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Accounting Information Systems

CONTROLS AND PROCESSES

Third Edition

Leslie Turner

Andrea Weickgenannt

Mary Kay Copeland

DIRECTOR Michael McDonald
AQUISITION EDITOR Emily McGee
PROJECT MANAGER Gladys Soto
PROJECT SPECIALIST Nichole Urban
CONTENT MANAGEMENT DIRECTOR Lisa Wojcik
SENIOR CONTENT SPECIALIST Nicole Repasky
PRODUCTION EDITOR Linda Christina E
PHOTO RESEARCHER Billy Ray
COVER PHOTO CREDIT © Zayne C/Shutterstock

This book was set in 10/12 ITC New Baskerville Std by SPi Global and printed and bound by Lightning Source Inc.

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ISBN: 9781119329565 (PBK)

ISBN: 9781119297611 (EVALC)

Library of congress Cataloging‐in‐Publication Data

Names: Turner, Leslie, author. | Weickgenannt, Andrea, author. | Copeland, Mary Kay, author.
Title: Accounting information systems : controls and processes / Leslie
Turner, Andrea Weickgenannt, Mary Kay Copeland.
Description: Third edition. | Hoboken, NJ : John Wiley & Sons Inc., [2017] |
Includes bibliographical references and index.
Identifiers: LCCN 2016036148 | ISBN 9781119329565 (pbk. : alk. paper)
Subjects: LCSH: Accounting—Data processing.
Classification: LCC HF5679 .T87 2017 | DDC 657.0285—dc23 LC record available at https://lccn.loc.gov/2016036148

The inside back cover will contain printing identification and country of origin if omitted from this page. In addition, if the ISBN on the
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Printed in the United States of America

 Leslie Turner
To my parents and the many students who have inspired and motivated my work.
Andrea Weickgenannt
To my sons, Karl and Erik, for their encouragement, wit, and tolerance.
Mary Kay Copeland
To Bob and Barb Schiesser (my parents), Steve (my husband)
and Tim and Chris (my sons) for their continued support.
 ABOU T TH E AU TH O R S

Leslie D. Turner is Dean and a professor of accounting at Palm Beach Atlantic University.
He previously taught at Northern Kentucky University and the University of North
Carolina at Greensboro. He earned a DBA in accounting from the University of Kentucky,
an MBA from Wheeling Jesuit University, and a BBA in accounting from Ohio University.
Dr. Turner is a Certified Management Accountant (CMA) and a Certified Financial
Manager (CFM).
Professor Turner’s research interests are in internal controls and Sarbanes–Oxley com-
pliance, educational pedagogy, and ethics. His research has been published in The
Accounting Educators’ Journal Management Accounting Quarterly, Accounting Horizons, Journal
of Accounting and Public Policy, Journal of Internet Commerce, Journal of Information Systems,
Management Accounting, The Review of Accounting Information Systems, The Journal of
Management Accounting Research, Strategic Finance, The CPCU Journal, National Accounting
Journal, The Oil and Gas Tax Quarterly, Accounting Systems Journal, and The Journal of
Accounting Case Research.
Professor Turner is a member of the American Accounting Association, the Institute of
Management Accountants, and the Information Systems Audit and Control Association.

Andrea B. Weickgenannt is an assistant professor in the Department of Accountancy at

Xavier University. She is a DBA candidate at Kennesaw State University, and also holds an
MBA from the University of Maryland and a BBA from the University of Cincinnati. She
is a Certified Public Accountant (CPA) and has over 13 years of experience with Ernst &
Young LLP (Cincinnati and Baltimore).
Professor Weickgenannt’s research interests are in the areas of accounting informa-
tion systems, financial accounting, auditing, and corporate governance. Her research
has been published in The Journal of Business Cases and Applications, Issues in Accounting
Education, Advances in Accounting Education, The National Accounting Journal, Journal of
Accounting Case Research, Critical Perspectives on Accounting, and The Journal of College
Teaching & Learning.
Professor Weickgenannt is a member of the American Accounting Association, the
American Institute of Certified Public Accountants, the Institute of Internal Auditors,
the Institute of Management Accountants, and the Ohio Society of Certified Public
Accountants.

Mary Kay Copeland, PhD, MBA, CPA

Mary Kay Copeland is an assistant professor, teaching accounting and accounting infor-
mation systems at St. John Fisher College in Rochester, NY. She previously taught at the
University of Buffalo and Bowling Green State University. She earned a BS/MBA in
Accounting from the University of Buffalo and a PhD from Regent University.
Dr. Copeland is a Certified Public Accountant and has over 30 years of professional expe-
rience including 5 years with KPMG and 20 years in consulting and CFO positions.

