CHAPTER 1: OVERVIEW OF AIS  Auditors need to evaluate the

accuracy and reliability of information

Data vs. Information produced by the AIS.
 Tax accountants must understand
the client’s AIS adequately to be
confident that it is providing complete
and accurate information for tax
planning and compliance work.
 In management consulting, the
design, selection, and implementation
of accounting systems is a rapid
growth area.
 In private industry and not-for-
profits, systems work is considered
the most important activity performed
The Information System
by accountants.
3. The AIS course complements
other systems courses.
 Other systems courses focus on
design and implementation of
information systems, databases,
expert systems, and
telecommunications.
 AIS courses focus on accountability
and control.
Accounting Information System 4. AIS topics are tested on the new
- a unified structure that employ CPA exam.
physical resources and components to  Makes up about 25% of the Business
transform economic data into Environment & Concepts section of
accounting information for external the CPA exam.
and internal users. 5. AIS topics impact corporate
strategy and culture.
Why Study Accounting Information
Systems? 6 Components of AIS
1. It’s fundamental to accounting. 1. People
 Accounting is an information-providing 2. Procedure
activity, so accountants need to 3. Security
understand: 4. Data
- How the system that provides that 5. Information Technology
information is designed, implemented 6. Software
and used.
- How financial information is reported Business Functions of AIS
- How information is used to make
- Collect and store data about
decisions
organizational activities, resources
 Other accounting courses focus on
and personnel.
how the information is provided and
- Transform data into information that
used.
is useful for making decisions.
 An AIS course places greater
- Provide adequate controls to
emphasis on:
safeguard the organization’s asset, to
- How the data is collected and
ensure that the assets and data are
transformed
available when needed and the data
- How the availability, reliability, and
are accurate and reliable.
accuracy of the data is ensured
 AIS courses are not number-crunching Value Chain
courses
2. The skills are critical to career
success.
 Basic Business Strategies

Product differentiation strategy

- Adding features or services to

charge customer a premium price

Low-cost strategy

- Striving to be the most efficient

producer of a product and service

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Role of the AIS in the Value Chain
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-

CHAPTER 2: BUSINESS PROCESSES

Information Needs and Business

Activities

Businesses engage in a variety of

activities, including:

 Acquiring capital
 Buying buildings and equipment
 Hiring and training employees
 Purchasing inventory
 Doing advertising and marketing
 Selling goods or services
 Collecting payment from customers
 Paying employees
 Paying taxes
 Paying vendors

An effective AIS needs to be able to

integrate information of different types
(financial or non-financial) and from
different sources (internal or external)
Decision Structure and Scope
Interaction with External and
Internal Parties

The AIS and Corporate Strategy Business Cycles

 Corporations have: A transaction is:

- Unlimited opportunities to invest in
- An agreement between two entities to
technology
exchange goods or services; OR
- Limited resources to invest in
- Any other event that can be measured
technology
in economic terms by an organization.
 Must identify the improvements likely
to yield the highest return. Examples:
 This decision requires an
understanding of the entity’s overall - Sell goods to customers
business strategy. - Depreciate equipment
The transaction cycle is a process: 1. Data Input - Any data or instructions
you enter into a computer.
- Begins with capturing data about a  The first step in data processing is to
transaction capture the data.
- Ends with an information output, such  Usually triggered by a business
as financial statements activity.
 Data is captured about:
 Many business activities are paired in - The event that occurred
give-get exchanges - The resources affected by the
 The basic exchanges can be grouped event
into five major transaction cycles. - The agents who participated
1. Revenue cycle  A number of actions can be taken to
- The revenue cycle involves improve the accuracy and efficiency
interactions with your customers. of data input:
- You sell goods or services and get - Turnaround documents
cash. o EXAMPLE: The stub on your
- Give Goods – Get Cash telephone bill that you tear
2. Expenditure cycle off and return with your
- The expenditure cycle involves check when you pay the bill.
interactions with your suppliers. o The customer account
- You buy goods or services and pay number is coded on the
cash. document, usually in
- Give Cash – Get Goods machine-readable form,
which reduces the probability
3. Production cycle
of human error in applying
- In the production cycle, raw materials
the check to the correct
and labor are transformed into
account.
finished goods.
- Source data automation
- Give Raw Materials & Labor – Get
o Capture data with minimal
Finished Goods
human intervention.
4. Human resources/payroll cycle EXAMPLES:
- The human resources cycle involves o ATMs for banking
interactions with your employees. o Point-of-sale (POS) scanners
- Employees are hired, trained, paid, in retail stores
evaluated, promoted, and terminated. o Automated gas pumps that
- Give Cash – Get Labor accept your credit card
5. Financing cycle - Well-designed source
- The financing cycle involves documents and data entry
interactions with investors and screens
creditors. - Using pre-numbered
- You raise capital (through stock or documents or having the
debt), repay the capital, and pay a system automatically assign
return on it (interest or dividends). sequential numbers to
- Give Cash – Get Cash transactions

