‬ ‭hierarchy includes‬
‭movement of raw materials into‬ ‭●‬ ‭attribute,‬
‭work-in-process (WIP), the‬ ‭●‬ ‭record and‬
‭application‬ ‭●‬ ‭file.‬
‭MODULE 1‬

‭ ata attribute-‬‭is the most elemental‬

d d‭ atabase for processing. After‬
‭piece of potentially useful data in the‬ ‭processing is complete, the storage‬
‭database. An attribute is a logical and‬ ‭task restores the updated‬
‭relevant characteristic of an entity‬ ‭record to its place in the database.‬
‭about which the firm captures‬ ‭Deletion-‬‭is the task of permanently‬
‭data.‬ ‭removing obsolete‬
‭record-‬‭is a complete set‬‭of attributes‬ ‭or redundant records from the‬
‭for a single occurrence within an‬ ‭database.‬
‭entity class. For example, a particular‬ ‭Information generation-‬‭is the‬
‭customer’s name, address, and‬ ‭process of compiling, arranging,‬
‭account balance is one occurrence (or‬ ‭formatting, and presenting‬
‭record) within the AR class. To find a‬ ‭information to users. Information can‬
‭particular record within the database,‬ ‭be an operational document such as a‬
‭we must be able to identify it‬ ‭sales order, a structured report, or a‬
‭uniquely.‬ ‭message on a computer screen.‬
‭file-‬‭is a complete set‬‭of records of an‬ ‭Regardless of physical form,‬
‭identical class. For example, all the‬
‭AR records of the organization‬ ‭ seful information has the following‬
u
‭constitute the AR file. Similarly, files‬ ‭characteristics:‬
‭are constructed for other classes of‬ ‭1.‬ ‭relevance,‬
‭records such as inventory, accounts‬ ‭2.‬ ‭timeliness,‬
‭payable, and payroll.‬ ‭3.‬ ‭accuracy,‬
‭Database management involves‬ ‭4.‬ ‭completeness, and‬
‭three fundamental tasks‬‭:‬ ‭5.‬ ‭summarization.‬
‭1.‬ ‭storage,‬
‭2.‬ ‭retrieval, and‬ ‭ elevance-‬‭The contents of a report‬
R
‭3.‬ ‭deletion.‬ ‭or document must serve a purpose.‬
‭Timeliness-‬‭The age of information is‬
s‭ torage task-‬‭assigns keys to new‬ ‭a critical factor in determining its‬
‭records and stores them in their‬ ‭usefulness.‬
‭proper location in the‬ ‭Accuracy-‬‭Information must be free‬
‭database.‬ ‭from material errors.‬
‭Retrieval-‬‭is the task of locating and‬ ‭Completeness-‬‭No piece of‬
‭extracting an existing record from the‬ ‭information essential to a decision or‬
‭task should be missing.‬
‭MODULE 1‬

‭ ummarization-‬‭Information should‬
S f‭ inancial statements and other‬
‭be aggregated in accordance with the‬ ‭mandated reports. Internally,‬
‭user’s needs.‬ ‭management receives‬
‭Feedback-‬‭is a form of output that is‬ ‭stewardship information from‬
‭sent back to the system as a source of‬ ‭various responsibility reports.‬
‭data.‬ ‭2.‬ ‭To support management‬
‭Feedback may be internal or external‬ ‭decision making. The‬
‭and is used to initiate or alter a‬ ‭information system supplies‬
‭process.‬ ‭managers with the information‬
‭Internal feedback-‬‭from this‬ ‭they need to carry out their‬
‭information will initiate‬ ‭decision-making‬
‭the inventory ordering process to‬ ‭responsibilities.‬
‭replenish the inventories. Similarly,‬ ‭3.‬ ‭To support the firm’s‬
‭external feedback-‬‭about the level of‬ ‭day-to-day operations. The‬
‭uncollected customer accounts can be‬ ‭information system provides‬
‭used to adjust the organization’s‬ ‭information to operations‬
‭credit-granting policies.‬ ‭personnel to assist them in the‬
‭Information System Objectives-‬ ‭efficient and effective discharge‬
‭Each organization must tailor its‬ ‭of their daily tasks‬
‭information system to the needs of its‬
‭users. Therefore, specific information‬ ‭ e conclude this section with a‬
W
‭system objectives may differ from‬ ‭brief discussion of how‬
‭firm to firm.‬ ‭organizations obtain information‬
‭systems. Usually, they do so in two‬
‭ hree fundamental objectives are,‬
T ‭ways:‬
‭however, common to all systems:‬
‭1.‬ ‭To support the stewardship‬ (‭ 1) they develop customized systems‬
‭function of management.‬ ‭from scratch through in-house‬
‭Stewardship refers to‬ ‭systems development activities, and‬
‭management’s responsibility to‬ ‭(2) they purchase preprogrammed‬
‭properly manage the resources‬ ‭commercial systems from software‬
‭of the firm. The information‬ ‭vendors. Larger organizations with‬
‭system provides information‬ ‭unique and frequently‬
‭about resource utilization to‬ ‭changing needs engage in in-house‬
‭external users via traditional‬ ‭development. The formal process by‬
‭MODULE 1‬

