Chapter 1

ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW

TEACHING TIPS
This chapter provides general coverage of many of the text's major themes. It's usually a good idea to
indicate how the topics covered in this chapter will be covered in more detail later in the course.
Many instructors will not assign any of the problems from the end of this chapter. This can be done without
any loss of overall continuity in the course.
If the course will emphasize internal controls, it might be desirable to cover in class, one of the general
cases on internal control from the bac of !hapters ", #, or $. This should be done to stimulate student
interest, but the instructor should not worry if the students in the course fail to analyze the case correctly.
In some ways, teaching systems can be more difficult than teaching other areas. In many cases, there are no
clear%cut debits and credits to be made, and judgment is often re&uired. This can mae some students feel
uncomfortable. 'o, it's usually good to emphasize this at the beginning of the course to properly set
students' expectations. The point should also be made that systems are an important area of professional
examinations.
(
) ( *ccounting Information 'ystems+ *n ,verview
,ne of the biggest riss in teaching systems is that it can easily become dry and boring. I have found that
the best way to overcome this is to generate as much class discussion as possible on many of the major
points in the chapter. *ccordingly, I always mae class participation about one%fourth of the total course
grade. I tell students on the first day of class that as a starting point, I will give all students the same
number of points -reflecting a class average. for participation. Then, at the end of the course, I will
typically add or subtract /, (0, or (/ points to1from each student's grade according to the participation.
Many students typically stay at the average, so only noteworthy students end up with an adjustment. I
always use a seating chart, unless the class is small.
Many of my students have had jobs. 'o one &uestion that I constantly as throughout the term is 23as
anyone experienced this before in his1her job or otherwise42
ACCOUNTING INFORMATION SYSTEMS AND BUSINESS ORGANIZATIONS
*n acc!"t#"$ #"%r&at#" '('te& is a collection of resources, such as people and e&uipment, designed to
transform financial and other data into information. *ccounting information systems perform this
transformation whether they are essentially manual systems or thoroughly computerized.
*ccounting Information 'ystems+ *n ,verview ( 5
I"%r&at#" a") Dec#'#"'. The users of accounting information fall into two broad groups+ external and
internal. 3igher%level managers re&uire less information detail than lower level managers. * distinction
might be drawn between two broad classes of accounting information+ mandatory and discretionary.
!onceptually, information should satisfy a cost%benefit criterion. In meeting mandatory information
re&uirements, the primary consideration is minimizing costs while meeting minimum standards of reliability
and usefulness. 6hen the provision of information is discretionary, the primary consideration is that the
benefits obtained exceed the costs of production.
I"%r&at#" S('te&'. * 2computer%based2 information system is a collection of computer hardware and
software designed to transform data into useful information.
E*ectr"#c Data Prce''#"$ +EDP r DP,+ the use of computer technology to perform an
organization's transaction%oriented data processing.
Ma"a$e&e"t I"%r&at#" S('te&' +MIS,+ use computer technology to provide decision%oriented
information to managers. *n MI' provides a wide variety of information beyond that which is
associated with 78 in organizations. MI' subsystems are not physically independent. 9xamples of
MI' subsystems are as follows+
Mareting information system
" ( *ccounting Information 'ystems+ *n ,verview
Manufacturing information system
3uman resource information system
:inancial information system
Dec#'#" S!pprt S('te&' +DSS,+ process data into a decision%maing format for the end user.
7'' serve ad hoc, specific, non%routine information re&uests by management, including what%if
analyses.
E-pert S('te&' +ES,+ nowledge%based information systems that use nowledge about a specific
application area to act as an expert consultant to end%users. *n 9' differs from a 7'' in that a
7'' assists a user in maing a decision, whereas an 9' maes the decision.
E-ec!t#.e I"%r&at#" S('te&' +EIS,+ tailor information to the strategic information needs of
top%level management.
Acc!"t#"$ I"%r&at#" S('te&' +AIS,+ include transaction processing cycles, the use of
information technology, and the development of financial information systems.
