Accounting

Information
System
Transaction Processing Cycles; Financial Reporting and
Management Reporting Systems; Information System
Models; Electronic Commerce System
 Transaction Processing Cycles
Financial Transaction
An economic event that affects the assets and equities of
the firm, is reflected in its accounts, and is measured in
monetary terms.

Transaction Processing Cycles

Process most of the firm’s economic activity (financial
transactions).
 3 Transaction Cycles (common to all
businesses)

1.The Revenue Cycle

2.The Expenditure Cycle (Purchases and Cash
Disbursements Procedures; Payroll
Processing and Fixed Asset Procedures)
3.The Conversion Cycle
 The Revenue Cycle

• the direct exchange of finished goods or

services for cash in a single transaction
between a seller and a buyer.
 The Expenditure Cycle

• The conversion of the organization’s

cash into the physical materials and
the human resources it needs to
conduct business.
 The Conversion Cycle

• transforms (converts) input resources,

such as raw materials, labor, and overhead,
into finished products or services for sale.
 Finished Goods

Revenue Cycle
Cash

Finished Goods
Transaction
Conversion Cycle Cycle
Input Resources

Cash

Expenditure Cycle
Input & Human
Resources
 Financial Reporting and
Management Reporting Systems
Financial
Transaction General Reporting
Cycle Ledger System
System
Management
Reporting
System
 General Ledger System

- Sources of inputs for other

information subsystems,
such as inventory control.
 Financial Reporting System

- its purpose is to assist the management in its

responsibility to provide information to external
parties (reporting obligation)
- Financial reporting is mandatory
POTENTIAL RISKS POSSIBLE SOLUTIONS

1. A defective audit trail. 1. Transaction Authorization

2. Unauthorized access to the 2. Segregation of Duties
general ledger. 3. Access Controls
3. General ledger accounts 4. Accounting Records
that are out of balance with 5. Independent Verification
subsidiary accounts.
4. Incorrect general ledger
account balances because of
unauthorized or incorrect
journal vouchers.
 Management Reporting
System
- often called discretionary reporting because it is not mandated as is
financial reporting. However, as an exception, it is mandated if covered
by SOX.
- provides the internal financial information needed to manage a
business.
- directs management’s attention to problems on a timely basis
- promotes effective management and thus supports the organization’s
business objectives
COMMON PRINCIPLES THAT INFLUENCE
MANGEMENT REPORTING SYSTEM
1.Formalization of Task
2.Responsibility and Authority
3.Span of Control
4.Management by Exception
 Information System Models
What is Information System?

- set of formal procedures by which data are collected,

processed into information, and distributed to users.
 Information System Objectives (for internal
users)
1.To support the stewardship function of
management.
2.To support management decision making.
3.To support the firm’s day-to-day operations
Acquisition of Information Systems
How?
 through in-house systems development
1.Turnkey systems
2.Backbone systems
3.Vendor-supported systems
 by purchase of preprogrammed
commercial systems from software
vendors.
Information System Models
1.The Manual Process Model
2.The Flat-File Model
3.The Database Model
4.The REA Model
5.The Enterprise Resource Planning
Systems
The Manual Process Model

• the oldest and most traditional form of

accounting systems.
• constitute the physical events, resources,
and personnel that characterize many
business processes.
• also includes the physical task of record
keeping.
• is used to teach the principles of
accounting to business students (a training
aid).
 Flat-File Model

• most often associated with so-called

legacy systems.
• environment in which individual data files
are not related to other files
• end users in this environment own their
data files rather than share them with
other users.
• stand-alone applications rather than
integrated systems perform data
processing.
•
 Problems associated with Flat-File Model
1.data storage*
2.data updating*
3.currency of information*
4.task-data dependency
5.flat files limit data integration
Database Model

• centralizes the organization’s data into a common

database that is shared by other users.
• “traditional”
• Problem: “Control”
• Solution: Database Management System
Four Primary Elements of a Database Management
1.Users
2.Database Management System
3.Database Administrator
4.Physical Database

Database Management System

provides a controlled environment to assist (or prevent)
user access to the database and to efficiently manage the
data resource.
The most important feature of a DBMS is to permit
authorized user access to the database.
3 Software Modules that Facilitate Database Access

1 Data definition language

 Internal View
 Conceptual View (Schema)
 User View (Subschema)
2 Data manipulation language
3 Query language
Flat-File vs. Database

Users have two ways to access the database:

- user application program
- direct query
REA Model

• an accounting framework for modeling an organization’s critical

resources, events, and agents (REA) and the relationships
between them.
• “relational”

Elements of a REA Model

R - the assets of the organization. (ex. cash)
E - phenomena that affect changes in resources. (ex. receive cash)
A - individuals and departments that participate in an economic
event. (ex. customer)
 Steps in the Process Involved in REA
Modeling
1. Identify the event entities.
2. Identify the resource entities.
3. Identify the agent entities.
4. Determine associations and cardinalities
between entities.

