Module 2

Accounting Information System • Journals - a record of chronological entry

A Financial Transaction is... ● special journals - specific classes of
an economic event that affects the assets and transactions that occur in high frequency
equities of the firm, reflected in its accounts, and ● general journal - nonrecurring,
is measured in monetary terms. infrequent, and dissimilar transactions

similar types of transactions are grouped • Ledger - a book of financial accounts

together into three transaction cycle:
● general ledger - shows activity for each
● the expenditure cycle, account listed on the chart of accounts
● the conversion cycle, and ● subsidiary ledger - shows activity by
● the revenue cycle. detail for each account type

Each Cycle has Two Subsystems Computer-Based Systems

• Expenditure Cycle: time lag between the two • The audit trail is less observable in
due to credit relations with suppliers: computer-based systems than traditional manual
● physical component (acquisition of systems.
goods) • The data entry and computer programs are the
● financial component (cash physical trail.
disbursements to the supplier) • The data are stored in magnetic files.

• Conversion Cycle: Cardinalities...represents the numerical mapping

● the production system (planning, between entities:
scheduling, and control of the physical • one-to-one
product through the manufacturing • one-to-many
process) • many-to-many
● the cost accounting system (monitors
the flow of cost information related to Computer-Based Accounting Systems
production)
• Two broad classes of systems:
• Revenue Cycle: time lag between the two due • batch systems
to credit relations with customers: • real-time systems
………………..
Batch Processing
Manual System Accounting Records
• A batch is a group of similar transactions that
• Source Documents - used to capture and are accumulated over time and then processed
formalize transaction data needed for together.
transaction processing • The transactions must be independent of one
another during the time period over which the
• Product Documents - the result of transaction transactions are accumulated in order for batch
processing processing to be appropriate.
• A time lag exists between the event and the
• Turnaround Documents - a product document processing.
of one system that becomes a source document
for another system
Steps in Batch Processing/Sequential File Database Backup Procedures
•Destructive updates leave no backup.
• Keystroke - source documents are transcribed
by clerks to magnetic tape for processing later • To preserve adequate records, backup
procedures must be
• Edit Run - identifies clerical errors in the batch implemented, as shown below:
and places them into an error file
● The master file being updated is copied
• Sort Run - places the transaction file in the as a backup.
same order as the master file using a primary ● A recovery program uses the backup to
key create a pre- update version of the
master file.
• Update Run - changes the value of appropriate
fields in the master file to reflect the transaction
Computer Files
• Backup Procedure - the original master
• Master File - generally contains account data
continues to exist and a new master file is (e.g., general ledger and subsidiary file)
created
• Transaction File - a temporary file containing
Advantages of Batch Processing transactions since the last update

• Organizations can increase efficiency by • Reference File - contains relatively constant

grouping large numbers of transactions into information used in processing (e.g., tax tables,
batches rather than processing each event customer addresses)
separately.
• Batch processing provides control over the • Archive File - contains past transactions for
transaction process via control figures. reference purpose.

Real-Time Systems... Module 3

• process transactions individually at the Business Ethics
moment the economic event occurs Why should we be concerned about ethics in the
business world?
• have no time lag between the economic event
and the processing • Ethics are needed when conflicts arise-the
need to choose
• generally require greater resources than batch
processing since they require dedicated • In business, conflicts may arise between:
processing capacity; however, these cost
differentials are decreasing ● Employees
● Management
• oftentimes have longer systems development ● stakeholders
time • Litigation
Four Main Areas of Business Ethics ■ Equity in access
Ethical Issues in Business ■ Environmental issues
■ Artificial intelligence
*Equity ■ Unemployment and displacement
● Executive Salaries ■ Misuse of computer
● Comparable Worth
● Product Pricing Legal Definition of Fraud
• False representation - false statement or
*Rights disclosure
● Corporate Due Process • Material fact - a fact must be substantial in
● Employee Health Screening inducing someone to act
● Employee Privacy • Intent to deceive must exist
● Sexual Harassment • The misrepresentation must have resulted in
● Diversity justifiable reliance upon information, which
● Equal Employment Opportunity caused someone to act
● Whistle-Blowing • The misrepresentation must have caused
injury or loss