v
vi  About the Authors

Professor Copeland’s research interests include accounting information systems,

financial and managerial accounting, ethics, and values‐based leadership. Her research
has been published in The CPA Journal, Research on Professional Responsibility and Ethics
in Accounting, International Journal of Leadership Studies and Business Education Forum.
Dr. Copeland also has had numerous conference proceeding publications with the
American Accounting Association. Dr. Copeland has also co‐published a Microsoft
Dynamics GP® text with Armond Dalton Publishers and authored hands on Microsoft
Dynamics coursework for Microsoft Dynamics AX and Microsoft Dynamics GP
ERP systems.
Professor Copeland is a member of the American Accounting Association, the
American Institute of Certified Public Accountants, and the Microsoft Dynamics
National Academic Advisory Board.
 PREFAC E

Instructor
Overview Each of us who teaches Accounting Information Systems (AIS) faces the
problem of providing students a comprehensive, but interesting knowledge base of AIS.
However, we all know that it is difficult to find the right balance of coverage of technical
concepts and student comprehension. When addressing this issue of balance, we began
to see clearly that a better, more comprehensible approach was needed. With this book,
we have achieved a good balance of covering technical concepts while still making the
text easy to read and understand. Our textbook also reinforces AIS concepts with rele-
vant, real‐world examples and reasonable end‐of‐chapter materials.
This text incorporates the important content found in a typical AIS course, but has five
distinguishing characteristics. Five characteristics we focus on throughout the text are
simplicity and understandability of the writing, business processes, accounting and IT
controls, examples from Microsoft Dynamics GP (an ERP/AIS system), and ethics as it
relates to accounting systems.
We place extra emphasis on the students’ understanding. We explain AIS in the con-
text of business processes and incorporate many real‐world examples. The richness of
these examples improves the text, the discussion questions, and end‐of‐chapter exercises
and cases. We explain IT controls by employing the framework in the AICPA Trust Services
Principles. This is an encompassing, but easy to understand, framework of IT controls.
We provide examples in the text of an AIS/ERP system, Microsoft Dynamics GP. Instructors
are able to add a hands‐on learning of Microsoft Dynamics GP that complements the
theoretical concepts in the text. Finally, we believe that ethics continues to increase in
importance as a topic to be included in accounting texts. We have included an ethics sec-
tion in each chapter.
We think that including all these characteristics in a single text has resulted in an
extremely user‐friendly product: one that will help your students achieve a better founda-
tion in AIS.

Features
The book is designed to enhance student learning with a focus on ease of use, business
processes and the related controls, and ethics and corporate governance as they relate to
accounting information systems (AIS).

Ease of Use This AIS textbook will allow students to easily read and comprehend the
material, understand the charts and graphs, and successfully answer questions and cases
at the end of the chapters. To attain ease of use, we included several features, including
the following:
• An approach to technical topics with a writing style that is easy to understand.

vii
viii  Preface

• Process maps and document flowcharts that provide a picture of business processes
and that are easy to understand. While there are several approaches to charts that
depict systems, we have used the types of charts that illustrate business processes in
the simplest, yet complete manner. Especially in the chapters focused on business
processes, we use matched process maps, document flowcharts, and data flow dia-
grams to illustrate the processes that occur, and the related flow of information and
documents. These charts are easy to follow and they will enhance the understanding
of the business processes.
• AICPA Trust Services Principles framework for IT controls. Controls within
Information Technology can be a very difficult subject to comprehend because of
the underlying complexity of the technology. While COBIT is the most comprehen-
sive source of IT control information, it is not typically easy for students to under-
stand. This is especially true for students who have not had the opportunity to gain
work experience with IT systems and business processes. We use the simplest
­framework available for the explanation of IT controls: the AICPA Trust Services
Principles. The Trust Services Principles categorize IT Controls into five areas: secu-
rity, availability, processing integrity, online privacy, and confidentiality.
• Control and risk tables that summarize internal controls and the related risks.
Internal controls are easier to understand when students can see the corresponding
types of risks that the controls are intended to lessen. We use control/risk exhibits to
present risks that are reduced when controls are used.
• Real‐world examples to illustrate important concepts. Concepts are often easier to
comprehend when presented in a real‐world scenario. Each chapter includes exam-
ples of issues faced by actual business organizations that help illustrate the nature
and importance of concepts in the chapter. Real‐world discussions are boxed in a
feature titled “The Real World.”
• Microsoft Dynamics GP screen shots to present topics in the context of a real com-
puter system. New concepts are often easier for students to understand while pre-
sented within a real‐life application. We use screen shots from Microsoft Dynamics
GP software to show how various aspects of business processes would appear in this
computer system. In addition, in this version, we have added the ability for instruc-
tors to add hands‐on learning of Microsoft Dynamics GP to the coursework. See the
textbook website for details. This add‐on tool provides access to a cloud‐based ver-
sion of Microsoft Dynamics minimizing the involvement of a university’s IT staff.
• The IT technology that underlies AIS continually evolves and allows enhancements
to those systems. Several chapters integrate the concept of cloud computing and the
increasing use of cloud computing. The effects of cloud computing on the risk
­benefits and auditing in AIS are also described.
• End‐of‐chapter questions, problems, and cases that match well with the chapter con-
tent. It is important to provide material at the end of each chapter that helps stu-
dents reinforce the topics presented. It is equally important that this material be
relevant and understandable. We have devoted our attention to providing a variety
of end‐of‐chapter activities that are meaningful and manageable, including a con-
cept check, discussion questions, brief exercises, Web exercises, problems, cases, and
a continuing case. In addition, most chapters include activities adapted from profes-
sional (CPA, CMA, and CIA) examinations.