‭ hich this is accomplished is called‬

w ‭ he structure of an organization‬
T
‭the system development life cycle.‬ ‭reflects the distribution of‬
‭Smaller companies and larger firms‬ ‭responsibility, authority, and‬
‭that have standardized information‬ ‭accountability throughout the‬
‭needs are the primary market for‬ ‭organization.‬
‭commercial software.‬
‭BUSINESS SEGMENTS‬
‭ hree basic types of commercial‬
T
‭software are‬ ‭ usiness organizations consist of‬
B
‭1.‬ ‭turnkey systems,‬ ‭functional units or segments. Three‬
‭2.‬ ‭backbone systems, and‬ ‭of the most common approaches‬
‭3.‬ ‭vendor-supported systems‬ ‭include segmentation by:‬

‭ urnkey systems-‬‭are completely‬

T 1‭ . Geographic Location.‬‭Many‬
‭finished and tested systems that are‬ ‭organizations have operations‬
‭ready for implementation. Typically,‬ ‭dispersed across the Organizational‬
‭they are general-purpose systems or‬ ‭Structure Acquisition of Information‬
‭systems customized to a specific‬ ‭Systems country and around the‬
‭industry‬ ‭world. They do this to gain access to‬
‭Backbone systems-‬‭consist of a basic‬ ‭resources, markets, or lines of‬
‭system structure on which to build.‬ ‭distribution.‬
‭The primary processing logic is‬ ‭2. Product Line.‬‭Companies that‬
‭preprogrammed, and the vendor then‬ ‭produce highly diversified products‬
‭designs the user interfaces to suit‬ ‭often organize around product lines,‬
‭the client’s unique needs. A backbone‬ ‭creating separate divisions for each.‬
‭system is a compromise between a‬ ‭Product segmentation allows the‬
‭custom system and a turnkey system.‬ ‭organization to devote specialized‬
‭Vendor-supported systems-‬‭are‬ ‭management, labor, and resources to‬
‭custom (or customized) systems that‬ ‭segments separately, almost as if they‬
‭client organizations purchase‬ ‭were separate firms.‬
‭commercially rather than develop‬ ‭3. Business Function.‬‭Functional‬
‭in-house. Under this approach, the‬ ‭segmentation divides the organization‬
‭software vendor designs, implements,‬ ‭into areas of‬
‭and maintains the system for its client.‬ ‭specialized responsibility based on‬
‭tasks. The functional areas are‬
‭MODULE 1‬