ACCOUNTING INFORMATION SYSTEMS AND APP/ICATION ARCHITECTURE
*ccounting Information 'ystems+ *n ,verview ( /
*ccounting information systems and information technology -IT. are strongly intertwined. The
fundamental benefits of information technology are automation, information organization, and
communication. App*#cat#"' arch#tect!re involves the process of ensuring the suite of organization;s
applications wor together as a composite application according to the goals and objectives of the
organization. *rchitecture has evolved automating the traditional accounting cycle to enhancing functional
planning and control within the organization. Material <e&uirements 8lanning -M<8. software assisted
management in managing inventories and scheduling production. M<8 evolved into M<8 II,
-Manufacturing <esource 8lanning II. which added new capabilities. M<8 and M<8 II paved the way for
!omputer Integrated Manufacturing -!IM. and :lexible Manufacturing 'ystems -:M'.. In !IM,
computers tae control of the entire manufacturing process, and in :M', computers not only control
production processes but can also be reprogrammed so that the same processes can produce entirely
different products. 9nterprise <esource 8lanning -9<8. involves the combining of the various functional
information systems under the umbrella of a single software pacage and a single database. 9<8 II adds
collaborative commerce to 9<8. C**a0rat#.e c&&erce involves groups of organizations woring
together toward common goals, such as new products, new process methods, and human capital
intelligence. In recent years the 9<8 system has given way to the E"terpr#'e App*#cat#" S!#te -9*'..
The 9*' replaces one monolithic 9<8 software pacage with a group -i.e., a suite. of individual pacages
that wor closely with each other and run in web browsers.
= ( *ccounting Information 'ystems+ *n ,verview
BUSINESS PROCESSES
* 0!'#"e'' prce'' is an interrelated set of tass that involve data, organizational units, and a logical time
se&uence. * ey characteristic of business processes is that they are not necessarily limited to a single
functional area of the information system or the organization chart.
B!'#"e'' Prce'' Re%ere"ce M)e*'
The basic business processes can be organized and grouped together according to various reference models,
depending on the desired emphasis.
The ERP F!"ct#"a* M)e*
The Va*!e Cha#" M)e*
The S!pp*( Cha#" M)e*
The Operat#"' Prce'' M)e*
The Tra"'act#" C(c*e M)e*
Tra"'act#" Prce''#"$ C(c*e'
Re.e"!e c(c*e 9vents related to the distribution of goods and services to other entities and
*ccounting Information 'ystems+ *n ,verview ( >
the collection of related payments.
E-pe")#t!re c(c*e 9vents related to the ac&uisition of goods and services from other
entities and the settlement of related obligations.
Pr)!ct#" c(c*e 9vents related to the transformation of resources into goods and
services.
F#"a"ce c(c*e 9vents related to the ac&uisition and management of capital funds, including
cash.
The transaction cycle model of an organization includes a fifth cycle ? the %#"a"c#a* reprt#"$
c(c*e. The financial reporting cycle is not an operating cycle. It obtains accounting and operating
data from the other cycles and processes these data in such a manner that financial reports may be
prepared.
I"ter"a* C"tr* Prce''
The term internal control process suggests actions taen within an organization to regulate and direct the
activities of the organization.
E*e&e"t' % I"ter"a* C"tr* Prce''1 *n organization's #"ter"a* c"tr* prce'' consists of the policies
and procedures established to provide reasonable assurance that specific organizational objectives will be
achieved. *n organization's internal control process consists of five elements+ the control environment, ris
# ( *ccounting Information 'ystems+ *n ,verview
assessment, control activities, information and communication, and monitoring. Internal control also calls
for the maintenance of ade&uate records in an effort to control assets and analyze the assignment of
responsibility.
Se$re$at#" % Acc!"t#"$ F!"ct#"'. 'egregate record eeping, custody, and authorization.
I"ter"a* A!)#t F!"ct#". Internal audit is charged with monitoring and assessing compliance with
organizational policies and procedures. The internal audit function must be segregated from the accounting
function and also have neither responsibility nor authority for any operating activity.