Business Processes, Accounting Controls, and IT Controls Business transac-

tions are portrayed within the text in terms of business processes, which are widely recog-
nized throughout the accounting profession. These business processes are described in a
manner that is applicable to many different business environments.
 Preface   ix

We incorporate the COSO framework and integrate discussions of risks and controls
in all business process chapters. These discussions are also carried out in as many of the
other chapters as possible. The COSO framework, especially the control procedure com-
ponent, is used as a framework to describe accounting controls. This continued use of the
framework across several chapters is intended to increase student understanding and
retention of risk and control concepts.
In addition, we place a strong emphasis on IT controls. We accomplish this by using
the guidance provided by the AICPA in the revised (2009) Trust Services Principles for
WebTrust® and SysTrust® assurance engagements. The Trust Services Principles are the
AICPA’s guidance that is closely related to COBIT.
The Trust Services Principles risk and control procedures are incorporated into the
chapters covering business processes and controls. These controls are also discussed
in chapters on databases, ERP systems, auditing IT systems, and the system development
life cycle.

Ethics and Corporate Governance It is indisputable within the business world that
honest, consistent reporting and management of information has never been more
important. Considering the increased responsibility on corporate managers for the over-
all financial reporting of the company, the study and use of accounting information sys-
tems is critical. Accordingly, business ethics and corporate governance continue to
increase in focus and we made them a focus of this textbook. An ethics discussion is
also found at the end of each chapter and an ethics icon highlights applicable end‐of‐­
chapter material.
In order to place emphasis on business ethics in many chapters, it is important to estab-
lish a foundation of ethics to build upon. Chapter 3 includes a significant section on eth-
ics in the current environment and the relation of ethical problems to the need for
internal controls and ethics codes. We establish Chapter 3 as the foundation for the
­chapters that follow. The ethics and control concepts in Chapter 3 are reinforced as
themes throughout the text. We also include ethics‐related questions or cases in the
end‐of‐­chapter materials.
In addition to business ethics, corporate governance is a related topic that has received
much attention in the business world without a corresponding increase in focus by AIS
texts. In addition, each process chapter in Module 3 discusses corporate governance in its
application to the various business processes. Sarbanes–Oxley discussions are highlighted
in the textbook margins with the letters “SOX.”

Supplements
A solutions manual, test bank, computerized test bank, instructor outlines, and PowerPoint
presentations accompany this textbook. They are available on the instructor companion
site available with this textbook. The third edition of the text also provides instructors the
option of adding hands‐on learning of an ERP/AIS system, Microsoft Dynamics GP, to
their coursework. This additional supplement provides instructional materials and cloud
access to Microsoft Dynamics GP at a nominal cost. Details are provided in the textbook
website. The authors would like to thank Patricia Fedje, Minot State University; Yvonne
Phang, Borough of Manhattan Community College; and Coby Harmon, University of
California–Santa Barbara for their help in developing the test bank and PowerPoint
presentations.
 ACKN OWL E DGM E N T S

We would like to thank every instructor whose feedback helped us in all stages of the
­writing, editing, and production of this textbook. In particular, we thank Amelia Baldwin,
University of Alabama; Somnath Bhattacharya, Florida Atlantic University; Pascal A.
Bizzaro, University of Mississippi; Richard Dull, Clemson University; John Butler, Ohio
State University; Stephanie Farewell, University of Arkansas–Little Rock; Lawrence Grasso,
Central Connecticut State University; Neal Hannon, University of Hartford; Michael
Harkness, University of Michigan–Dearborn; Kenneth Henry, Florida International
University; Frank Ilett, Boise State University; Jack Kissinger, Saint Louis University; David
Knight, Borough of Manhattan Community College; Antoinette Lynch, Miami University;
Dorothy McMullen, Rider University; Johna Murray, University of Missouri–St. Louis;
Michael Palley, Baruch College; Karen Otto, University of Arizona; Tom Oxner, University
of Central Arkansas; Jeffery Payne, University of Kentucky; Georgia Smedley, University of
Nevada–Las Vegas; George Schmelzle, Indiana University–Purdue University Fort Wayne;
Wallace Wood, University of Cincinnati; Curt Westbook, California State University–San
Bernadino; and Yan Xiong, California State University–Sacramento.

