Chapter 1The Information System: An Accountants PerspectiveAccounting Information Systems

Objectives for Chapter 1Primary information flows within the business environmentAccounting information systems and management information systemsThe general model for information systemsFinancial transactions from non-financial transactionsThe functional areas of a businessTwo main stages in the evolution of information systemsThree roles of accountants in an information system

Internal & External Information Flows

Internal Information FlowsHorizontal flows of information used primarily at the operations level to capture transaction and operations dataVertical flows of informationdownward flows instructions, quotas, and budgetsupward flows aggregated transaction and operations data

Information RequirementsEach user group has unique information requirements.The higher the level of the organization, the greater the need for more aggregated information and less need for detail.

Information in BusinessInformation is a business resource that:needs to be appropriately managedis vital to the survival of contemporary businesses

Users of AIS and their needs and demandINTERNAL USERSManagement They use the information for planning that is the development of short term and long term plansSupervisorsControlling activities that involve motivating employees and evaluation of people and other resources within the organisation

Internal users3.Internal auditorsThey use the information that enables to access operational and internal controls .4 employees They use the information in order to carryout their daily duties.

External users Tax accountants must understand the clients AIS adequately to be confident that it is providing complete and accurate information for tax planning and compliance work.Potential investorsThey want information that will enable them to access the feasibility of investing their funds in a particular entity or to withdraw their funds and invest it else where. Information can be obtained from the SOFP, SOCI and SOCE

External usersCreditorsThey want to access the ability of the company to settle its debts.Debtors They are mainly concerned about the going concern of a companyThis will assure them if the company is able to supply them with raw materials in the future(continued business).

What is a System?A group of interrelated multiple components or subsystems that serve a common purposeSystem or subsystem?A system is called a subsystem when it is viewed as a component of a larger system.A subsystem is considered a system when it is the focus of attention.

THREE MAIN CHARACTERISTICS OF A SYSTEM

Component parts/ tangible features .These imply structure and order. The components are arranged to help achieve objectives for example a computer system is designed around an input device, a central processing unit, an output device and one or more storage units. When linked together they work as a whole system to produce information.

CHARACTERISTICS OF A SYSTEM CONTINUEProcess.This is whereby the component parts co-ordinate in a defined way. Process refers to the manner in which each components function with other components of the system.For example, in a computer system the CPU must interact with the input device to solve a problem, in turn the main memory holds the program and data that the arithmetic unit uses for computation.This means that the parts of the system depend on each other and they are coordinate and linked together according to plan.

CHARACTERISTICS OF A SYSTEM CONTINUEDGoalThese are the objectives which the components parts are coordinated. The objectives may be real or stated. In most organizations, they state an objective and operate to achieve it.

WHAT ARE SUB-SYSTEMS AND SUPER SYSTEMS.

Sub-system.A subsystem is a system that exists in another system; its existence depends upon the existence of a super system. A sub system contributes to the proper working of the entire systemFor example, an auto mobile system consists of many sub-systems like acceleration system, fuel injection system and the braking system. Every sub-system is responsible for the proper functioning of the entire auto mobile system.

Super system

A super system is a system responsible for monitoring the overall working of its sub-systems therefore it contains many sub-systems. It decides the constraints and resources to be put on its sub-systems.For example; the central government system which has the state government under its control which form the sub-system.

Why should an accountant be knowledgeable about these systems?

Enables the accountant to navigate suitable system software; the knowledge will enable the accountant to confirm and record actual business transaction, describe economic events, perform activities timely and sufficiently, sort the economic property in the financial reports.

2. Enables accountants; to access the barriers for implementation of financial control of owners connectivity with financial managers. The accountant will seek ways to improve and reach maximum operations if he reviews that the sub-system and super systems and becoming obsolete.

3. Enables the accountant; to evaluate the business performance correctly and predict the prospects of the enterprise. 4. Analysis of systems theory and corporate financial control; knowing the characteristics of systems and there organic in nature, an accountant can promote the smooth development of corporate financial activities.

System Decomposition versus System InterdependencySystem Decomposition the process of dividing the system into smaller subsystem partsSystem Interdependency distinct parts are not self-contained they are reliant upon the functioning of the other parts of the system all distinct parts must be functioning or the system will fail

BOUNDARIES AND INTERFACES IN A SYSTEM

Boundaries A boundary is anything marking a limit thatseparate the internal components of a systemfrom external entities. Boundaries can beclassified in to two, permeable andimpermeable boundaries.