d‭ etermined according to the flow of‬ ‭ roduction activities-‬‭occur in the‬

P
‭primary resources through the firm.‬ ‭conversion cycle in which raw‬
‭Examples of business‬ ‭materials, labor, and plant assets are‬
‭function segments are marketing,‬ ‭used to create finished products. The‬
‭production, finance, and accounting.‬ ‭specific activities are determined by‬
‭the nature of the products being‬
‭ UNCTIONAL SEGMENTATION‬
F ‭manufactured.‬
‭Segmentation by business function is‬
‭the most common method of‬ I‭ n general they fall into two broad‬
‭organizing.‬ ‭classes:‬
‭(1)‬‭primary manufacturing‬
‭ aterials Management-‬‭The‬
M ‭activities and‬
‭objective of materials management is‬ ‭(2)‬‭production support activities.‬
‭to plan and control the materials‬
‭inventory of the company. A‬ ‭ rimary manufacturing activities -‬
P
‭manufacturing firm must have‬ ‭shape and assemble raw materials into‬
‭sufficient inventories on hand to meet‬ ‭finished products.‬
‭its production needs and yet avoid‬ ‭Production-‬‭support activities ensure‬
‭excessive inventory levels.‬ ‭that primary manufacturing activities‬
‭operate efficiently and effectively.‬
‭ aterials management has three‬
M
‭sub functions:‬ ‭ hese include, but are not limited‬
T
‭1. Purchasing‬‭is responsible for‬ ‭to, the following types of activities:‬
‭ordering inventory from vendors‬ ‭1.‬ ‭Production planning-‬‭involves‬
‭when inventory levels‬ ‭scheduling the flow of‬
‭fall to their reorder points.‬ ‭materials, labor, and machinery‬
‭2. Receiving‬‭is the task of accepting‬ ‭to efficiently meet production‬
‭the inventory previously ordered by‬ ‭needs.‬
‭purchasing. Receiving activities‬ ‭2.‬ ‭Quality control-‬‭monitors the‬
‭include counting and checking the‬ ‭manufacturing process at‬
‭physical condition of these items.‬ ‭various points to ensure that the‬
‭3. Stores‬‭takes physical custody of‬ ‭finished products meet the‬
‭the inventory received and releases‬ ‭firm’s quality standards.‬
‭these resources into the production‬
‭process as needed.‬
‭MODULE 1‬

‭ aintenance-‬‭keeps the firm’s‬

M r‭ ecords the financial effects of the‬
‭machinery and other manufacturing‬ ‭firm’s transactions. Second, the‬
‭facilities in running order.‬ ‭accounting function distributes‬
‭Marketing-‬‭The marketplace needs to‬ ‭transaction information to operations‬
‭know about, and have access to, a‬ ‭personnel to coordinate many of their‬
‭firm’s products. The marketing‬ ‭key tasks.‬
‭function deals with the strategic‬ ‭Accounting activities that‬
‭problems of product promotion,‬ ‭contribute directly to business‬
‭advertising, and market research. On‬ ‭operations include‬
‭an operational level, marketing‬ ‭1.‬ ‭inventory control,‬
‭performs such daily activities as sales‬ ‭2.‬ ‭cost accounting,‬
‭order entry.‬ ‭3.‬ ‭payroll,‬
‭Distribution-‬‭is the activity of getting‬ ‭4.‬ ‭accounts payable,‬
‭the product to the customer after the‬ ‭5.‬ ‭accounts receivable,‬
‭sale.‬ ‭6.‬ ‭billing,‬
‭Personnel-‬‭Competent and reliable‬ ‭7.‬ ‭fixed asset accounting, and‬
‭employees are a valuable resource to‬ ‭8.‬ ‭the general ledger.‬
‭a business.‬
‭Finance-‬‭The finance function‬ ‭ ccounting Independence-‬
A
‭manages the financial resources of the‬ ‭Information reliability rests heavily‬
‭firm through banking and treasury‬ ‭on the concept of accounting‬
‭activities, portfolio management,‬ ‭independence.‬
‭credit evaluation, cash disbursements,‬ ‭Accounting authorizes‬‭- purchases of‬
‭and cash receipts.‬ ‭raw materials and the disbursement of‬
‭The finance function-‬‭also‬ ‭cash payments to vendors and‬
‭administers the daily flow of cash in‬ ‭employees.‬
‭and out of the firm.‬ ‭Accounting supports-‬‭these‬
‭functions within formation but does‬
‭ HE ACCOUNTING FUNCTION‬
T ‭not actively participate in the physical‬
‭The accounting function manages the‬ ‭activities.‬
‭financial information resource of the‬
‭firm. In this regard, it plays two‬ ‭ HE INFORMATION‬
T
‭important roles in transaction‬ ‭TECHNOLOGY FUNCTION‬
‭processing. First, accounting captures‬ ‭Returning to Figure, the final area to‬
‭and‬ ‭be discussed is the IT function. Like‬
‭MODULE 1‬