The Data Processing 2. Data Process - Manipulate the input

(data) to produce output
 An important function of the AIS is to
(information).
efficiently and effectively process the
 Updating data to record the
data about a company’s transactions.
occurrence of an event, the resources
- In manual systems, data is
affected by the event, and the agents
entered into paper journals and
who participated, e.g., recording a
ledgers.
sale to a customer.
- In computer-based systems, the
 Changing data, e.g., a customer
series of operations performed on
address
data is referred to as the data
 Adding data, e.g., a new customer.
processing cycle.
 Deleting data, e.g., removing an old
The data processing cycle consists of customer that has not purchased
four steps: anything in 5 years.
Updating can be done through several Output can serve a variety of purposes:
approaches:
- Financial statements can be provided
 Batch processing to both external and internal parties.
- Source documents are grouped into
batches, and control totals are Some outputs are specifically for internal
calculated. use:
- Periodically, the batches are entered  For planning purposes
into the computer system, edited, - Budgets: an entity’s formal expression
sorted, and stored in a temporary file. of goals in financial terms
- The temporary transaction file is run - Sales forecasts
against the master file to update the  For management of day-to-day
master file. operations
- Output is printed or displayed, with  For control purposes
error reports, transaction reports, and - Performance reports are outputs that
control totals. are used for control purposes.
 On-line batch processing - These reports compare an
- Transactions are entered into a organization’s standard or expected
computer system as they occur and performance with its actual outcomes.
stored in a temporary file. - Management by exception is an
- Periodically, the temporary approach to utilizing performance
transaction file is run against the reports that focuses on investigating
master file to update the master file. and acting on only those variances
- The output is printed or displayed. that are significant.
 On-line, Real-time Processing  For evaluation purposes
- Transactions are entered into a
computer system as they occur. Behavioral implications of managerial
- The master file is immediately reports:
updated with the data from the
transaction. - You get what you measure
- Output is printed or displayed.
 Suppose an instructor wants to
3. Information Output - Data that has improve student learning.
been processed into information. - He decides to encourage better
attendance by grading students on
This output can be in the form of: attendance (i.e., measuring it).
- The result will be better student
 Documents attendance, i.e., you get what you
- Documents are records of measure.
transactions or other company data. - The improved attendance may or may
- Documents generated at the end of not improve learning outcomes.
the transaction processing activities - Students may be getting better
are known as operational documents grades when attendance is measured,
(as opposed to source documents). but not learning more.
 Reports - Some students may in fact reduce
- Reports are used by employees to their studying because they believe
control operational activities and by they can use the attendance score to
managers to make decisions and boost their grade. This behavior
design strategies. would be a dysfunctional result of the
- They may be produced on a regular measurement.
basis, on an exception basis or on
demand  Budgets can cause dysfunctional
- Organizations should periodically behavior.
reassess whether each report is - EXAMPLE: In order to stay within
needed. budget, the IT Department did not buy
 Queries a security package for its system.
- Queries are user requests for specific - A hacker broke in and devastated
pieces of information. some of their data files.
- They may be requested periodically or - Critical security measures were
one time foregone in order to meet budgetary
- They can be displayed on monitor goals.
(softcopy) or on screen (hardcopy)
- The resulting costs far outweighed the - The accounts receivable subsidiary
savings. ledger will contain three separate t-