BoundariesPermeable boundaries allow a certain degree of interactions between the system and its environment for example relatively closed system. Impermeable boundaries do not allow interactions between the system and its environment for example closed systems.

Interfaces An interface is a shared boundary or connection between two similar systems through which information is passed; the information can be either physical or logical.

It is necessary to create boundaries and interfaces;

To enable efficiency allocation of resources to each sub-system. To make it easier for accountants and auditors to review on the effectiveness of internal controls.

It is necessary to create boundaries and interfaces;To enable the achievement of almost every characteristic of a successful system since the components parts, processes and goals will be established against each boundary.Boundaries simplify the process of organizing subsystems so as to reduce the number of interconnections, which is a potential interface for communication among sub-systems.

Characteristics of a systemCorrect and reliable informationTimely informationUser satisfactionSatisfy the organizations needsa)currentb)FutureAdopt to technological changes Reasonable time for development

Correct and reliable informationimplement adequate internal controls1)through segregation of duties2)use of confirmations and inquiries3)independent verification that is to check to assess if the information produced is correct-maintenance, servings and reviewing of the system at intervals-Correct procedures of recording transactions

Timely informationChose a processing method suitable to users needs. For example use of online processing method as it processes transactions at the moment the event occurs

User satisfaction-user input in setting policies-user support for project-activate user participation in project-user responsibility for the system-training programs to familiarize the user with the new system

Satisfy the organizations needs

a)currentGetting steering committee approval for new system development

b)futureHave a long range system master plan this governs the objectives of the organization.

Adopt to technological changes

higher creative and innovative employeeshave systems analyst and expertise responsible for research and development. For example pastel use can easily change from version 8 to 17.

Reasonable time for development -properly define the scope of the system-use project management techniques

Different types of systemsClosed SystemRelatively Closed systemOpen SystemFeedback control system

TYPES OF SYSTEMSCLOSED SYSTEMis a system that does not interact with the environmentThere are no interfaces.Has no effects on the outside of its boundaries and the environment has no effects on the process within the system. For example, a watch.

CLOSED SYSTEM

It is a system which maintains itself on a limited amount of resources that are firmly established in that particular system hence being difficult to change it.Such a system is a theoretical concept rather than being a practical concept.

CLOSED SYSTEMEXAMPLECertain departments within an organisation can be set up as closed system.A research and development (R&D) department within a computer organisation may be set up as a closed system with no interaction outside the division.The purpose is to protect trade secretes and invention that are being produced inside.

CLOSED SYSTEMSADVANTAGESThere are no disturbances in the system.It is highly effective and efficient.

CLOSED SYSTEMSLIMITATIONSCan hamper growth since the flow of information stays within the system.Has no chance to interact with or build on knowledge from the outer world.It does not adapt to technological changes.It practically does not exist because it lacks the need for interaction.

RELATIVELY CLOSED SYSTEMRELATIVELY CLOSED SYSTEMIt reacts with its environment in a known and controlled way.The interactions consist of system inputs (if they flow from the environment to the system) and outputs (which are interactions flowing in the opposite direction)The system contains interfaces with the environment and controls the effects of the environment on its process.

RELATIVELY CLOSED SYSTEMRELATIVELY CLOSED SYSTEMIt interacts with its environment in a restricted way that does not eliminate but limits its susceptibility to the environment.For example, labour negotiations can limit the effects of strike.It is semi permeable.

RELATIVELY CLOSED SYSTEMSADVANTAGESAble to meet user needs as they are able to take inputs for development purposes.It is flexible adapts to technological changes. It allows for a reasonable level of sharing and exchange of information.Minimises the impact of disturbances as there are control measures.

RELATIVELY CLOSED SYSTEMSDISADVANTAGESIt is not reliable for it is prone to disturbances from the environment

OPEN SYSTEMIs one in which the systems interaction with the environment is not controlled.Has many interfaces with its environment ,that is ,system that interacts freely with its environment, taking input and returning output.Contains subsystems which help in converting input into output.

OPEN SYSTEMIt permits interactions across its boundary , it receives inputs from and delivers outputs to the outside.System designers anticipate the things that can go wrong in the environment and create processes and interfaces to control them.For example, media and internet.