a‭ ccounting, the IT function is‬ o‭ f users are‬‭met by two related‬

‭associated with the information‬ ‭functions:‬
‭resource. Its activities can be‬ ‭1.‬ ‭systems development‬
‭organized in a number of different‬ ‭2.‬ ‭and systems maintenance.‬
‭ways. One extreme structure is the‬
‭centralized data processing approach;‬ ‭ he former group-‬‭is responsible for‬
T
‭at the other extreme is the distributed‬ ‭analyzing user needs and for‬
‭data processing approach.‬ ‭designing new systems to satisfy‬
‭Centralized Data Processing-‬‭Under‬ ‭those needs. The participants in‬
‭the centralized data processing model,‬ ‭system development include systems‬
‭all data processing is performed by‬ ‭professionals, end users, and‬
‭one or more large computers housed‬ ‭stakeholders.‬
‭at a central site that serve users‬ ‭Systems professionals-‬‭include‬
‭throughout the organization.‬ ‭systems analysts, database designers,‬
‭Areas of operation in IT functions‬ ‭and programmers who design and‬
‭include database administration, data‬ ‭build the system.‬
‭processing, and systems development‬ ‭End users-‬‭are those for whom the‬
‭and maintenance.‬ ‭system is built.‬
‭Database Administration-‬‭Centrally‬ ‭Stakeholders-‬‭are individuals inside‬
‭organized companies maintain their‬ ‭or outside the firm who have an‬
‭data resources in a central location‬ ‭interest in the system but are not end‬
‭that is shared by all end users.‬ ‭users.‬
‭Data Processing-‬‭The data processing‬ ‭Distributed Data Processing-‬
‭group manages the computer‬ ‭An alternative to the centralized‬
‭resources used to perform the‬ ‭model is the concept of distributed‬
‭day-to-day processing of transactions.‬ ‭data processing (DDP).‬
‭It may consist of the following‬
‭functions:‬ ‭ he topic of DDP is quite broad,‬
T
‭1.‬ ‭data control,‬ ‭touching on such related topics as‬
‭2.‬ ‭data conversion,‬
‭3.‬ ‭computer operations, and‬ 1‭ .‬ ‭end-user computing,‬
‭4.‬ ‭the data library.‬ ‭2.‬ ‭commercial software,‬
‭3.‬ ‭networking, and‬
‭ ystem development and‬
S ‭4.‬ ‭office automation.‬
‭maintenance-‬‭The information needs‬
‭MODULE 1‬

‭ imply stated, DDP involves‬

S ‭ he data redundancy-‬‭demonstrated‬
T
‭reorganizing the IT function into‬ ‭in this example contributes to three‬
‭small in processing units (IPUs) that‬ ‭significant problems in‬‭the flat-file‬
‭are distributed to end users and placed‬ ‭environment:‬
‭under their control. IPUs may be‬ ‭1.‬ ‭data storage,‬
‭distributed according to business‬ ‭2.‬ ‭data updating, and‬
‭function, geographic location, or both.‬ ‭3.‬ ‭currency of information.‬

‭ he manual process model-‬‭is the‬

T ‭ ask-Data Dependency-‬‭Another‬
T
‭oldest and most traditional form of‬ ‭problem with the flat-file approach is‬
‭accounting systems.‬ ‭the user’s inability to obtain‬
‭Manual systems-‬‭constitute the‬ ‭additional information as his or her‬
‭physical events, resources, and‬ ‭needs change. This problem is called‬
‭personnel that characterize‬ ‭task-data dependency. The user’s‬
‭many business processes.‬ ‭information set is constrained by the‬
‭data that he or she possesses and‬
‭This includes such tasks as‬ ‭controls. Users act independently‬
‭rather than as members of a user‬
1‭ .‬ ‭order-taking,‬ ‭community. In such an environment,‬
‭2.‬ ‭warehousing materials,‬ ‭it is very difficult to establish a‬
‭3.‬ ‭manufacturing goods for sale,‬ ‭mechanism for the formal sharing of‬
‭4.‬ ‭shipping goods to customers,‬ ‭data.‬
‭and‬
‭5.‬ ‭placing orders with vendors.‬ ‭ atabase Model-‬‭Access to the data‬
D
‭resource is controlled by a database‬
‭ raditionally, this model also includes‬
T ‭management system (DBMS).‬
‭the physical task of record keeping.‬ ‭The DBMS-‬‭is a special software‬
‭Often, manual record keeping is used‬ ‭system that is programmed to know‬
‭to teach the principles of accounting‬ ‭which data elements each user is‬
‭to business students.‬ ‭authorized to access.‬
‭The flat-file model-‬‭describes an‬ ‭Evolution of Information System‬
‭environment in which individual data‬ ‭Models‬
‭files are not related to‬
‭other files.‬ ‭control issue for auditors to consider.‬
‭MODULE 1‬