xi
 TO T H E STU DE N TS

Businesses, and the products and services they provide, are unquestionably a critically
important part of our society. We would not have food, shelter, cars, computers, iPhones,
or the other things we need and use daily without smoothly functioning businesses to
provide those goods and services. Likewise, individual businesses could not operate at a
level to sustain our society without accounting information. Accounting information is
the lifeblood of business. Without the regular flow of accurate accounting information to
managers and investors, businesses would collapse. Operating a business or investing in
businesses without accounting information would be as difficult as driving with a covered
windshield. You would have no feedback information about where you are going and
what corrections you must make to get there. Just as your view through the windshield
tells you when to make steering, braking, and accelerating corrections, accounting infor-
mation allows managers and investors to determine how to make corrections that will
allow them to achieve business objectives.
Accountants generate, evaluate, summarize, report, and confirm the information that
managers and investors need to make good choices in their operations or objectives. The
system that allows accountants to accomplish this is the accounting information system.
The study of AIS provides a very important set of concepts to prepare you for an
accounting and business career. We hope the features of this book make your study of AIS
a little more pleasant, interesting, and understandable. Now, go forward and learn more
about AIS and its role in providing critical information to managers and investors!

xiii
 A LI S T OF R E A L - WO R L D E X A M P L E S
I N T H IS TE X TBOOK

Chapter Company Example Subject

1 McDonald’s remote order taking at drive‐throughs Business processes
1 McDonald’s and a dedicated supplier of buns, East Balt Supply chain
1 Ford and its reengineered vendor payment system Business processes
reengineering
1 American Institute of CPAS Top Technology IT priorities
Initiatives survey
1 BP and Deep Water Horizon oil spill Risks
1 Anonymous company that inflated revenues Ethics
2 Au Bon Pain and South Gate Restaurant updated Business processes
ordering systems
2 Bowen implementing a new system Legacy systems
2 Thomas Kemper Soda Company’s updated systems Cloud computing
2 Cole Haan, a subsidiary of Nike and system integration Legacy systems
2 Hawaii Commercial Real Estate, LLC’s data sharing Business processes
3 Phar‐Mor fraud Top management ethics
3 Johnson & Johnson fraud Top management ethics
3 Association of Certified Fraud Examiners and fraud Fraud
statistics
3 Enron and its demise Fraud
3 Xerox GAAP violations Fraud
3 Koss Corporation embezzlement scheme Fraud
3 Dow Chemical’s warning signs of fraud Fraud
3 Data Processors International and access to its database Hackers
3 Denial of service attacks at Yahoo, eBay, Amazon.com Hackers
3 Survey results: Ethical conduct in corporations Financial pressures
4 Network break‐ins at Stratfor and Target computers Hackers
4 2003 North American power blackout Disaster recovery
4 Internet company SurveyMonky Business continuity
4 Microsoft Windows operating system Hackers
4 Boeing’s automated shop floor Wireless networking
4 Availability risks at SalesForce.com and Coghead Cloud computing
4 Public and private cloud applications at Starbucks Cloud computing
4 Pornography on Federal computers at SEC Fraud
5 Information and technology strategy committee at UPS IT governance

xv
xvi  A List of Real-World Examples in This Textbook

Chapter Company Example Subject

5 Prioritizing IT projects at Allstate IT governance
5 Anheuser‐Busch’s use of IT to improve beer sales IT governance
6 Advantages of an ERP system at Agri‐Beef Company ERP
6 Advantages of an ERP system at Viper ERP
Motorcycle Company
6 SkullCandy’s growth and ERP system Cloud computing
6 Data security and availability at Microsoft Cloud computing
6 Failed ERP implementation at the city of Tacoma, ERP implementation
Washington and in Marin County, California
6 Successful ERP implementation at Marathon ERP implementation
7 JCPenney’s vendor audit of Aurafin IT audit benefits
7 Ford Motor Company’s focus on financial processes Internal audit
and controls
7 Use of CAATs at EY IT audit
7 Audit mistakes at Phar‐Mor Auditor independence
7 Koss Corporation’s lack of controls Audit failure
7 Crazy Eddie’s fraud Auditor independence
7 Enron, WorldCom, and Xerox and the need to Substantive testing
test balances
8 Sales processes performance measures at Staples Sales processes
8 Internet sales processes at Staples Sales processes
8 Internet EDI at Nortel Internet EDI
8 Advantages of a POS system at Pizza Hut POS systems
8 Fraud at MiniScribe Fraud
8 Sales misstatements at Coca‐Cola and McAfee Ethics
8 Sales misstatements at HealthSouth Fraud
9 General Electric’s electronic invoice presentment system IT enablement of purchasing
9 City Harvest doubles deliveries without increasing costs Purchasing and
procurement process
9 Frymaster’s automated invoice matching system IT enablement of purchasing
9 Federal government of the United States as strong IT enablement of
advocate of e‐invoicing purchasing
9 Evaluated receipt settlement system at an IT enablement of
anonymous company purchasing
9 General Electric’s procurement card use Business process
reengineering
9 Special checking account used at Phar‐Mor Fraud
9 Multiple instances of fraud by Paul Pigeon Fraud
9 Walmart’s ethics guidelines for employees in purchasing Ethics
10 Prince George’s County and Los Angeles county school Payroll processes
districts payroll problems with ERP
10 Amtrak ERP systems Payroll processes
10 Automated payroll system at Scott Paper Company IT enablement of payroll
 A List of Real-World Examples in This Textbook   xvii