Have flexible boundaries since it interacts with the environment.Promote effective problem solving.Subsystems help in resolving conflicts as well as allocating resources.

DISADVANTAGESThe system has disturbances of uncontrolled inputs that affect the processed resources within the system.

FEEDBACK CONTROLLED SYSTEMA portion of the system is retained as an input to the system.For example, in accounting system ,revenue output by other goods can be used as capital in costing and variances can be output that can be used in decision making.Designed to provide feedbackUses interfaces to permeate information bottom up and top down.

FEEDBACK CONTROLLED SYSTEMUses the function of a prescribed relationship between the output and reference input to control the process of resources in that system.The difference between the output of the process under control and the reference input is amplified and used to control the process so that the difference is continuously reduced

ADVANTAGESCan be used for decision making.Provide the feedback which help the system to obtain its goals and enhance employee motivation.Provide management with meaningful information on how effective its planning effort was.The effect of unwanted disturbances can be effectively reduced.

DISADVANTAGESThe time the manager may get the information , the damage might already have been done thus making feedback irrelevantIt is expensive to set up and the cost of feedback is first manifested in the increased number of components and the complexity of the system.

What is an Information System? An information system is the set of formal procedures by which data are collected, processed into information, and distributed to users.

TransactionsA transaction is a business event.Financial transactions economic events that affect the assets and equities of the organization e.g., purchase of an airline ticketNonfinancial transactionsall other events processed by the organizations information system e.g., an airline reservation no commitment by the customer

TransactionsFinancial TransactionsNonfinancial TransactionsInformation SystemUser Decision Making

Information

What is Accounting Information Systems?Accounting is an information system.It identifies, collects, processes, and communicates economic information about a firm using a wide variety of technologies.It captures and records the financial effects of the firms transactions.It distributes transaction information to operations personnel to coordinate many key tasks.

AIS versus MISAccounting Information Systems (AIS) process financial transactions; e.g., sale of goods and nonfinancial transactions that directly affect the processing of financial transactions; e.g., addition of newly approved vendorsManagement Information Systems (MIS) process nonfinancial transactions that are not normally processed by traditional AIS; e.g., tracking customer complaints

AIS versus MIS?

Differences between AIS and MISAISMISis concerned about day to day running of the business with subsystems such as Transaction Processing System (TPS). MIS is mainly used for strategic planning which involves identifying a companys long run goal and developing plans for achieving these goals.

Differences between AIS and MISAISMISrecords financial transactions which are economic events that affect assets and equities of a firm and is measured in monetary terms for instance sale of goods to customers cash movements etc.goes beyond AIS in that it records financial transactions and non-financial transactions.

Differences between AIS and MISAISMISprovides information for internal and external use. MIS principally provides information to internal parties.

Differences between AIS and MISAISMIS AIS is used as a tool for short term decision making.It uses historical data.

MIS gives data for long term decision making and control. MIS is futuristic that is decisions are made based on projections.

Differences between AIS and MISAISMIS supports stewardship management with information contained in the financial statements and responsibility report. Information is about how resources are utilised and safeguarded.MIS is used as a yardstick for measuring performance. Managers make future projections and hence actual results are compared with the projections made.

Differences between AIS and MISAISMIS provide information that conforms to Generally Accepted Accounting Principles (GAAP). Albright (2006) goes on to say it is produced in a variety of formats that meet the particular information needs of a companys managers.

AIS SubsystemsTransaction processing system (TPS)supports daily business operationsGeneral Ledger/ Financial Reporting System (GL/FRS)produces financial statements and reportsManagement Reporting System (MRS)produces special-purpose reports for internal use

The General AIS Model

Data SourcesData sources are financial transactions that enter the information system from internal and external sources. External financial transactions are the most common source of data for most organizations.E.g., sale of goods and services, purchase of inventory, receipt of cash, and disbursement of cash (including payroll).Internal financial transactions involve the exchange or movement of resources within the organization. E.g., movement of raw materials into work-in-process (WIP), application of labor and overhead to WIP, transfer of WIP into finished goods inventory, and depreciation of equipment.