ACCOUNTING AND INFORMATION TECHNO/OGY
The term accounting information system includes the use of information technology to provide information
to users. !omputers are used in all types of information systems. Information technology includes
computers, but it also includes other technologies used to process information. Technologies such as
machine%readable bar codes and scanning devices, and communications protocols and standards such as
*@'I A.(), are essential to contemporary information systems.
The I"%r&at#" S('te&' F!"ct#"
*ccounting Information 'ystems+ *n ,verview ( $
9very organization that uses computers to process transactional data has an information systems function,
which is responsible for data processing -78..
Or$a"#2at#"a* /cat#"1 The head of the information systems function is typically called the Ch#e%
I"%r&at#" O%%#cer and is advised by an advisory group called a steering committee.
F!"ct#"a* Spec#a*#2at#". The most prevalent information systems departmental structure is the
assignment of responsibilities and duties by area of technical specialization, that is, function.
'ub%functions include the a"a*('#' %!"ct#"3 the pr$ra&&#"$ %!"ct#", the perat#"' %!"ct#", the
tech"#ca* '!pprt %!"ct#", and the !'er '!pprt %!"ct#".
*nalysis and programming functions are typically organized by project. In pr4ect r$a"#2at#", analysts
and programmers are assigned to specific application projects and wor together to complete a project
under the direction of a project leader.
5!#c6 Re'p"'e Tech"*$(.
Buic response systems are essential to the T5P -Tta* 5!a*#t( Per%r&a"ce. movement in business.
Buic response systems use several ey technologies+ 7!'t8#"8T#&e +7IT,, We0 C&&erce3 E*ectr"#c
(0 ( *ccounting Information 'ystems+ *n ,verview
Data I"tercha"$e +EDI,3 5!#c6 Re'p"'e +5R, C)e'3 Ra)# Fre9!e"c( I)e"t#%#cat#" +RFID,3
C&p!ter8I"te$rate) Ma"!%act!r#"$ +CIM,, /ea" Ma"!%act!r#"$, and E*ectr"#c F!")' Tra"'%er
+EFT,.
Cean Manufacturing -or Cean 8roduction. is a general class of production improvement principles that
focus on eliminating waste and improving the smoothness of the production flow.
<etail 9:T systems include the telephone wire transfers and telephone payment systems, preauthorized
payment systems, point%of%sale -8,'. applications, and automated teller machines -*TMs..
THE ACCOUNTANT AND SYSTEMS DEVE/OPMENT
The term accounting information system includes systems development activities that an accountant or
auditor might expect to encounter professionally.
The Nat!re % S('te&' De.e*p&e"t. * systems development project ordinarily consists of three general
phases+ systems analysis, systems design, and systems implementation.
The '('te&' apprach is a process that consists of six steps+
*ccounting Information 'ystems+ *n ,verview ( ((
o 'tatement of system objective-s.
o !reation of alternatives
o 'ystems analysis
o 'ystems design
o 'ystems implementation
o 'ystems evaluation
B!'#"e'' Prce'' B*!epr#"t#"$1 Dlueprinting is the use of generic or industry standards for systems
development, as opposed to the development of a new system.
Beha.#ra* C"'#)erat#"' #" S('te&' De.e*p&e"t
The user cooperation needed to operate the system successfully should be ensured during the design of a
system, not afterward. * philosophy of !'er8r#e"te) design fosters a set of attitudes and an approach to
systems development that consciously considers the organizational context.
Gree" IT: De'#$"#"$ Fr S!'ta#"a0#*#t(
The term Gree" IT has become an acronym for utilizing information technology resources in an
environmentally responsive manner.
E"er$( U'a$e1 Ereen data centers use energy%efficient cooling technologies, energy efficient
() ( *ccounting Information 'ystems+ *n ,verview
e&uipment, and energy efficient building designs to reduce their environmental footprint.
E8:a'te1 9%waste is IT and other electronic products that are at, or near the end, of their useful
life.
REVIEW 5UESTIONS
(. *n accounting information system is a collection of resources designed to provide data, especially
financial data, to a variety of decision maers according to their needs and entitlement.
