THE INFORMATION ENVIRONMENT

•INFORMATION IS A BUSINESS RESOURCE.

•INTERNAL AND EXTERNAL INFORMATION FLOW
INTERNAL AND EXTERNAL INFORMATION FLOW
INTERNAL INFORMATION FLOW
•HORIZONTAL FLOW
•PRIMARILY USED AT THE OPERATIONS LEVEL TO CAPTURE
TRANSACTIONAL AND OPERATIONS DATA
•VERTICAL FLOW
•DOWNWARD FLOW – INSTRUCTIONS, DATA, QUOTAS
•UPWARD FLOW – AGGREGATED TRANSACTIONS AND OPERATIONS
OPERATIONS DATA
EXTERNAL INFORMATION FLOW

•TRADING PARTNERS
•CUSTOMER SALES AND COMPANY PURCHASE INFORMATION
•STAKEHOLDERS
•ENTITIES WITH DIRECT OR INDIRECT INTEREST IN THE FIRMS
INFORMATION REQUIREMENT

•ALL USER GROUPS HAVE UNIQUE INFORMATION

REQUIREMENTS
•LEVEL OF DETAIL AND NATURE OF INFORMATION
SYSTEM

•A SYSTEM IS A GROUP OF MULTIPLE INTERRELATED

COMPONENTS OR SUBSYSTEMS THAT SERVE A COMMON
PURPOSE.
SYSTEM
•MULTIPLE COMPONENTS
• MUST CONTAIN MORE THAN ONE PART
•RELATEDNESS
• A COMMON PURPOSE RELATES THE MULTIPLE PARTS OF THE SYSTEM
•PURPOSE
• A SYSTEM MUST SERVE AT LEAST ONE PURPOSE, BUT MAY SERVE
SEVERAL
SYSTEM

•SYSTEM VS SUBSYSTEM
•SUBSYSTEM – A SYSTEM THAT IS VIEWED IN RELATION TO A
LARGER SYSTEM WHICH IT IS A PART
 CELLPHONE

DISPLAY POWER COMMUNICATION CAMERA PROCESSOR

SYSTEM SYSTEM SYSTEM SYSTEM SYSTEM

Sim Camera
Screen Battery
Card Lens CPU

Image
Touch Battery Application
WiFi Processing
Sensors Circuitry Unit Components

Touch
Circuitry
Bluetooth

EXAMPLE OF A SUBSYSTEM
DECOMPOSITION VS. INTERDEPENDENCY
•SYSTEM DECOMPOSITION
•PROCESS OF DIVIDING THE SYSTEM INTO SMALLER SUBSYSTEM
PARTS
•SYSTEM INTERDEPENDENCY
•ALL VITAL PARTS OF A SUBSYSTEM MUST BE FUNCTIONING WELL
OR THE ENTIRE SYSTEM WILL FAIL
INFORMATION SYSTEM

•SET OF FORMAL PROCEDURES BY WHICH DATA ARE COLLECTED,

PROCESSED INTO INFORMATION, AND DISTRIBUTED TO USERS
TRANSACTION
•AN EVENT THAT AFFECTS OR IS OF INTEREST TO THE
ORGANIZATION AND IS PROCESSED BY ITS INFORMATION
SYSTEM AS A UNIT OF WORK
2 CLASSES OF TRANSACTION
•FINANCIAL TRANSACTION
• ECONOMIC EVENT THAT AFFECTS THE ASSETS AND EQUITIES OF THE
ORGANIZATION,IS REFLECTED IN ITS ACCOUNTS, AND IS MEASURED IN
MONETARY TERMS
•NON-FINANCIAL TRANSACTION
•EVENTS THAT MEET THE RESIDUAL DEFINITION OF A FINANCIAL
TRANSACTION
FINANCIAL
TRANSACTION
INFORMATION INFORMATION USER
SYSTEM DECISIONS
NON- FINANCIAL
TRANSACTION
ACCOUNTING INFORMATION SYSTEM
•AN EVENT THAT AFFECTS OR IS OF INTEREST TO THE
ORGANIZATION AND IS PROCESSED BY ITS INFORMATION
SYSTEM AS A UNIT OF WORK
THE ACCOUNTING INFORMATION SYSTEM
• IDENTIFIES, COLLECTS, PROCESSES, AND COMMUNICATES ECONOMIC
INFORMATION ABOUT A FIRM USING A WIDE VARIETY OF TECHNOLOGIES
• IT CAPTURES AND RECORDS THE FINANCIAL EFFECTS OF A FIRM’S
TRANSACTIONS
• DISTRIBUTES TRANSACTION INFORMATION TO OPERATIONS PERSONNEL
TO COORDINATE MANY KEY TASKS
AIS VS. MIS
• AIS SUBSYSTEMS PROCESS FINANCIAL TRANSACTIONS AND
NONFINANCIAL TRANSACTIONS THAT DIRECTLY AFFECT THE
PROCESSING OF FINANCIAL TRANSACTIONS.
• THE MANAGEMENT INFORMATION SYSTEM (MIS) PROCESSES
NONFINANCIAL TRANSACTIONS THAT ARE NOT NORMALLY
PROCESSED BY TRADITIONAL AIS
AIS VS. MIS
INFORMATION
SYSTEM