Chapter Company Example Subject

10 Technology enhancements to property accounting at IT enablement of
Tempel Steel and Pepsi‐Cola fixed assets
10 Misclassification of fixed asset at WorldCom, Krispy Fraud
Kreme, and Sunbeam
10 Adelphia’s poor corporate governance related to Corporate governance
fixed assets
11 Nissan’s robotic plant IT enablement of
manufacturing
11 CAD/CAM at Jean Larrivée Guitars IT enablement of
manufacturing
11 CAD/CAM at Wild West Motorcycle Company IT enablement of
manufacturing
11 Walmart’s sophisticated database IT enablement of logistics
11 Fraud in conversion processes at F&C Flavors Fraud
12 Typical timing of month‐end closing processes Administrative processes
12 Fast closing process at Alcoa Administrative processes
12 Fraud in administrative processes at echapman.com Fraud
12 Automated authorization at Walmart Administrative processes
12 Interconnected systems at Walmart and Administrative processes
Procter & Gamble
12 Automatic triggering in ERP systems Administrative processes
12 Misleading data for investors at Krispy Kreme Ethics
13 Large database at Walmart Databases
13 High‐impact processes at Anheuser‐Busch and High‐impact processes
Hewlett Packard
13 Failed ERP and IT projects Data mining
13 Data mining at Anheuser‐Busch Data mining
13 Procter & Gamble (P&G) as a multinational consumer Cloud computing
products manufacturer
13 Data mining activities in Walmart Data mining
13 Control breakdown at Netflix Ethics
13 Distributed databases at McDonald’s Distributed data
13 Theft of data at Bloodstock Ethics
14 Walmart’s change to Internet EDI Internet EDI
14 E‐business at General Electric E‐business
14 E‐business at General Motors E‐business
14 E‐business at Komatsu E‐business
14 E‐business at Kenworth Truck Company E‐business
14 E‐business at Staples E‐business
14 Extranet use at Staples Extranet
14 Abuse of private information at Gateway Learning Ethics
Corporation
 CON TE N TS

About the Authors v

Prefacevii
Acknowledgmentsxi
To the Students xiii
A List of Real-World Examples in This Textbook xv

MODULE 1 INTRODUCTION Defines business processes, AIS,

and all foundational concepts. This module provides the
knowledge building blocks to support the
remaining chapters.

1 Introduction to AIS 1
Overview of Business Processes (Study Objective 1), 1
Overview of an Accounting Information System (Study Objective 2), 4
Business Process Linkage Throughout the Supply Chain (Study
Objective 3),5
IT Enablement of Business Processes (Study Objective 4), 7
Basic Computer and IT Concepts (Study Objective 5), 10
Basic Computer Data Structures, 10
File Access and Processing Modes, 11
Data Warehouse and Data Mining, 12
Structured, Unstructured, and Big Data, 13
Networks and the Internet, 14
Examples of IT Enablement (Study Objective 6), 15
E‐Business,15
Electronic Data Interchange, 15
Point of Sale System, 16
Automated Matching, 16
Evaluated Receipt Settlement, 16
E‐Payables and Electronic Invoice Presentment and Payment, 16
Enterprise Resource Planning Systems, 17
The Internal Control Structure of Organizations (Study Objective 7), 17
Enterprise Risk Management, 18

xix
xx  Contents

A Code of Ethics, 20
Coso Accounting Internal Control Structure, 20
IT Controls, 20
Corporate Governance, 20
IT Governance, 21
The Importance of Accounting Information Systems to
Accountants (Study Objective 8), 22
Users of the AIS, 22
Design or Implementation Team, 22
Auditors of the AIS, 22
The Relation of Ethics to Accounting Information Systems (Study
Objective 9),22
Summary of Study Objectives, 24
Key Terms, 25
End of Chapter Material, 26
■ Concept Check, 26
■ Discussion Questions, 26
■ Brief Exercises, 27
■ Problems, 27
■ Cases, 29
Solutions to Concept Check, 29

2 Foundational Concepts of the AIS 31

Interrelationships of Business Processes
and the AIS (Study Objective 1), 32
Types of Accounting Information Systems (Study Objective 2), 34
Manual Systems, 35
Legacy Systems, 36
Modern, Integrated Systems, 38
Client‐Server Computing (Study Objective 3), 38
Cloud Computing (Study Objective 4), 39
Accounting Software Market Segments (Study Objective 5), 43
Input Methods Used in Business Processes (Study Objective 6), 46
Source Documents and Keying, 46
Bar Codes, 47
Point of Sale Systems, 47
Electronic Data Interchange, 48
E‐Business and E‐Commerce, 48
Processing Accounting Data (Study Objective 7), 48
Batch Processing, 48
Online and Real‐Time Processing, 50
Outputs From the AIS Related to Business Processes
(Study Objective 8), 50
Documenting Processes and Systems (Study Objective 9), 51
Process Maps, 51
 Contents  xxi

System Flowcharts, 52
Document Flowcharts, 53
Data Flow Diagrams, 55
Entity Relationship Diagrams, 55
Ethical Considerations at the Foundation of
Accounting Information Systems(Study Objective 10), 59
Summary of Study Objectives, 60
Key Terms, 61
End of Chapter Material, 62
■ Concept Check, 62
■ Discussion Questions, 63
■ Brief Exercises, 63
■ Problems, 64
■ Cases, 65
Solutions to Concept Check, 66

MODULE 2 
CONTROL ENVIRONMENT Describes the proper
control environment to oversee and control processes.