). The users of accounting information fall into two broad groups+ external and internal. 9xternal
users include stocholders, investors, creditors, government agencies, customers and vendors, competitors,
labor unions, and the public at large. Internal users are the managers in an organization.
5. 9lectronic data processing -978. is the use of computer technology to perform an organization's
transaction%oriented data processing. Management information systems -MI'. use computer technology to
provide decision%oriented information to managers. In a decision support system -7''., data is processed
into a decision%maing format for the end user. *n expert system -9'. is a nowledge%based information
system that uses its nowledge about a specific application area to act as an expert consultant to end%users.
*ccounting Information 'ystems+ *n ,verview ( (5
". The four common operating cycles of business activity are the revenue cycle, expenditure cycle,
production cycle, and finance cycle.
/. The term internal control suggests actions taen within an organization to regulate and direct the
activities of the organization.
=. * controller is in charge of the accounting function. The treasurer is responsible for the finances of
the business.
>. Internal audit is charged with monitoring and assessing compliance with organizational policies and
procedures.
#. The most prevalent information systems departmental structure is the assignment of responsibilities
and duties by area of technical specialization, that is, function.
$. The analysis function focuses on identifying problems and projects for computer processing and
designing systems to satisfy these problems' re&uirements. The programming function is responsible for the
design, coding, testing, and debugging of computer programs necessary to implement the system designed
by the analysis function. The operations function is charged with data preparation, the operation of the
(" ( *ccounting Information 'ystems+ *n ,verview
e&uipment, and system maintenance. The technical support function allows specialization in areas such as
operating systems and software, data management and database design, and communications technology.
The user support function services end users, much as the technical support function services personnel of
the information systems department.
(0. In project organization, analysts and programmers are assigned to specific application projects and
wor together to complete a project under the direction of a project leader. 8roject organization focuses
responsibility for application projects on a single group, unlie functional organization, in which
responsibility for a specific project is spread across different functional areas.
((. * steering committee is the means by which managers of other areas outside of information
systems can influence the policies, budget, and planning of information services.
(). Dlueprinting is the use of generic or industry standards for systems development, as opposed to the
development of a new system. Dlueprinting avoids the expense of 'reinventing the wheel.'
(5. *n accountant might access accounts receivable data from a company's centralized database,
manipulate them, and then print a report using a networed 8! and &uery language software.
*ccounting Information 'ystems+ *n ,verview ( (/
(". 'everal technologies important to &uic response systems are 97I -9lectronic 7ata Interchange.,
F8! bar code identification of products, and scanning technology.
(/. 97I differs from electronic mail in that electronic mail messages are created and interpreted by
humans -person%to%person., whereas 97I messages are created and interpreted by computers.
(=. !omponents of a !IM system typically include computer%aided design -!*7. worstations,
real%time production monitoring and control systems, and order and inventory control systems. !IM
components are connected by a computer networ and e&uipped with software systems designed to support
distributed operation.
(>. The six steps in the systems approach are+
o 'tatement of system objective-s.
o !reation of alternatives
o 'ystems analysis
o 'ystems design
o 'ystems implementation
o 'ystems evaluation
(= ( *ccounting Information 'ystems+ *n ,verview
(#. * philosophy of user%oriented design fosters a set of attitudes and an approach to systems
development that involves users in the design of applications.
ANSWERS TO DISCUSSION 5UESTIONS AND PROB/EMS
($. @ature of Transactions % (0 minutes 9asy
* credit sale is not complete until the subse&uent billing and collection of funds from the customer. This
&uestion illustrates how a single transaction might consist of several events and also how a transaction
might impact on several cycles -in this case both revenue and finance cycles as discussed in the chapter..
The instructor might note the interdependencies between sales, billings, and cash collections, as well as the
possibilities of sales returns, adjustments, and uncollectibility of accounts.
)0. ,rganizational Cocation of *udit :unction % (0 minutes 9asy
Internal auditing should be organizationally independent of the controller or similar office and should be
administratively responsible to top management. The 'ecurities and 9xchange !ommission and the major
stoc exchanges have endorsed this position, as have all of the professional accounting associations
-*I!8*, II*, IM*..