ACCOUNTING MANAGEMENT
INFORMATION INFORMATION
SYSTEM SYSTEM

FINANCIAL HUMAN
MARKETING DISTRIBUTION
GL/FRS TPS MRS MANAGEMENT RESOURCE
SYSTEM SYSTEM
SYSTEM SYSTEM
AIS SUBSYSTEMS
•TRANSACTION PROCESSING SYSTEM (TPS)
• SUPPORTS DAILY BUSINESS OPERATIONS WITH NUMEROUS
REPORTS, DOCUMENTS, AND MESSAGES FOR USERS THROUGHOUT
THE ORGANIZATION
• TPS CONSISTS OF THREE TRANSACTION CYCLES: THE REVENUE
CYCLE, THE EXPENDITURE CYCLE, AND THE CONVERSION CYCLE
AIS SUBSYSTEMS
•GENERAL LEDGER/FINANCIAL REPORTING SYSTEM (GL/FRS)
• PRODUCES THE TRADITIONAL FINANCIAL STATEMENTS
• THIS TYPE OF REPORTING IS CALLED NONDISCRETIONARY
BECAUSE THE ORGANIZATION HAS FEW OR NO CHOICES IN THE
INFORMATION IT PROVIDES.
AIS SUBSYSTEMS
•MANAGEMENT REPORTING SYSTEM (MRS)
• PROVIDES INTERNAL MANAGEMENT WITH SPECIAL-PURPOSE
FINANCIAL REPORTS AND INFORMATION NEEDED FOR DECISION
MAKING
• THIS TYPE OF REPORTING IS CALLED DISCRETIONARY REPORTING
BECAUSE THE ORGANIZATION CAN CHOOSE WHAT INFORMATION
TO REPORT AND HOW TO PRESENT IT
 AIS
SUBSYSTEMS
DATA VS. INFORMATION
• DATA ARE FACTS, WHICH MAY OR MAY NOT BE PROCESSED AND HAVE
NO DIRECT EFFECT ON THE USER
• INFORMATION CAUSES THE USER TO TAKE AN ACTION THAT HE OR
SHE OTHERWISE COULD NOT, OR WOULD NOT, HAVE TAKEN.
DATA SOURCES
• DATA SOURCES ARE FINANCIAL TRANSACTIONS THAT ENTER THE INFORMATION
SYSTEM FROM BOTH INTERNAL AND EXTERNAL SOURCES.
• INTERNAL FINANCIAL TRANSACTIONS INVOLVE THE EXCHANGE OR MOVEMENT
OF RESOURCES WITHIN THE ORGANIZATION.
• EXTERNAL FINANCIAL TRANSACTIONS ARE ECONOMIC EXCHANGES WITH
OTHER BUSINESS ENTITIES AND INDIVIDUALS OUTSIDE THE FIRM.
TRANSFORMING DATA INTO INFORMATION
• FUNCTIONS FOR TRANSFORMING DATA INTO INFORMATION
ACCORDING TO THE GENERAL AIS MODEL:
1. DATA COLLECTION
2. DATA PROCESSING
3. DATA MANAGEMENT
4. INFORMATION GENERATION
DATA COLLECTION
• THE MOST IMPORTANT STAGE IN THE SYSTEM.
• THE OBJECTIVE IS TO ENSURE THAT EVENT DATA ENTERING THE
SYSTEM ARE VALID, COMPLETE, AND FREE FROM MATERIAL ERRORS
• CAPTURE TRANSACTION DATA
• RECORD DATA INTO FORMS
• VALIDATE AND EDIT THE DATA
DATA PROCESSING
• CLASSIFYING • MERGING
• TRANSCRIBING • CALCULATING
• SORTING • SUMMARIZING
• BATCHING • COMPARING
DATA MANAGEMENT
• THE ORGANIZATION’S DATABASE IS ITS PHYSICAL OR DIGITAL REPOSITORY
FOR FINANCIAL AND NONFINANCIAL DATA AND REPRESENTS ITS CONTENTS
IN A LOGICAL HIERARCHY.
• DATA ATTRIBUTE - A LOGICAL AND RELEVANT CHARACTERISTIC OF AN ENTITY ABOUT
WHICH THE FIRM CAPTURES DATA
• DATA RECORD - COMPLETE SET OF ATTRIBUTES FOR A SINGLE OCCURRENCE WITHIN
AN ENTITY CLASS
• DATA FILES - COMPLETE SET OF RECORDS OF AN IDENTICAL CLASS.
INFORMATION GENERATION
• PROCESS OF COMPILING, ARRANGING, FORMATTING, AND
PRESENTING INFORMATION TO USERS.
CHARACTERISTICS OF USEFUL
INFORMATION
• RELEVANCE - THE CONTENTS OF A REPORT OR DOCUMENT MUST
SERVE A PURPOSE.
• TIMELINESS - INFORMATION MUST BE NO OLDER THAN THE TIME OF
THE ACTION IT SUPPORTS.
• ACCURACY - INFORMATION MUST BE FREE FROM MATERIAL ERRORS
CHARACTERISTICS OF USEFUL
INFORMATION
• COMPLETENESS - NO PIECE OF INFORMATION ESSENTIAL TO A
DECISION OR TASK SHOULD BE MISSING.
• SUMMARIZATION - INFORMATION SHOULD BE AGGREGATED IN
ACCORDANCE WITH THE USER’S NEEDS
INFORMATION SYSTEM OBJECTIVES
1. TO SUPPORT THE STEWARDSHIP FUNCTION OF MANAGEMENT
2. TO SUPPORT MANAGEMENT DECISION MAKING
3. TO SUPPORT THE FIRM’S DAY-TO-DAY OPERATIONS
ORGANIZATIONAL STRUCTURE
• REFLECTS THE DISTRIBUTION OF RESPONSIBILITY, AUTHORITY, AND
ACCOUNTABILITY THROUGHOUT THE ORGANIZATION.
BUSINESS SEGMENTS
• BUSINESS ORGANIZATIONS CONSIST OF FUNCTIONAL UNITS OR
SEGMENTS.
• MANAGERS WITHIN A SEGMENT CAN FOCUS THEIR ATTENTION ON
NARROW AREAS OF RESPONSIBILITY TO ACHIEVE HIGHER LEVELS OF
OPERATING EFFICIENCY.
BUSINESS SEGMENTS
• THREE OF THE MOST COMMON APPROACHES
1. GEOGRAPHIC LOCATION
2. PRODUCT LINE
3. BUSINESS FUNCTION