‭ lat-file and early database‬

F t‭ransaction data and permits the‬
‭systems-‬‭are called traditional‬ ‭development of AIS that promote,‬
‭systems. Within this context, the‬ ‭rather than inhibit,‬
‭term traditional means that the‬ ‭integration.‬
‭organization’s information systems‬ ‭The REA model was proposed in-‬
‭applications (its programs) function‬ ‭1982 as a theoretical model for‬
‭independently of each other rather‬ ‭accounting.‬
‭than as an integrated whole. Early‬ ‭Advances in database technology‬
‭database management systems were‬ ‭have focused renewed attention on‬
‭designed to interface directly with‬ ‭REA as a practical alternative to the‬
‭existing flat-file programs. Thus,‬ ‭classic accounting framework.‬
‭when an organization replaced its flat‬
‭files with a database, it did not have‬ ‭ he following summarizes the key‬
T
‭to spend millions of dollars rewriting‬ ‭elements of the REA models.‬
‭its existing programs. Indeed, early‬
‭database applications performed‬ ‭ esources‬‭- Economic resources are‬
R
‭essentially the same independent‬ ‭the assets of the organization. They‬
‭functions as their flat-file‬ ‭are defined as objects that are both‬
‭counterparts.‬ ‭scarce and under the control of the‬
‭REA Model-‬‭is an accounting‬ ‭enterprise. This definition departs‬
‭framework for modeling an‬ ‭from the traditional model because it‬
‭organization’s critical resources,‬ ‭does not include AR. An account‬
‭events, and agents (REA) and the‬ ‭receivable is an artifact record used‬
‭relationships between them. Once‬ ‭simply to store and transmit data.‬
‭specified, both accounting and‬ ‭Events-‬‭Economic events are‬
‭non accounting data about these‬ ‭phenomena that affect changes in‬
‭phenomena can be identified,‬ ‭resources. They can result from‬
‭captured, and stored in a‬ ‭activities such as production,‬
‭relational database. From this‬ ‭exchange, consumption, and‬
‭repository, user views can be‬ ‭distribution.‬
‭constructed that meet the needs‬ ‭Agents-‬‭Economic agents are‬
‭of all users in the organization. The‬ ‭individuals and departments that‬
‭availability of multiple views allows‬ ‭participate in an economic event.‬
‭flexible use of‬ ‭They are parties both inside and‬
‭MODULE 1‬

o‭ utside the organization with‬ p‭ erspective that predates the computer‬

‭discretionary power to use or dispose‬ ‭as a business information tool.‬
‭of economic resources. Examples of‬ ‭Accountant as system auditor-‬
‭agents include sales clerks, production‬ ‭Auditing is a form of independent‬
‭workers, shipping‬ ‭attestation performed by an‬
‭clerks, customers, and vendors.‬ ‭expert—the auditor—who‬
‭Enterprise resource planning‬ ‭expresses an opinion about the‬
‭(ERP)‬‭- is an information system‬ ‭fairness of a company’s financial‬
‭model that enables an organization to‬ ‭statements.‬
‭automate and integrate its key‬ ‭external accountant’s-‬‭responsibility‬
‭business processes.‬ ‭as a systems auditor was limited to the‬
‭attest function described previously.‬
‭ CCOUNTANTS AS USERS‬
A ‭Assurance-‬‭Assurance services are‬
‭In most organizations, the accounting‬ ‭professional services, including the‬
‭function is the single largest user of‬ ‭attest function, that are designed to‬
‭IT. All systems that process financial‬ ‭improve the quality of information,‬
‭transactions impact the accounting‬ ‭both financial and nonfinancial,‬
‭function in some way. As end users,‬ ‭used by decision makers.‬
‭accountants must provide a clear‬ ‭IT Auditing-‬‭IT auditing is usually‬
‭picture of their needs to the‬ ‭performed as part of a broader‬
‭professionals who design their‬ ‭financial audit.‬
‭systems. For example, the accountant‬ ‭-‬ ‭The organizational unit‬
‭must specify accounting rules and‬ ‭responsible for conducting IT‬
‭techniques to be used, internal control‬ ‭audits may fall under the‬
‭requirements, and special algorithms‬ ‭assurance services group or be‬
‭such as depreciation models. The‬ ‭independent. Typically, they‬
‭accountant’s participation in systems‬ ‭carry a name such as‬
‭development should be active rather‬ ‭1.‬ ‭IT Risk Management,‬
‭than passive.‬ ‭2.‬ ‭Information Systems‬
‭Accountant as system designer-‬ ‭Risk Management, or‬
‭An appreciation of the accountant’s‬ ‭3.‬ ‭Global Risk‬
‭responsibility for system design‬ ‭Management.‬
‭requires a historic‬
‭The IT The Role of an Accountant‬
‭MODULE 1‬