accounts—one for Anthony Adams,
 Budgeting can also be dysfunctional in one for Bill Brown, and one for Cory
that the focus can be redirected to Campbell.
creating acceptable numbers instead - The related general ledger account is
of achieving organizational objectives. often called a “control” account.
 The saying goes, “Not many people sit - The sum of the subsidiary account
around and have a roast goose fall in balances should equal the balance in
their lap.” the control account.
 In other words, if you want a roast 4. Coding Techniques
goose, you have to aim. - Coding is a method of systematically
 With financial results, you’re also assigning numbers or letters to data
unlikely to achieve when you don’t items to help classify and organize
aim. them.
 Just be careful where you aim. - There are many types of codes
including sequence code, block codes,
4. Data Storage - Area in a computer and group codes.
that can hold data and information for - Group coding schemes are often used
future use. in assigning general ledger account
 Data needs to be organized for easy numbers.
and efficient access.
5. Chart of Accounts
1. Ledger - The chart of accounts is a list of all
- A ledger is a file used to store general ledger accounts an
cumulative information about organization uses.
resources and agents. - The structure of this chart is an
- We typically use the word ledger to important AIS issue, as it must contain
describe the set of t-accounts. The t- sufficient detail to meet the
account is where we keep track of the organization’s needs.
beginning balance, increases,
decreases, and ending balance for 6. Journals
each asset, liability, owners’ equity, - In manual systems and some
revenue, expense, gain, loss, and accounting packages, the first place
dividend account. that transactions are entered is the
journal.
7. Audit Trail
- An audit trail exists when there is
sufficient documentation to allow the
tracing of a transaction from
beginning to end or from the end back
to the beginning.
- The inclusion of posting references
2. General Ledger and document numbers enable the
- The general ledger is the summary tracing of transactions through the
level information for all accounts. journals and ledgers and therefore
Detail information is not kept in this facilitate the audit trail.
account.
- Example: Suppose XYZ Co. has three  When transaction data is captured on
customers. Anthony Adams owes XYZ a source document, the next step is to
$100. Bill Brown owes $200. And record the data in a journal.
Cory Campbell owes XYZ $300. The  A journal entry is made for each
balance in accounts receivable in the transaction showing the accounts and
general ledger will be $600, but you amounts to be credited.
will not be able to tell how much  Entries are originally made in the
individual customers owe by looking general journal only for
at that account. The detail isn’t there. - Non-routine transactions.
- Summaries of routine transactions
3. Subsidiary Ledger
 Routine transactions are originally
- The subsidiary ledgers contain the
entered in special journals. The most
detail accounts associated with the
common special journals are:
related general ledger account.
 - Credit sales - What are some other attributes about
- Cash receipts students that a university might
- Credit purchases store?
- Cash disbursements  Field
- A field is the physical space where an
 When routine transactions occur, they attribute is stored.
are recorded in special journals. - The space where the student ID
 When non-routine transactions occur, number is stored is the student ID
they are recorded in the general field.
journal.
 Periodically, the transactions in the
special journal are totaled, and a
summary entry is made in the general
journal.
 The individual line items in the special
journal are posted to the subsidiary
 Record
ledger accounts.
- A record is the set of attributes stored
 The items in the general journal are
for a particular instance of an entity.
posted to the general ledger.
- The combination of attributes stored
 Periodically, the balances in the
for Barry Andrews is Barry’s record.
general ledger control accounts are
compared to the sums of the balances
in the related subsidiary accounts.