• SOME FIRMS USE MORE THAN ONE METHOD OF SEGMENTATION

FUNCTIONAL SEGMENTATION
1. INVENTORY/MATERIALS 5. PERSONNEL
MANAGEMENT 6. FINANCE
2. PRODUCTION 7. ACCOUNTING
3. MARKETING 8. IT SERVICES
4. DISTRIBUTION
ACCOUNTING INDEPENDENCE
• INFORMATION RELIABILITY RESTS HEAVILY ON THE CONCEPT OF
ACCOUNTING INDEPENDENCE.
• MUST BE SEPARATE AND INDEPENDENT OF THE FUNCTIONAL AREAS
THAT MAINTAIN CUSTODY OF PHYSICAL RESOURCES.
• ACCOUNTING SUPPORTS THESE FUNCTIONS WITH IN FORMATION BUT
DOES NOT ACTIVELY PARTICIPATE IN THE PHYSICAL ACTIVITIES.
 INFORMATION TECHNOLOGY FUNCTION
• CENTRALIZED DATA PROCESSING
• ALL DATA PROCESSING IS PERFORMED
BY ONE OR MORE LARGE COMPUTERS
HOUSED AT A CENTRAL SITE THAT
SERVE USERS THROUGHOUT THE
ORGANIZATION.
 INFORMATION TECHNOLOGY FUNCTION