3 Fraud, Ethics, and Internal Control 67

Introduction to the Need for a Code of Ethics and Internal
Controls (Study Objective 1), 67
Accounting‐Related Fraud (Study Objective 2), 70
Categories of Accounting‐Related Fraud, 72
The Nature of Management Fraud (Study Objective 3), 72
The Nature of Employee Fraud (Study Objective 4), 74
The Nature of Customer Fraud (Study Objective 5), 75
The Nature of Vendor Fraud (Study Objective 6), 76
The Nature of Computer Fraud (Study Objective 7), 76
Internal Sources of Computer Fraud, 76
External Sources of Computer Fraud, 77
Policies to Assist in the Avoidance of Fraud
and Errors (Study Objective 8), 79
Maintenance of a Code of Ethics (Study Objective 9), 79
Maintenance of Accounting Internal Controls (Study Objective 10), 80
The Details of the COSO Report, 82
Reasonable Assurance of Internal Controls, 90
Maintenance of Information Technology Controls
(Study Objective 11), 91
The Sarbanes–Oxley Act of 2002 (Study Objective 12), 93
Section 404—Management Assessment of Internal Controls, 93
Section 406—Code of Ethics for Senior Financial Officers,94
Summary of Study Objectives, 94
Key Terms, 96
xxii  Contents

End of Chapter Material, 96

■ Concept Check, 96
■ Discussion Questions, 97
■ Brief Exercises, 98
■ Problems, 98
■ Cases, 100
Solutions to Concept Check, 102

4 Internal Controls and Risks in IT Systems 103

An Overview of Internal Controls for IT Systems (Study Objective 1), 103
General Controls for IT Systems (Study Objective 2), 105
Authentication of Users and Limiting Unauthorized Users, 106
Hacking and Other Network Break‐Ins, 109
Organizational Structure, 112
Physical Environment and Security, 113
Business Continuity, 114
General Controls from an AICPA Trust Services Principles
Perspective (Study Objective 3), 115
Risks in not Limiting Unauthorized Users, 116
Risks from Hacking or Other Network Break‐Ins, 119
Risks from Environmental Factors, 119
Physical Access Risks, 120
Business Continuity Risks, 120
Hardware and Software Exposures in IT Systems (Study Objective 4), 120
The Operating System, 122
The Database, 123
The Database Management System, 124
LANs and WANs, 125
Wireless Networks, 125
The Internet and World Wide Web, 126
Telecommuting Workers and Mobile Workers, 127
Electronic Data Interchange, 127
Cloud Computing, 128
Application Software and Application Controls (Study Objective 5), 130
Input Controls, 131
Processing Controls, 137
Output Controls, 137
Ethical Issues in IT Systems (Study Objective 6), 138
Summary of Study Objectives, 139
Key Terms, 140
End of Chapter Material, 141
■ Concept Check, 141
■ Discussion Questions, 142
 Contents  xxiii

■ Brief Exercises, 143

■ Problems, 143
■ Cases, 144
Solutions to Concept Check, 145

5 IT Governance 148
Introduction to IT Governance (Study Objective 1), 148
An Overview of the SDLC (Study Objective 2), 152
The Phases of the SDLC, 155
Elements of the Systems Planning Phase of the SDLC
(Study Objective 3), 155
The Match of IT Systems to Strategic Objectives, 156
Feasibility Study, 156
Planning and Oversight of the Proposed Changes, 158
Elements of the Systems Analysis Phase of the SDLC
(Study Objective 4), 158
Preliminary Investigation, 158
System Survey: The Study of the Current System, 158
Determination of User Requirements, 160
Analysis of the System Survey, 161
Systems Analysis Report, 161
Elements of the Systems Design Phase of the SDLC
(Study Objective 5), 162
The Purchase of Software, 163
In‐House Design, 164
Conceptual Design, 164
Evaluation and Selection, 165
Cloud Computing as a Conceptual Design, 167
Detailed Design, 167
Elements of the Systems Implementation Phase
of the SDLC (Study Objective 6), 169
Software Programming, 170
Training Employees, 170
Software Testing, 171
Documenting the System, 171
Data Conversion, 171
System Conversion, 171
User Acceptance, 172
Post‐Implementation Review, 172
Elements of the Operation and Maintenance Phase of the SDLC
(Study Objective 7),172
The Critical Importance of IT Governance in an Organization
(Study Objective 8), 173
SDLC as Part of Strategic Management, 173
SDLC as an Internal Control, 173
xxiv  Contents