Using the balances in the general ledger,

prepare a trial balance.
 Prepare the end-of-period adjusting
entries.  Data Value
 Make an adjusted trial balance. - A data value is the intersection of the
 Using the numbers in the adjusted row and column.
trial balance, prepare an income - The data value for Barry Andrews’
statement. phone number is 405-744-0236.
 Prepare closing entries.
 Prepare:
- Statement of stockholders’ equity
- Balance sheet
- Statement of cash flows

Computer-Based Storage Concepts

 File
 Entity - A file is a group of related records.
- An entity is something about which - The collection of records about all
information is stored. students at the university might be
- In your university’s student called the student file. If there were
information system, one entity is the only three students and four attributes
student. The student information stored for each student, the file might
system stores information about appear as shown below:
students.
- What are some other entities in your
student information system?
 Attribute
- Attributes are characteristics of
interest with respect to the entity.
- Some attributes that a student  Master File
information system typically stores - A master file is a file that stores
about the student entity are: cumulative information about an
- Student ID number organization’s entities.
- Phone number - It is conceptually similar to a ledger in
- Address a manual AIS in that:
- The file is permanent
 - The file exists across fiscal periods - Program flowcharts describe the
- Changes are made to the file to sequence of logical operations
reflect the effects of new performed in a computer program.
transactions.  Diagrams
 Transaction File - Graphical descriptions of the
- A transaction file is a file that contains sources and destinations of data.
records of individual transactions They show:
(events) that occur during a fiscal - Where data comes from
period. - How it flows
- It is conceptually similar to a journal in - The processes performed on it
manual AIS in that: - Where it goes
- The files are temporary  Other written materials
- The files are usually maintained for
one fiscal period Data Flow Diagrams
 Database - A data flow diagram (DFD) graphically
- A database is a set of interrelated, describes the flow of data within an
centrally-coordinated files. organization. It is used to:
- When files about students are - Document existing systems
integrated with files about classes and - Plan and design new systems
files about instructors, we have a - There is no black-and-white approach
database. to developing a DFD.

Role of the AIS

- The traditional AIS captured financial

data.
- Non-financial data was captured in A data flow diagram consists of four
other, sometimes-redundant systems basic elements:
- Enterprise resource planning
(ERP) systems are designed to  Data sources and destinations
integrate all aspects of a company’s - Data sources and destinations
operations (including both financial - Appear as squares
and non-financial information) with - Represent organizations or
the traditional functions of AIS. individuals that send or receive
data used or produced by the
---------------------------------------------------------- system
---------------------------------------------------------- - An item can be both a source and a
- destination
CHAPTER 3: SYSTEMS DEVELOPMENT
 Data flows
AND DOCUMENTATION TECHNIQUES
- Appear as arrows
Types of Documentation Tools - Represent the flow of data between
sources and destinations, processes,
 Narrative (written description) and data stores.
 Flowcharts
- Document flowcharts describe
the flow of documents and
information between departments
or units.
- System flowcharts describe the
relationship between inputs,
processing, and outputs for a
system.
 Rules in Data Flow Diagrams

1. Understand the system. Observe the

flow of information and interview
people involved to gain that
understanding.
2. Ignore control processes and control
actions (e.g., error corrections). Only
very critical error paths should be
included.
3. Determine the system boundaries—
where it starts and stops. If you’re
not sure about a process, include it for
the time being.
4. Draw the context diagram first, and
then draw successively greater levels
of detail.
5. Identify and label all data flows. The
- Transformation processes only ones that do not have to be
- Appear as circles labeled are those that go into or come
- Represent the transformation of data out of data stores.
6. Data flows that always flow together
 Data stores should be grouped together. Those
- Appear as two horizontal lines that do not flow together should be
- Represent a temporary or permanent shown on separate lines.
repository of data 7. Show a process (circle) wherever a
data flow is converted from one form
Subdividing the DFD to another. Every process should
have at least one incoming data flow
- The highest level of DFD is called a and at least one outgoing data flow.
context diagram. 8. Transformation processes that are
- It provides a summary-level view of logically related or occur
the system. simultaneously can be grouped in one
- It depicts a data processing system bubble.
and the external entities that are: 9. Number each process sequentially. A
- Sources of its input process labeled 5.0 would be
- Destinations of its output exploded at the next level into
processes numbered 5.1, 5.2, etc.
10. Process names should include
action verbs, such as update, prepare,
etc.
11. Identify and label all data stores,
whether temporary or permanent.
12. Identify and label all sources and
destinations. An entity can be both a
source and destination. You may wish
to include such items twice on the
diagram, if needed, to avoid excessive
or crossing lines.
13. As much as possible, organize the
flow from top to bottom and left to
right.
14. You’re not likely to get it beautiful
the first time, so plan to go through
several iterations of refinements.
15. On the final copy, lines should not
cross. On each page, include: The
name of the DFD, The date prepared,
The preparer’s name

Keep the following in mind as you

develop your DFD:

 Remember to ignore control activities,

such as error correction processes.
 Some data inputs and outputs will not
appear on the first level of the DFD
but appear as the processes are
exploded into greater levels of detail.
 The data flow diagram focuses on the
logical flow of data.