• DISTRIBUTED DATA PROCESSING

• DDP INVOLVES REORGANIZING THE IT
FUNCTION INTO SMALL IN FORMATION
PROCESSING UNITS (IPUS) THAT ARE
DISTRIBUTED TO END USERS AND
PLACED UNDER THEIR CONTROL.
ADVANTAGES OF DDP
• COST REDUCTIONS IN HARDWARE AND DATA ENTRY TASKS
• IMPROVED COST CONTROL RESPONSIBILITY
• IMPROVED USER SATISFACTION
• BACKUP
DISADVANTAGES OF DDP
• LOSS OF CONTROL • REDUNDANT TASKS AND DATA
• MISMANAGEMENT OF • CONSOLIDATING INCOMPATIBLE
ORGANIZATION-WIDE RESOURCES ACTIVITIES
• HARDWARE AND SOFTWARE • HIRING QUALIFIED PROFESSIONALS
INCOMPATIBILITY • LACK OF STANDARDS
EVOLUTION OF INFORMATION SYSTEM
MODELS
• THE MANUAL PROCESS MODEL
• OLDEST AND MOST TRADITIONAL FORM OF ACCOUNTING SYSTEMS.
• PHYSICAL EVENTS, RESOURCES, AND PERSONNEL THAT CHARACTERIZE MANY
BUSINESS PROCESSES. INCLUDES THE PHYSICAL TASK OF RECORD KEEPING.
EVOLUTION OF INFORMATION SYSTEM
MODELS
• THE FLAT-FILE MODEL
• ALSO CALLED LEGACY SYSTEM
• DESCRIBES AN ENVIRONMENT IN
WHICH INDIVIDUAL DATA FILES
ARE NOT RELATED TO OTHER FILES.
EVOLUTION OF INFORMATION SYSTEM
MODELS
• THE FLAT-FILE MODEL
• DATA REDUNDANCY EVIDENT TO THE LEGACY SYSTEM CONTRIBUTES TO THE
FOLLOWING PROBLEMS:
• DATA STORAGE • TASK DATA DEPENDENCY
• DATA UPDATING • LIMIT DATA INTEGRATION
• CURRENCY OF
INFORMATION
 EVOLUTION OF INFORMATION SYSTEM
MODELS
• DATABASE MODEL
• THIS APPROACH CENTRALIZES THE
ORGANIZATION’S DATA INTO A COMMON
DATABASE THAT IS SHARED BY OTHER USERS.
• WITH THE ORGANIZATION’S DATA IN A CENTRAL
LOCATION, ALL USERS HAVE ACCESS TO THE DATA
THEY NEED TO ACHIEVE THEIR RESPECTIVE
OBJECTIVES.
 EVOLUTION OF INFORMATION SYSTEM
MODELS
• THE REA MODEL
• RESOURCES ARE THE ASSETS OF THE
ORGANIZATION.
• EVENTS ARE PHENOMENA THAT AFFECT
CHANGES IN RESOURCES.
• AGENTS ARE INDIVIDUALS AND
DEPARTMENTS THAT PARTICIPATE IN AN
ECONOMIC EVENT.
EVOLUTION OF INFORMATION SYSTEM
MODELS
• ENTERPRISE RESOURCE PLANNING SYSTEMS
• INFORMATION SYSTEM MODEL THAT ENABLES AN ORGANIZATION TO
AUTOMATE AND INTEGRATE ITS KEY BUSINESS PROCESSES.
• ERP BREAKS DOWN TRADITIONAL FUNCTIONAL BARRIERS BY FACILITATING
DATA SHARING, INFORMATION FLOWS, AND THE INTRODUCTION OF COMMON
BUSINESS PRACTICES AMONG ALL ORGANIZATIONAL USERS.
THE ROLE OF THE ACCOUNTANT
• ACCOUNTANTS AS USERS OF INFORMATION SYSTEM
• ACCOUNTANTS MUST PROVIDE A CLEAR PICTURE OF THEIR NEEDS TO THE
PROFESSIONALS WHO DESIGN THEIR SYSTEMS.
• THE ACCOUNTANT SHOULD ACTIVELY PARTICIPATE IN SYSTEMS
DEVELOPMENT PROJECTS TO ENSURE APPROPRIATE SYSTEMS DESIGN
THE ROLE OF THE ACCOUNTANT
• ACCOUNTANTS AS SYSTEM DESIGNERS
• THE 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
THE ROLE OF THE ACCOUNTANT
• ACCOUNTANTS AS SYSTEM AUDITORS
• EXTERNAL AUDITORS
• ATTEST TO FAIRNESS OF FINANCIAL STATEMENTS
• ASSURANCE SERVICE: BROADER IN SCOPE THAN TRADITIONASL ATTESTATION AUDIT
• IT AUDITORS
• EVALUATE IT, OFTEN AS PART OF EXTERNAL AUDIT
• INTERNAL AUDITORS
• IN-HOUSE IS AND IT APPRAISAL SERVICES
INTRODUCTION TO TRANSACTION
PROCESSING
 AN ECONOMIC EVENT THAT AFFECTS THE
ASSETS AND EQUITIES OF THE FIRM, IS
REFLECTED IN ITS ACCOUNTS, AND IS MEASURED
IN MONETARY TERMS.
THE EXPENDITURE CYCLE
 PHYSICAL COMPONENT (THE ACQUISITION OF
THE GOODS AND SERVICES)
 FINANCIAL COMPONENT (THE CASH
DISBURSEMENT TO THE SUPPLIER)
THE CONVERSION CYCLE
 PRODUCTION SYSTEM (PLANNING,
SCHEDULING, AND CONTROL OF THE PHYSICAL
PRODUCT)
 COST ACCOUNTING SYSTEM (FLOW OF COST
INFORMATION RELATED TO PRODUCTION)
THE REVENUE CYCLE
 PHYSICAL COMPONENT (SALES ORDER
PROCESSING)
 FINANCIAL COMPONENT (CASH RECEIPTS)
THE REVENUE CYCLE
 PHYSICAL COMPONENT (SALES ORDER
PROCESSING)
 FINANCIAL COMPONENT (CASH RECEIPTS)
SOURCE DOCUMENTS
 USED TO CAPTURE AND FORMALIZE TRANSACTION
DATA THAT THE TRANSACTION CYCLE NEEDS FOR
PROCESSING
PRODUCT DOCUMENTS
 THE RESULT OF TRANSACTION PROCESSING
RATHER THAN THE TRIGGERING MECHANISM FOR
THE PROCESS
TURNAROUND DOCUMENTS
 PRODUCT DOCUMENTS OF ONE SYSTEM THAT
BECOME SOURCE DOCUMENTS FOR ANOTHER
SYSTEM
JOURNALS – A RECORD OF
CHRONOLOGICAL ENTRY
 SPECIAL JOURNALS – SPECIFIC CLASSES OF
TRANSACTIONS OCCURING IN HIGH
FREQUENCY
 GENERAL JOURNAL – NONRECURRING,
INFREQUENT, AND DISSIMILAR TRANSACTIONS
LEDGER – BOOK OF FINANCIAL ACCOUNTS
 GENERAL LEDGER – SHOWS ACTIVITY FOR
EACH ACCOUNT LISTED ON THE CHART OF
ACCOUNTS
 SUBSIDIARY LEDGER – SHOWS ACTIVITY BY
DETAIL FOR EACH ACCOUNT TYPE
 SOURCE GENERAL FINANCIAL
JOURNAL
DOCUMENT LEDGER STATEMENT