*Honesty 2004 ACFE Study of Fraud

● Employee and Management Conflicts • Loss due to fraud equal to 6% of revenues-
of Interest approximately $660 billion
● Security of Organization Data and • Loss by position within the company:
Records
● Misleading Advertising Position Percent of Frauds Loss
● Questionable Business Practices in Owner/Executive 12 900,000
Foreign Countries Manager 34 140,000
● Accurate Reporting of Shareholder Employee 68 62,000
Interests
• Other results: higher losses due to men,
employees acting in collusion, and employees
*Exercise of Corporate Power with advance degrees
● Political Action Committees
● Workplace Safety Enron, WorldCom, Adelphia Underlying
● Product Safety Problems
● Environmental IssueS
● Divestment of Interests • Lack of Auditor Independence: auditing firms
● Corporate Political Contributions also engaged by their clients to perform non
Downsizing and Plant Closures accounting activities
• Lack of Director Independence: directors who
also serve on the boards of other companies,
concerns the social impact of computer
have a business trading relationship, have a
technology (hardware, software, and
financial relationship as stockholders or have
telecommunications).
received personal loans, or have an operational
relationship as employees
The main computer ethics issues
• Questionable Executive Compensation
Schemes: short-term stock options as
■ Privacy
compensation result in short-term strategies
■ Security-accuracy and confidentiality
aimed at driving up stock prices at the expense
■ Ownership of property
of the firm's long-term health.
 B. Corruption
• Inappropriate Accounting Practices: a Examples:
characteristic common to many financial ● Bribery
statement fraud schemes. ● illegal gratuities
● conflicts of interest
● Enron made elaborate use of special ● economic extortion
purpose entities
● WorldCom transferred transmission line Foreign Corrupt Practice Act of 1977:
costs from current expense accounts to • indicative of corruption in business world
capital accounts • impacted accounting by requiring accurate
records and internal controls
Employee Fraud
C. Asset Misappropriation
• Committed by non-management personnel • Most common type of fraud and often occurs
• Usually consists of: an employee taking cash as employee fraud
or other assets for personal gain by
Examples:
circumventing a company's system of internal
controls ● making charges to expense accounts to
cover theft of asset (especially cash)
● lapping: using customer's check from
Management Fraud
one account to cover theft from a
different account
• Perpetrated at levels of management above
● transaction fraud: deleting, altering, or
the one to which internal control structure relates
adding false transactions to steal assets
• Frequently involves using financial statements
to create an illusion that an entity is more
Data Collection Fraud
healthy and prosperous than it actually is
• Involves misappropriation of assets, it
• This aspect of the system is the most
frequently is shrouded in a maze of complex
vulnerable because it is relatively easy to
business transactions
change data as it is being entered into the
system.
Fraud Schemes
• Also, the GIGO (garbage in, garbage out)
principle reminds us that if the input data is
Three categories of fraud schemes according to
inaccurate, processing will result in inaccurate
the Association of Certified Fraud Examiners:
output.
A. fraudulent statements
B. corruption
Information Generation Fraud
C. asset misappropriation

Stealing, misdirecting, or misusing computer

A. Fraudulent Statements
output
• Misstating the financial statements to make the
copy appear better than it is
Scavenging
• Usually occurs as management fraud
● searching through the trash cans on the
• May be tied to focus on short-term financial
computer center for discarded output
measures for success
(the output should be shredded, but
• May also be related to management bonus
frequently is not)
packages being tied to financial statements
Internal Control Objectives According to AICPA Physical Controls
SAS Transaction Authorization
• used to ensure that employees are carrying out
1. Safeguard assets of the firm only authorized transactions
2. Ensure accuracy and reliability of accounting • general (everyday procedures) or specific
records and information (non- routine transactions) authorizations
3. Promote efficiency of the firm's operations
4. Measure compliance with management's Segregation of Duties
prescribed policies and procedures • In manual systems, separation between:
● authorizing and processing a
Modifying Assumptions to the Internal Control transaction
Objectives ● custody and recordkeeping of the asset
● subtasks
• Management Responsibility • In computerized systems, separation between:
The establishment and maintenance of a system ● program coding
of internal control is the responsibility of ● program processing
management. ● program maintenance

• Reasonable Assurance Supervision

The cost of achieving the objectives of internal • a compensation for lack of segregation; some
control should not outweigh its benefits. may be built into computer systems

• Methods of Data Processing Accounting Records

The techniques of achieving the objectives will • provide an audit trail
vary with different types of technology.
Access Controls
Limitations of Internal Controls • help to safeguard assets by restricting physical
• Possibility of honest errors access to them
• Circumvention via collusion
• Management override Independent Verification
• Changing conditions--especially in companies • reviewing batch totals or reconciling subsidiary
with high growth accounts with control accounts

Exposures of Weak Internal Controls (Risk) Physical Controls in IT Contexts

• Destruction of an asset
• Theft of an asset Segregation of Duties
• Corruption of information • A computer program may perform many tasks
• Disruption of the information system that are deemed incompatible.
• Thus the crucial need to separate program
Six Types of Physical Controls development, program operations, and program
• Transaction Authorization maintenance.
• Segregation of Duties
• Supervision
• Accounting Records
• Access Control
• Independent Verification