a‭ uditor attests to the effectiveness of a‬ ‭ usiness activities begin with the‬

B
‭client’s IT controls to establish their‬ ‭acquisition of materials, property, and‬
‭degree of compliance with prescribed‬ ‭labor in exchange for cash—the‬
‭standards.‬ ‭expenditure cycle Most expenditure‬
‭-‬ ‭Because many of the modern‬ ‭transactions are based on a credit‬
‭organization’s internal controls‬ ‭relationship between the trading‬
‭are computerized, the IT audit‬ ‭parties. The actual disbursement of‬
‭may be a large portion of the‬ ‭cash takes place at some point after‬
‭overall audit.‬ ‭the receipt of the goods or services.‬
‭Internal Auditing-‬ ‭Internal auditing‬ ‭Days or even weeks may pass‬
‭is an appraisal function housed within‬ ‭between these two events.‬
‭the organization.‬ ‭Thus,‬
‭from a systems perspective, this‬
‭ hree transaction cycles process most‬
T ‭transaction has two parts:‬‭a‬
‭of the firm’s economic activity:‬ ‭physical component-‬‭(the acquisition‬
‭1.‬ ‭the expenditure cycle,‬ ‭of the goods)‬
‭2.‬ ‭the conversion cycle, and‬ ‭and a financial component-‬‭(the‬
‭3.‬ ‭the revenue cycle.‬ ‭cash disbursement to the supplier).‬
‭These cycles exist in all types of‬
‭businesses— both profit-seeking and‬ ‭ separate subsystem of the cycle‬
A
‭not-for-profit types. For instance,‬ ‭processes each component. The major‬
‭every business‬ ‭subsystems of the expenditure cycle‬
‭are outlined here.‬
(‭ 1) incurs expenditures in exchange‬
‭for resources‬‭(expenditure cycle),‬ ‭ urchases/accounts payable system-‬
P
‭This system recognizes the need to‬
(‭ 2) provides value added through‬ ‭acquire physical inventory (such as‬
‭its products or services‬‭(conversion‬ ‭raw materials) and places an order‬
‭cycle), and‬ ‭with the vendor.‬
‭Cash disbursements system-‬‭When‬
(‭ 3) receives revenue from outside‬ ‭the obligation created in the purchases‬
‭sources‬‭(revenue cycle).‬ ‭system is due, the cash disbursements‬
‭system authorizes the payment,‬
‭The Expenditure Cycle‬ ‭disburses the funds to the vendor, and‬
‭MODULE 1‬

r‭ ecords the transaction by reducing‬

‭the cash and accounts payable‬
‭accounts.‬
‭Payroll system-‬‭The payroll system‬
‭collects labor usage data for each‬
‭employee, computes the payroll, and‬
‭disburses paychecks to the employees.‬
‭Fixed asset system-‬‭A firm’s fixed‬
‭asset system processes transactions‬
‭pertaining to the acquisition,‬
‭maintenance, and disposal of its fixed‬
‭assets.‬
‭The conversion cycle-‬‭is composed‬
‭of two major subsystems: the‬
‭production system and the cost‬
‭accounting system.‬
‭production system-‬‭involves the‬
‭planning, scheduling, and control of‬
‭the physical product through the‬
‭manufacturing process.‬
‭cost accounting system-‬‭monitors the‬
‭flow of cost information related to‬
‭production. Information this system‬
‭produces is used for inventory‬
‭valuation, budgeting, cost control,‬
‭performance reporting, and‬
‭management decisions, such as make‬
‭or-buy decisions.‬