ACCOUNTANTS SHOULD BE ABLE TO TRACE

IN BOTH DIRECTIONS.
VERIFYING AND CONFIRMATION ARE TWO
COMMON TECHNIQUES
 AUDIT TRAILS IN COMPUTER-BASED SYSTEMS ARE
LESS OBSERVABLE THAN IN TRADITIONAL
MANUAL SYSTEMS
 THE DATA ENTRY AND COMPUTER PROGRAMS
ARE THE PHYSICAL TRAIL.
 THE DATA ARE STORED IN MAGNETIC
FILES/CLOUD STORAGES
 TYPES OF FILES
 MASTER FILE - GENERALLY CONTAINS ACCOUNT DATA
 TRANSACTION FILE – TEMPORARY FILE OF
TRANSACTION RECORDS SINCE THE LAST UPDATE
 REFERENCE FILE – CONTAINS RELATIVELY CONSTANT
INFORMATION USED IN PROCESSING
 ARCHIVE FILE CONTAINS RECORDS OF PAST
TRANSACTIONS THAT ARE RETAINED FOR FUTURE
REFERENCE.
 DOCUMENTATION IN A COMPUTER-BASED
ENVIRONMENT IS NECESSARY FOR MANY
REASONS.
 FIVE COMMON DOCUMENTATION TECHNIQUES
 DATA FLOW DIAGRAMS
 DOCUMENT FLOWCHARTS
 SYSTEM FLOWCHARTS
 PROGRAM FLOWCHARTS
 USES SYMBOLS TO REPRESENT THE ENTITIES,
PROCESSES, DATA FLOWS, AND ENTITIES IN A
SYSTEM
 REPRESENT THE LOGICAL ELEMENTS OF THE
SYSTEM
 DO NOT REPRESENT THE PHYSICAL SYSTEM
ENTITY DATA STORE
NAME NAME