Transforming the Data into Information Functions for transforming data into information according to the general AIS model: 1. Data Collection2. Data Processing3. Data Management4. Information Generation

1. Data Collection Capturing transaction dataRecording data onto formsValidating and editing the data

2. Data ProcessingClassifyingTranscribingSortingBatching

MergingCalculatingSummarizingComparing

3. Data ManagementStoringRetrievingDeleting

4. Information GenerationCompilingArrangingFormattingPresenting

Characteristics of Useful InformationRegardless of physical form or technology, useful information has the following characteristics: Relevance: serves a purposeTimeliness: no older than the time period of the action it supportsAccuracy: free from material errorsCompleteness: all information essential to a decision or task is presentSummarization: aggregated in accordance with the users needs

Information System Objectives in a Business ContextThe goal of an information system is to support the stewardship function of managementmanagement decision makingthe firms day-to-day operations

Organizational StructureThe structure of an organization helps to allocate responsibilityauthorityaccountabilitySegmenting by business function is a very common method of organizing.

Functional AreasInventory/Materials Managementpurchasing, receiving and storesProductionproduction planning, quality control, and maintenanceMarketingDistributionPersonnelFinanceAccountingComputer Services

Accounting IndependenceInformation reliability requires accounting independence.Accounting activities must be separate and independent of the functional areas maintaining resources. Accounting supports these functions with information but does not actively participate. Decisions makers in these functions require that such vital information be supplied by an independent source to ensure its integrity.

The Computer Services FunctionCentralized Data ProcessingDistributed DataProcessingMost companies fall in between.All data processingis performed byone or more largecomputers housedat a central sitethat serves users throughout theorganization.

Primary areas:database administrationdata processingsystems developmentsystems maintenanceReorganizing thecomputer services function into small information processingunits that are distributedto end users and placed under their control

Organization of Computer Services Function in a Centralized System

Organizational Structure for a Distributed Processing System

Potential Advantages of DDPCost reductions in hardware and data entry tasksImproved cost control responsibilityImproved user satisfaction since control is closer to the user levelBackup of data can be improved through the use of multiple data storage sites

Potential Disadvantages of DDPLoss of controlMismanagement of company resourcesHardware and software incompatibilityRedundant tasks and dataConsolidating tasks usually segregatedDifficulty attracting qualified personnelLack of standards

Manual Process ModelTransaction processing, information processing, and accounting are physically performed by people, usually using paper documents.Useful to study because:helps link AIS courses to other accounting coursesoften easier to understand business processes when not shrouded in technologyfacilitates understanding internal controls

The Evolution of IS Models: The Flat-File Model

Data Redundancy ProblemsData Storage - excessive storage costs of paper documents and/or magnetic formData Updating - changes or additions must be performed multiple timesCurrency of Information - potential problem of failing to update all affected filesTask-Data Dependency - users inability to obtain additional information as needs changeData Integration - separate files are difficult to integrate across multiple users

The Evolution of IS Models: The Database Model

34An REA Data Model Example

InventorySales

Salesperson

Cash CollectionsCashCustomerCashierM1MMMMMMMM1111REA

REA ModelThe REA model is an accounting framework for modeling an organizations economic resources; e.g., assets economic events; i.e., affect changes in resourceseconomic agents; i.e., individuals and departments that participate in an economic event Interrelationships among resources, events and agents Entity-relationship diagrams (ERD) are often used to model these relationships.

Accountants as Information System UsersAccountants must be able to clearly convey their needs to the systems professionals who design the system.The accountant should actively participate in systems development projects to ensure appropriate systems design.

Accountants as System DesignersThe accounting function is responsible for the conceptual system, while the computer function is responsible for the physical system.The conceptual system determines the nature of the information required, its sources, its destination, and the accounting rules that must be applied.

Accountants as System AuditorsExternal Auditorsattest to fairness of financial statementsassurance service: broader in scope than traditional attestation auditIT Auditorsevaluate IT, often as part of external auditInternal Auditorsin-house IS and IT appraisal services

*2*4*6*2*7*8**9*10*10*3*11*11*12*13*8*9*10*11*13*19*21*22*20*25***4*6Solves the following problems of the flat file approachno data redundancy - except for primary keys, data is only stored oncesingle updatecurrent valuestask-data independence - users have access to the full domain of data available to the firmA database is a set of computer files that minimizes data redundancy and is accessed by one or more application programs for data processing.The database approach to data storage applies whenever a database is established to serve two or more applications, organizational units, or types of users.A database management system (DBMS) is a computer program that enables users to create, modify, and utilize database information efficiently.**42*26*27*28