*ccounting Information 'ystems+ *n ,verview ( (>
)(. *pply the 'ystems *pproach % )0 minutes 9asy
The systems approach is a general procedure for the administration of a systems project. The systems
approach can be viewed as a process that consists of several stages. Its purpose is to assist in the orderly
development of effective systems. These steps can be described as+
G 'tatement of system objective-s.
G !reation of alternatives
G 'ystems analysis
G 'ystems design
G 'ystems implementation
G 'ystems evaluation
The discussion of the systems approach to each of the given objectives could follow a format as presented
in :igure (.(= of the text. The instructor can stress the importance of defining objectives and plans in
operational terms.
)). @ature of *ccounting :unction % (0 minutes 9asy
'ome discussion areas for specific decisions follow+
-(. 'election of the controller, technological configuration of the *I', monitoring and setting
budget for the *I' function.
-). ,verall responsibility for lower%level personnel, procedures and methods, financial report
(# ( *ccounting Information 'ystems+ *n ,verview
preparation, budgeting, and tax%planning. 7uties would depend on the size of the
organization.
-5. Harious operating decisions relating to personnel and procedures+ approval of journal
vouchers, memos, and other such itemsI scheduling wor assignmentsI handling of
exceptionsI monitoring of wor load.
)5. !ommunication in 'ystems 7esign % (0 minutes 9asy
9ffective communication between all parties is essential to the system development process. 'ystems
analysts must understand management's needs in order to integrate these needs into the system that they are
designing. Ciewise, management must be able to communicate their needs and desires to systems analysts
for the same reason. ,perating personnel must understand management's needs in order to properly operate
the system, and the needs of operating personnel must be understood by analysts and management in order
that the system operates effectively.
)". !ontrol ,bjectives % 50 minutes Medium
a. 8rocurement
b. ,utbound sales logistics
c. ,utbound sales logistics
d. ,utbound sales logistics
*ccounting Information 'ystems+ *n ,verview ( ($
e. 3uman resource management
f. Manufacturing18roduction ,perations
g. :irm infrastructure
h. :irm infrastructure
i. :irm infrastructure
j. :irm infrastructure
. :irm infrastructure
l. :irm infrastructure
m. :irm infrastructure
)/. 'teering !ommittee % (/ minutes Medium
* steering committee is an organizational group, which meets periodically to set and review important
policy, budget, and project decisions relating to the information systems department in an organization. *
steering committee is composed of high%level members of user functions as well as the head of the
information systems department. Decause members of a steering committee include users -i.e., consumers.
as well as representatives of the information systems department, a steering committee provides user
feedbac in controlling the information systems department in an organization. *n important aspect of a
steering committee is that it allows for the exercise of organizational power and politics in decisions
regarding the information systems department in an organization. This facilitates support for decisions
)0 ( *ccounting Information 'ystems+ *n ,verview
made with respect to the allocation of information system resources.
* steering committee would assume the overall responsibility for planning for the ac&uisition and
use of computer resources at the <ed 6ine !ompany. Members of the steering committee should include
high%level officers from each of the company's business functions ? manufacturing, mareting, finance,
accounting, and general administration ? as well as the manager of I' department. The steering committee
should attempt to find the best allocation of resources to fit the needs of the company.
The <ed 6ine !ompany's rapid growth has strained the firm's computer resources, and the number
of complaints concerning inade&uate support and service from I' have increased dramatically in the past
year. This indicates a lac of support for the current manner in which resource allocation decisions
concerning computer e&uipment are being made. !urrently I' itself has a budget, which apparently it
administers itself, subject to the president's approval. Dut several users have recently made or are actively
considering their own purchase of computer e&uipment. This situation could prove to be counterproductive
for the company as a whole, and is a good reason why a steering committee is needed to centralize and
control the responsibility for planning for the ac&uisition and use of computer resources at the company. *
steering committee would allow for the exercise of organizational power and politics in decisions regarding
the allocation of computer resources. This should tend to build support within the organization for
decisions, which are made with respect to the future allocation of computer systems resources.