N
PROCESS
DESCRIP-
DIRECTION OF
TION
DATA FLOW
 DOCUMENTATION TECHNIQUE USED TO
REPRESENT THE RELATIONSHIP BETWEEN
ENTITIES
 THE REA MODEL VERSION OF ERD IS WIDELY
USED IN AIS.
 REA USES 3 TYPES OF ENTITIES:
 RESOURCES
 EVENTS
 AGENTS
CARDINALITIES
 NUMERIC MAPPING BETWEEN ENTITY
INSTANCES
 ONE-TO-ONE
 ONE-TO-MANY
 MANY-TO-MANY
 CARDINALITIES
GRAPHICAL REPRESENTATION OF THE
PHYSICAL RELATIONSHIPS AMONG KEY
ELEMENTS OF A SYSTEM.
CLEARLY DEPICT THE SEPARATION OF
FUNCTIONS IN A SYSTEM
 ARE USED TO REPRESENT THE RELATIONSHIP
BETWEEN THE KEY ELEMENTS – INPUT SOURCES,
PROGRAMS, AND OUTPUT PRODUCTS – OF
COMPUTER SYSTEMS
 DEPICTS THE MEDIA BEING USED (PAPER, CLOUD,
ETC. )
ILLUSTRATE THE LOGIC USED IN PROGRAMS
MODERN SYSTEMS CHARACTERISTICS:
 CLIENT-SERVER BASED AND PROCESS
TRANSACTIONS IN REAL TIME
 USE RELATIONAL DATABASE TABLES
 HAVE HIGH DEGREE OF PROCESS
INTEGRATION AND DATA SHARING
 SOME ARE MAINFRAME BASED AND USE
BATCH PROCESSING
LEGACY SYSTEMS CHARACTERISTICS
 MAINFRAME-BASED APPLICATIONS
 BATCH ORIENTED
 DATA STORAGE SYSTEMS PROMOTE A SINGLE-
USER ENVIRONMENT THAT DISCOURAGES
INFORMATION INTEGRATION
MODERN SYSTEMS VS. LEGACY SYSTEMS
 SOME FIRMS EMPLOY LEGACY SYSTEMS FOR
CERTAIN ASPECTS OF THEIR DATA
PROCESSING
 ACCOUNTANTS NEED TO UNDERSTAND
LEGACY SYSTEMS
 DESTRUCTIVE UPDATES LEAVES NO BACKUP
 TO PRESERVE ADEQUATE RECORDS, BACKUP
PROCEDURES MUST BE IMPLEMENTED
TWO BROAD CLASSES OF SYSTEMS
 BATCH SYSTEMS
 REAL-TIME SYSTEMS
BATCH PROCESSING SYSTEMS
 A BATCH IS A GROUP OF SIMILAR
TRANSACTIONS THAT ARE ACCUMULATED
OVER TIME AND THEN PROCESSED TOGETHER.
 A TIME LAG EXISTS BETWEEN THE EVENT AND
THE PROCESSING
REAL TIME SYSTEMS
 PROCESS THE ENTIRE TRANSACTION AS IT
OCCURS
 HAVE NO TIME LAG BETWEEN THE ECONOMIC
EVENT AND THE PROCESSING
AIS PROCESSING IS CHARACTERIZED BY
HIGH-VOLUME, INDEPENDENT
TRANSACTIONS, SUCH ARE RECORDING
CASH RECEIPTS CHECKS RECEIVED IN THE
MAIL.
THE PROCESSING OF SUCH HIGH-VOLUME
CHECKS CAN BE DONE DURING AN OFF-
PEAK COMPUTER TIME.
 CONCISELY REPRESENT LARGE AMOUNTS OF
COMPLEX INFORMATION THAT WOULD
OTHERWISE BE UNMANAGEABLE
 PROVIDE A MEANS OF ACCOUNTABILITY
COMPLETENESS OF THE TRANSACTIONS
PROCESSED OVER THE
 IDENTIFY UNIQUE TRANSACTIONS AND
ACCOUNTS WITHIN FILE
 SUPPORT THE AUDIT FUNCTION BY PROVIDING
AN EFFECTIVE AUDIT TRAIL
 REPRESENT ITEMS IN SEQUENTIAL ORDER
 USED TO PRENUMBER SOURCE DOCUMENTS
 TRACK EACH TRANSACTION PROCESSED
 IDENTIFY ANY OUT-OF-SEQUENCE DOCUMENTS
 REPRESENT WHOLE CLASSES BY ASSIGNING
EACH CLASS A SPECIFIC RANGE WITHIN THE
CODING SCHEME
 USED FOR CHART OF ACCOUNTS
 THE BASIS OF THE GENERAL LEDGER
 ALLOWS FOR THE EASY INSERTION OF NEW
CODES WITHIN A BLOCK
 DON'T HAVE TO REORGANIZE THE CODING
STRUCTURE
 REPRESENT COMPLEX ITEMS OR EVENTS
INVOLVING TWO OR MORE PIECES OF RELATED
DATA.
 USED FOR MANY OF THE SAME PURPOSES AS
NUMERIC CODES.
 MAY BE ASSIGNED SEQUENTIALLY (IN
ALPHABETIC ORDER) OR MAY BE USED IN
BLOCK AND GROUP CODING TECHNIQUES
 ALPHABETIC CHARACTERS IN THE FORM OF
ACRONYMS AND OTHER COMBINATIONS THAT
CONVEY MEANING
INTRODUCTION TO TRANSACTION
PROCESSING
ETHICS, FRAUD,
AND INTERNAL
CONTROL
BUSINESS ETHICS