Ethical Considerations Related to IT Governance (Study  175

Objective 9),
Ethical Considerations for Management,  175
Ethical Considerations for Employees, 175
Ethical Considerations for Consultants, 176
Summary of Study Objectives, 177
Key Terms, 178
End of Chapter Material, 179
■ Concept Check, 179
■ Discussion Questions, 179
■ Brief Exercises, 180
■ Problems, 180
■ Cases, 181
Solutions to Concept Check, 182

6 Enterprise Resource Planning (ERP) Systems 183

Overview of ERP Systems (Study Objective 1), 183
History of ERP Systems (Study Objective 2), 186
Current ERP System Characteristics (Study Objective 3), 188
ERP Modules (Study Objective 4), 190
Financials,190
Human Resources, 191
Procurement and Logistics, 191
Product Development and Manufacturing, 191
Sales and Services, 191
Analytics,191
Supply Chain Management (SCM), 191
Customer Relationship Management (CRM), 192
Market Segments of ERP Systems (Study Objective 5), 192
Tier One Software, 192
Tier Two Software, 193
Cloud‐Based ERP, 194
Implementation of ERP Systems (Study Objective 6), 195
Hiring a Consulting Firm, 195
The Best‐Fit ERP System, 195
Which Modules to Implement, 196
Best of Breed Versus ERP Modules, 196
Business Process Reengineering, 196
Customization of the ERP System, 197
The Costs of Hardware and Software, 197
Testing of the ERP System, 198
Data Conversion, 198
Training of Employees, 198
The Methods of Conversion to the ERP System, 198
 Contents  xxv

Benefits and Risks of ERP Systems (Study Objective 7), 201

Benefits of ERP Systems, 201
Risks of ERP Systems, 202
ERP Systems and the Sarbanes–Oxley Act (Study Objective 8), 204
Summary of Study Objectives, 206
Key Terms, 207
End of Chapter Material, 208
■ Concept Check, 208
■ Discussion Questions, 209
■ Brief Exercises, 209
■ Problems, 210
■ Cases, 210
Solutions to Concept Check, 211

7 Auditing Information Technology-Based Processes 212

Introduction to Auditing IT Processes (Study Objective 1), 212
Types of Audits and Auditors (Study Objective 2), 213
Information Risk and IT‐Enhanced Internal Control
(Study Objective 3), 215
Authoritative Literature Used in Auditing (Study Objective 4), 216
Management Assertions and Audit
Objectives (Study Objective 5), 218
Phases of an IT Audit (Study Objective 6), 219
Audit Planning, 220
Use of Computers in Audits (Study Objective 7), 223
Tests of Controls (Study Objective 8), 224
General Controls, 224
Application Controls, 227
Tests of Transactions and Tests of Balances (Study Objective 9), 231
Audit Completion/Reporting (Study Objective 10), 233
Other Audit Considerations (Study Objective 11), 235
Different IT Environments, 235
Changes in a Client’s IT Environment, 237
Sampling Versus Population Testing, 238
Ethical Issues Related to Auditing (Study Objective 12), 239
Summary of Study Objectives, 242
Key Terms, 243
End of Chapter Material, 244
■ Concept Check, 244
■ Discussion Questions, 246
■ Brief Exercises, 247
■ Problems, 247
■ Cases, 248
Solutions To Concept Check, 248
xxvi  Contents

MODULE 3 
BUSINESS PROCESSES The sets of business
processes and the internal controls in organizations.
With process maps, document flowcharts, and data flow
diagrams, the core business processes are described and
the necessary controls to manage risk are discussed.

8 Revenue and Cash Collection Processes and Controls 250

Introduction to Revenue Processes (Study Objective 1), 250
Sales Processes (Study Objective 2), 255
Risks and Controls in Sales Processes (Study Objective 2,
Continued),262
Authorization of Transactions, 262
Segregation of Duties, 262
Adequate Records and Documents, 263
Security of Assets and Documents, 263
Independent Checks and Reconciliation, 264
Cost–Benefit Considerations, 264
Sales Return Processes (Study Objective 3), 266
Risks and Controls in the Sales Return Processes
(Study Objective 3, Continued), 266
Authorization of Transactions, 266
Segregation of Duties, 269
Adequate Records and Documents, 269
Security of Assets and Documents, 270
Independent Checks and Reconciliation, 270
Cost–Benefit Considerations, 270
Cash Collection Processes (Study Objective 4), 271
Risks and Controls in the Cash Collection Processes
(Study Objective 4, Continued), 272
Authorization of Transactions, 272
Segregation of Duties, 272
Adequate Records and Documents, 276
Security of Assets and Documents, 276
Independent Checks and Reconciliation, 277
Cost–Benefit Considerations, 277
IT‐Enabled Systems of Revenue and Cash Collection Processes
(Study Objective 5), 279
E‐Business Systems and the Related Risks and Controls
(Study Objective 6), 281
Security and Confidentiality Risks, 283
Processing Integrity Risks, 283
Availability Risks, 284
Electronic Data Interchange (EDI) Systems and the Risks
and Controls (Study Objective 7), 284
Point Of Sale (POS) Systems and the Related Risks
and Controls (Study Objective 8), 288
 Contents  xxvii