*ccounting Information 'ystems+ *n ,verview ( )(
)=. Information 'ystems :unction % 50 minutes Medium
!ourtesy of Touche <oss :oundation
'ee figure on next page.
)>. Dusiness 8rocesses % (0 minutes 9asy
a. The fact that the business is 6eb%based has no real bearing to what are the company's basic
business processes. The usual processes are involved+ logistics, operations, mareting, service,
procurement, technology development, organization and human resources management, and firm
infrastructure.
b. Cogistics and procurement.
c. The basic business processes would not change. ,f course, specific sub%processes would change.
d. The major business processes would remain essentially the same if a second product were added.
)#. 8rocurement 8rocess % (0 minutes Medium
a. <ough setch of procurement process+ a. identify need to purchase tea, b. negotiate pricing and
select vendor, c. generate order, d. tae delivery, e. process delivery and perform necessary accounting
functions.
b. The negotiation of pricing and selecting of a vendor would change.
)) ( *ccounting Information 'ystems+ *n ,verview
c. The answer to part ( also serves to describe sub%processes.
:igure for 8roblem )=.
*ccounting Information 'ystems+ *n ,verview ( )5
)" ( *ccounting Information 'ystems+ *n ,verview
)$. Dusiness 8rocesses % (/ minutes Medium
a. 'tart, end+ Eenerate sales order, ship customer order. Trigger+ customer.
b. 'tart, end+ ac&uire inventory, ship or use inventory. Trigger+ customer or production order.
c. 'tart, end+ assemble shipment and paperwor, ship order. Trigger+ customer order.
d. 'tart, end+ assemble order, generate order. Trigger+ sales or production demand.
e. 'tart, end+ collection of hours wored, generation of payroll chec. Trigger+ end of worwee.
50. 6eb !ommerce % (0 minutes 9asy
*t first glance, Cuxdale was purely an innocent victim. Dut on the other hand, Cuxdale was apparently
unable to reassure the public with a published privacy policy that had been subject to some sort of audit.
Cuxdale might have obtained an *I!8* 6eb Trust seal of approval before the problem occurred. It would
have been in a much better position to assure the public when the trouble developed if it had.
5(. Dlueprinting *pproach to 'ystems 7evelopment % )0 minutes Medium
The company seems to have a truly amazing product, one that can forecast accurately up to = months in the
future. Decause of this, rapid growth is liely to continue. It is therefore imperative that a new system be
implemented that will allow for future growth. 'o the blueprint approach maes a lot of sense if it will
produce an integrated system that will handle the company's present and future needs. 'o the real &uestion
is not so much the viability of the blueprint approach, but rather the &uality of the wor that might be
*ccounting Information 'ystems+ *n ,verview ( )/
performed by 'ysBuic. Then there is the issue of Dlae being able to implement the blueprint once it is
developed. If Darbara !onta signs on with 'ysBuic, she is in effect putting her future in their hands. 'o it
would be imperative for her to thoroughly investigate this company and its success with other companies.
5). 'ystems 7evelopment in a 'mall !ompany % (/ minutes Medium
:ancy <opa;s situation is typical for a company that has grown without a comprehensive I' plan. The
result is a system that is a patchwor of parts that are not well integrated with each other.
The solution is to adopt a single, integrated enterprise%wide information system such as '*8 Dusiness ,ne
or ,racle 'mall Dusiness 'uite, which target small and medium%size enterprises. These products could then
be upgraded to the enterprise versions with continued expansion of the business.
'witching to an 9<8%type system can be fraught with many riss and a lot of pain and expense. :or this
reason, the best approach is to use a major accounting firm such as *ccenture to assist with the project.
WEB RESEARCH ASSIGNMENTS
55. In recent years, the top focus has been on information security and privacy. The exact priorities change
from year to year. Most students should have no problem completing this assignment.
)= ( *ccounting Information 'ystems+ *n ,verview
5". Most students should have no problem with this assignment. It may be helpful to as students to
present summaries of their findings to the class.