• Ethics pertains to the principles of conduct

that individuals use in making choices and
guiding their behavior in situations that
involve the concepts of right and wrong
BUSINESS ETHICS

• Four Areas:
• Equity
• Rights
• Honesty
• Exercise of Corporate Power.
COMPUTER ETHICS

• Analysis of the nature and social impact of

computer technology and the
corresponding formulation and justification
of policies for the ethical use of such
technology
COMPUTER ETHICS

• MAIN COMPUTER
• Privacy ETHICS
IssuesISSUES:
• Security • Artificial
• Ownership of Intelligence
Property • Unemployment and
• Equity in Access Displacement
• Misuse of
• Environmental Computers
FRAUD

• Fraud denotes a false representation of a

material fact made by one party to another
party with the intent to deceive and induce
the other party to justifiably rely on the fact
to his or her detriment.
FRAUD

• A fraudulent act must meet the following five

conditions:
• False representation.
• Material fact.
• Intent to deceive
• Justifiable reliance.
• Injury or loss.
EMPLOYEE FRAUD

• Fraud by nonmanagement employees, is

generally designed to directly convert cash or
other assets to the employee’s personal
benefit.
MANAGEMENT FRAUD
1. The fraud is perpetrated at levels of management
above the one to which internal control structures
generally relate.
2. The fraud frequently involves using the financial
statements to create an illusion that an entity is
healthier and more prosperous than, in fact, it is.
3. If the fraud involves misappropriation of assets, it
frequently is shrouded in a maze of complex
business transactions, often involving related third
parties.
FRAUD TRIANGLE
• Motivation
• Opportunity
• Rationalization
• Cability
THE UNDERLYING PROBLEMS

• Lack of Auditor Independence

• Lack of Director Independence
• Questionable Executive Compensation Schemes
• Inappropriate Accounting Practices
SARBANES-OXLEY ACT OF
2002
• Its principal reforms pertain to
1. the creation of an accounting oversight
board,
2. auditor independence
3. corporate governance and responsibility,
4. disclosure requirements
5. penalties for fraud and other violations
FRAUD SCHEMES

1. Fraudulent Statements
2. Corruption
3. Asset Missapropriation
FRAUDULENT STATEMENTS
• Associated with management fraud
• Misstating the financial statements to make
the copy appear better than it is
• May be tied to focus on short-term financial
measures for success
• May also be related to management bonus
packages being tied to financial statements
CORRUPTION