Ethical Issues Related to Revenue Processes (Study Objective 9), 289

Corporate Governance in Revenue Processes (Study Objective 10), 292
Summary of Study Objectives, 292
Key Terms, 294
End of Chapter Material, 294
■ Concept Check, 294
■ Discussion Questions, 296
■ Brief Exercises, 296
■ Problems, 297
■ Cases, 302
Solutions to Concept Check, 306

9 Expenditures Processes and Controls—Purchases 309

Introduction to Expenditures Processes (Study Objective 1), 309
Purchasing Processes (Study Objective 2), 312
Risks and Controls in the Purchasing Process
(Study Objective 2, continued), 322
Authorization of Transactions, 322
Segregation of Duties, 322
Adequate Records and Documents, 323
Security of Assets and Documents, 324
Independent Checks and Reconciliation, 324
Cost–Benefit Considerations, 324
Purchase Return Process (Study Objective 3), 326
Risks and Controls in the Purchase Return Processes
(Study Objective 3, continued), 330
Authorization of Transactions, 330
Segregation of Duties, 330
Adequate Records and Documents, 330
Security of Assets and Documents, 331
Independent Checks and Reconciliation, 331
Cost–Benefit Considerations, 331
Cash Disbursement Processes (Study Objective 4), 332
Risks and Controls in the Cash Disbursement Processes
(Study Objective 4, continued), 338
Authorization of Transactions, 338
Segregation of Duties, 339
Adequate Records and Documents, 339
Security of Assets and Documents, 339
Independent Checks and Reconciliation, 339
Cost–Benefit Considerations, 340
IT Systems of Expenditures and Cash Disbursement Processes
(Study Objective 5),341
Computer‐Based Matching (Study Objective 6), 343
Risks and Controls in Computer‐Based Matching
(Study Objective 6, continued), 344
Exploring the Variety of Random
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right hand; and two gentlemen were standing in the farthest corner at
the back of the room.
As he reached out his hand, His Majesty began to express, in simple
but sincere fashion, his satisfaction at the instruction and advice
which had been given to his people, and added renewed assurances
of his gratitude for the service. In few words, he was assured by me
of the great pleasure which had been taken in the work of the year,
and of the debt of gratitude which was felt for the opportunity to be of
service to Japan. His Majesty then said that he had heard of my
intention soon to depart for home, wished me a safe and prosperous
journey, and expressed the hope that my family and friends would be
found in health and prosperity on my arrival. He then dismissed me
by extending his hand again for me to take.
I have spoken of the four audiences which I have had the honour to
enjoy, with His Majesty, the Emperor of Japan, with some detail and
with all the frankness within the limits of a courteous reserve,
because they seem to me to throw light upon his personality as a
man and as a ruler of men. There has never been any diplomatic
reason or political motive for noticing me or my work in any
distinctive way. I am only a teacher; and I have had no ambition for
any higher title than that of “teacher,” no desire for any more
imposing kind of service. But His Majesty’s painstaking to recognise,
and to signalise with his favour before the nation, his appreciation for
any services rendered to the “moral education” of his people, has
been as unmistakably sincere as it has been distinctive. And there is
abundant reason to believe that this painstaking regard for the moral
and other welfare of his people, irrespective of considerations of
diplomatic policy, or rank, or expectation of similar favours in return,
characterises throughout the Imperial rule of the present Emperor of
Japan. One would have to search hard among the world’s present
day rulers to find another so affectionate, so solicitous, so self-
sacrificing, where the interests of his people are concerned, as
Mutsu-hito, His Imperial Japanese Majesty.
Let it be remembered that the present Emperor succeeded to the
Throne on the January of the year before the one (1868) on the third
of November of which he became sixteen years of age. A civil war
had placed him upon the throne, with something like the real Imperial
power which had been withheld from his ancestors for so many
generations. There was partisan strife and confusion of opinion and
of counsel everywhere. Since his day, the nation has passed through
one civil war, and two bloody and expensive foreign wars. Meantime,
too, it has in a manner to astonish the civilised world, come forward
into the rank of one of the nations destined to lead the world’s
civilisation. Without laying any stress upon the traditional way among
the Japanese of ascribing all manner of success and prosperity to
the virtues of the Emperor, it is simple matter of historical fact that
the patience, wisdom, and benevolence of their present ruler are,
either directly or indirectly, responsible for the escaping of much evil
and the securing of much good on the nation’s behalf. Japan has
been guided out of the old era into the new by a very remarkable
body of men; but among them all, there is probably not one who will
not tell you in all sincerity, if he can be induced to speak freely and in
confidence upon the subject, that, all things considered, His Imperial
Majesty must be conceded to be the most patient, wise, and
benevolent guide and supreme ruler of them all.

THE END
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