Association is the nature of the relationship

between two entities, as the labeled line
connecting them represents.

Cardinality (the degree of association between

Cardinality
One

Many

One (and only one)

Zero or one

One or many

Zero or many
Primary Key vs. Foreign Key vs. Attributes
Enterprise Resource Planning Systems

• an information system model that enables an organization

to automate and integrate its key business processes.
• facilitating data sharing, information flows, and the
introduction of common business practices among all
organizational users.
• massive and complex.
• one system that serves everyone
• “relational”
Client-server
• Most ERP systems are based on the client-server model

client-server model
 is a form of network topology in which a user’s computer or terminal (the client)
accesses the ERP programs and data via a host computer called the server.
 one of the 5 basic network topologies

network topology is the physical arrangement of the components (for example,

nodes, servers, communications links, and so on) of the network.
server is a special-purpose computer that manages common resources such as
programs, data, and printers
Two basic architectures of client-server
1.Two-Tier Model - the server handles both application and
database duties.

2.Three-Tier Model - the database and application functions

are separated
OLTP Versus OLAP Servers (ERP Core
Applications)
1. Online analytical processing (OLAP) - includes decision support, modeling,
information retrieval, ad hoc reporting/analysis, and what-if analysis

2. Online transaction processing (OLTP) - those applications that operationally

support the day-to-day activities of the business. If these applications fail, so
does the business. Typical core applications include, but are not limited to,
sales and distribution, business planning, production planning, shop floor
control, and logistics; also called core applications.
 OLTP OLAP
support mission-critical support management-
tasks through simple critical tasks through
queries of operational analytical investigation of
databases. complex data associations
that are captured in data
warehouses.
concentrate on reliability support common analytical
and transaction processing operations including
speed, instead of decision consolidation, drill-down,
support need. and slicing and dicing.
Advantages
 support a smooth and seamless flow of information across the organization by providing a
standardized environment for a firm’s business processes and a common operational database
that supports communications.
 supplies management with real-time information and permits timely decisions that are
needed to improve performance and achieve competitive advantage.

Disadvantages/Issues
 cultural problems within the firm that stand in opposition to the objective of process
reengineering.
 choosing the wrong ERP
 finding a good functionality fit
 system scalability issue
 choosing the wrong consultant
 high cost and cost overrun
 disruptions to operations

Scalability is the system’s ability to grow smoothly and economically as user requirements
increase.
 Electronic Commerce Systems
• involves the electronic processing and transmission of data.

Three aspects of electronic commerce:

1. the intra-organizational use of networks to support distributed data
processing
2. business-to-business transactions conducted via Electronic Data
Interchange (EDI) systems
3. Internet-based commerce including business-to-consumer and business-to-
business relationships.
Some Benefits from Internet Commerce

• Access to a worldwide customer and/or supplier base.

• Reductions in inventory investment and carrying costs.
• The rapid creation of business partnerships to fill market
niches as they emerge.
• Reductions in retail prices through lower marketing costs.
• Reductions in procurement costs.
• Better customer service.
Risks Associated with Electronic
Commerce
Intranet Risks
 Interception of Network Messages
 Access to Corporate Databases
 Privileged Employees
 Reluctance to Prosecute
Internet Risks
 Risks to Consumers
 Risks to Businesses
Security, Assurance, Trust
Assurance techniques that promote trust in electronic
commerce:
 Encryption - the conversion of data into a secret code for
storage in databases and transmission over networks.
 Digital Authentication - through digital signature and/or
digital certificate
 Firewalls - a system used to insulate an organization’s
intranet from the Internet.
 Seals of Assurance - a number of trusted third-party
organizations are offering seals of assurance that businesses
can display on their website home pages.
Implications for the Accounting Profession

Privacy Violation - The growing reliance on Internet technologies for conducting business has placed the
spotlight on privacy violation as a factor that is detrimental to a client entity. In response to this threat, several
firms have developed assurance services for evaluating their client’s privacy violation risk.
Audit Implications of XBRL - Taxonomy Creation; Validation of Instance Documents; Audit Scope and
Timeframe
Continuous Auditing - continuous auditing techniques need to be developed that will enable the auditor to
review transactions at frequent intervals or as they occur.
Electronic Audit Trails - audit need to be extended to critical systems of all parties involved in the transactions
because of how electronic transactions are relayed across a value-added network (VAN).
Confidentiality of Data - accountants need to understand the cryptographic techniques used to protect the
confidentiality of stored and transmitted data.
Authentication - accountants must develop the skill set needed to understand digital signatures and digital
certificate and their application
Nonrepudiation - accountants are responsible for assessing the accuracy, completeness, and validity of
transactions
Data Integrity - accountants must become familiar with the concept of computing a digest of a document and the
role of digital signatures in data transmissions.
Access Controls - need to be expert in assessing clients’ access controls
A Changing Legal Environment - the public accountant must understand the potential legal implications (both
domestic and international) of transactions that the client’s electronic commerce system processes.
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