Part Three

The structure of accounting information system 、 the internal

control and system management principle

Content abstract

The Users of Accounting Information Information Systems Transaction Processing Cycles The Internal Control Process Organization Interaction with Information

Systems The Development of Systems

4.1 The Users of Accounting Information

A. External Users of Accounting Information

B. Internal Users of Accounting Information

C. Mandatory vs. Discretionary Information

A. External Users of Accounting Information

Investors

Creditors

Stockholders

Customers and Vendors

Government Agencies

B. Internal Users of Accounting Information

Lower Level Managers

Middle Managers

Top-Level Managers

Characteristic of Information

Operational Control

Management Control

Strategic Planning

Source Largely internal

External

Level of Aggregation

Detailed

Aggregate

Time Horizon Historical Future

Required Accuracy

High

Low

C. Mandatory vs. Discretionary Information

Mandatory Information

Certain types of information must be

generated regardless of the

cost: Government reports

Payroll Basic bookkeeping

Evaluation Criteria For mandatory

information, the primary concern is

minimization of cost. In contrast,

discretionary information should

provide greater benefits than the cost

of generating it.

4.2 Information Systems

A. Electronic Data Processing (EDP) or Data Processing (DP)B. Management Information Systems (MIS)C. Decision Support Systems (DSS)D. Expert Systems (ES)E. Executive Information Systems (EIS)F. Accounting Information Systems (AIS)

The term information system suggests the use of computer technology in an organization

Hardware

Software

Information System

Data

Information for Decision Making

A. Electronic Data Processing (EDP) or

Data Processing (DP)

Use of computer technology to perform an organization’s

transaction-oriented data processing.

DP systems serve routine, recurring, general information needs.

B. Management Information Systems (MIS)

Use of computer technology to provide managers with decision-oriented information beyond what a normal DP system provides. Subsystems include:

Marketing information system Manufacturing information system Human resource information system Financial information system

Functional MIS subsystems provide a logical rather than physical way of implementing the MIS concept in

organizations.

C. Decision Support Systems (DSS)

Processes data into a decision making format for end users. Decision support systems (DSS’s) process nonroutine information requests on an ad hoc basis. Requires the use of decision models and specialized databases beyond what is in a DP system.

D. Expert Systems (ES)

Emulates an experts decision making process to provide a decision. Different from DSS which only provides information for making a decision. Two components of the ES are as follows:

Knowledge base – special knowledge that an expert possesses in the decision area.

Inference engine – process by which expert makes the decision.

E. Executive Information System (EIS)

Executive information systems tailor information to the strategic needs of top-level management.

Much of the information used by top-level management comes from sources outside the organizations information system. (i.e., meetings, memos, television, periodicals, and social activities).

F. Accounting Information Systems (AIS)

A computer-based system designed to transform accounting data into information.

Can also include transactions processing cycles, the use of information technology, and the development of information systems.

4.3 Transaction Processing Cycles

The transaction processing cycles provide a means of viewing the activities of a business.

Revenue Cycle Expenditure Cycle Production Cycle Finance Cycle Financial Reporting Cycle

A. Revenue Cycle

Events related to the distribution of goods and services to other entities and the collection of related payments

B. Expenditure Cycle

Events related to the acquisition of goods and services from other entities and the settlement of related obligations.

C. Production Cycle

Events related to the transformation of resources into goods and services.

D. Finance Cycle

Events related to the acquisition and management of capital funds, including cash. The treasurer is responsible for the finances of the business.

E. Financial Reporting Cycle

Not an operating cycle This cycle obtains accounting and operating data from

other cycles and processes this data so that financial reports can be prepared.

A controller is in charge of the accounting function.

4.4 The Internal Control Process

Since management is far removed from the scene of operations in a large organization, personal supervision of employees is often replaced with various control techniques

Definition of Internal Control The Five Elements of the Internal Control Process Segregation of Accounting Functions The Internal Audit Function

.

A. Definition of Internal Control

Internal control is a process designed to provide reasonable assurance regarding the achievement of objectives relating to:

Reliability of financial reporting Effectiveness and efficiency of operations Compliance with applicable laws and regulations

The concept of internal control structure is based on two major premises: management’s responsibility and reasonable assurance.

B. Five Elements of the Internal Control Process

Control environment – Overall values and integrity of organization.

Risk assessment – Identification and evaluation of risks (Potential loss x Probability = Exposure).

Control activities – Activities undertaken to reduce probability of loss due to significant risks.

Information and communication – Communicating information about the control environment and control activities.

Monitoring – Keeping watch over and changing internal controls so that they function effectively and efficiently.

C. Segregation of Accounting Functions

Segregate the following duties: Authorization Record keeping Custody of assets

D. Internal Audit Function

Internal auditing is an independent appraisal function charged with monitoring and assessing compliance with organizational policies and procedures.

4.5 Organization Interaction With Information Systems

A. The Steering Committee

B. End-User Computing

C. Quick-Response Technology

A. The Steering Committee

A committee advising the Chief Information Officer that is composed of high-level members of user functions such as manufacturing and marketing. The committee provides a means by which managers from other areas can influence the information services process.

B. End-User Computing (EUC)

Functional end users do their own information processing activities through an EUC application such as a database that uses a query language feature to generate specific information needed by the end user to make decisions.

C. Quick-Response Technology

Just-In-Time Web Commerce Electronic Data Interchange Extensible Business Reporting Language Computer Integrated Manufacturing Electronic Payment Systems

Purchase orders for inventory items are made on a “demand-pull” basis rather than a fixed interval “push” basis to restock store inventory levels. Adds flexibility to meet customer needs and reduces product rework.

Just-in-Time

Web Commerce

Provides worldwide availability of products on a single computer.

Specially trained CPAs offer the Web Trust seal to sites that meet certain security and privacy criteria.

Electronic Data Interchange

Electronic data interchange (EDI) is the direct computer- to-computer exchange of business documents via a communications network. EDI differs from e-mail in that EDI messages are created and interpreted by computers without human intervention. Also makes use of universal product code (UPC) bar code.

Extensible Business Reporting Language

Extensible Business Reporting Language (XBRL) is a language that facilitates the exchange over the Internet of all kinds of business documents and financial statements. The SEC permits companies to file their financial reports electronically using XBRL format.

Computer-Integrated Manufacturing (CIM)

Components of CIM typically include computer-aided design (CAD) workstations, real-time production monitoring and control systems, and order inventory and control systems.

Makes use of scanner technology and machine-readable bar codes.

Electronic Payment Systems

Electronic funds transfer (EFT) systems are electronic payment systems in which processing and communication are primarily or totally electronic.

4.4 The Development of Systems

A. Blueprinting

B. Systems Development

C. Behavioral Considerations

A. Blueprinting

The company uses generic or industry standard stock blueprints rather than designing its own system.

B. Systems Development

A systems development project ordinarily consists of three phases: systems analysis, systems design, systems implementation. The procedure attempts of improve information quality, internal control, and minimize cost. The systems approach consists of six steps:

Statement of system objective(s) Creation of alternatives Systems analysis Systems design Systems implementation Systems evaluation

The Result of Poor Systems

Development

C. Behavioral Considerations

The users of systems should be included throughout the steps of systems development.

Users provide valuable input into what is needed and must accept the system that is developed.

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