• Corruptioninvolves an executive, manager,

or employee of the organization in collusion
with an outsider.
• Bribery
• Illegal gratuities
• Conflicts of interest
• Economic extortion
ASSET MISAPPROPRIATION
• Mostcommon type of fraud and often
occurs as employee fraud
• Skimming • Expense
• Cash Larceny Reimbursements
• Billing Schemes • Thefts of Cash
• Check Tampering • Non-Cash
• Payroll Fraud Misappropriations
INTERNAL CONTROL
CONCEPTS AND TECHNIQUES
• The internal control system comprises
policies, practices, and procedures
employed by theassets
1. To safeguard organization to achieve
efficiency in the firm’s
four broad
of the firm. objectives: operations.
2. To ensure the 4. To measure
accuracy and compliance with
reliability of accounting management’s
records and information. prescribed policies and
procedures.
MODIFYING ASSUMPTIONS OF THE
INTERNAL CONTROL OBJECTIVES

1. MANAGEMENT RESPONSIBILITY
2. REASONABLE ASSURANCE
3. METHODS OF DATA PROCESSING
LIMITATIONS OF INTERNAL
CONTROLS

1. The possibility of error

2. Circumvention
3. Management override
4. Changing conditions
EXPOSURES OF WEAK
INTERNAL CONTROLS
(RISK)

1. Destruction of an
asset
2. Theft of an asset
3. Corruption of
information
4. Disruption of the
information system
THE PREVENTIVE–DETECTIVE–
CORRECTIVE INTERNAL
CONTROL MODEL

• PREVENTIVE CONTROLS
• Preventive controls are passive techniques
designed to reduce the frequency of
occurrence of undesirable events.
THE PREVENTIVE–DETECTIVE–
CORRECTIVE INTERNAL
CONTROL MODEL
• DETECTIVE CONTROLS.
• Detective controls form the second line of
defense. These are devices, techniques, and
procedures designed to identify and expose
undesirable events that elude preventive
controls
THE PREVENTIVE–DETECTIVE–
CORRECTIVE INTERNAL
CONTROL MODEL

• CORRECTIVE CONTROLS.
• Corrective controls are actions taken to
reverse the effects of errors detected in the
previous step.
SAS 78/COSO INTERNAL
CONTROL FRAMEWORK

• Describes the relationship between the

firm’s:
• Internal control structure
• Auditor’s assessment of risk
• Planning of audit procedures
FIVE INTERNAL CONTROL
COMPONENTS OF SAS
78/COSO
1. Control Environment
2. Risk Assessment
3. Information and Communication
4. Monitoring
5. Control activities
CONTROL ENVIRONMENT
1. The integrity and ethical values of management.
2. The structure of the organization.
3. The role of the organization’s board of directors and
the audit committee
4. Management’s philosophy and operating style.
5. The procedures for delegating responsibility and
authority.
6. External influences, such as examinations by
regulatory agencies.
7. The organization’s policies and practices for
RISK ASSESSMENT
1. Changes in external environment
2. Risky foreign markets
3. Significant and rapid growth that strain internal
controls
4. New product lines
5. Restructuring, downsizing
6. Changes in accounting policies
INFORMATION AND
COMMUNICATION
• the AIS should produce high quality information
which:
1. Identifies and records all valid transactions
2. Provide timely information about transactions in
sufficient detail to permit proper classification and
financial reporting.
3. Measure accourately the financial value of
transactions
4. Accurately record transactions in the time period
in which they occurred
MONITORING
• Separate procedures – test of controls by
internal auditors
• Ongoing monitoring:
• Computer modules integrated into routine operations
• Management reports which highlights trends and
exceptions from normal performance
CONTROL ACTIVITIES
• Policies
and procedures used to ensure that
appropriate actions are taken to deal with the
organization’s identified risks
• IT Controls
• Physical Controls
IT CONTROLS
• ITcontrols relate specifically to the computer
environment.
• They fall into two broad groups:
• General controls pertain to entity-wide concerns
• Application controls ensure the integrity of specific
systems
PHYSICAL CONTROLS
• relates primarily to the human activities
employed in accounting systems.
• six categories of physical control activities:
• transaction authorization
• segregation of duties
• Supervision
• accounting records
• access control
• independent verification
TRANSACTION
AUTHORIZATION
• ensure that all material transactions processed
by the information system are valid and in
accordance with management’s objectives.
• Authorizations may be general (everyday
procedures) or specific (non-routine transactions)
authorizations
SEGREGATION OF DUTIES
• In manual systems, separation between:
• Authorizing and processing a transaction
• Custody and recordkeeping of the asset
• Subtasks
• In computer systems, separation between
• Program coding
• Program processing
• Program maintenance
SUPERVISION
• compensate for the absence of segregation controls
• supervision is often called a compensating control.

ACCOUNTING RECORDS
• Provide an audit trail
ACCESS CONTROL
• Help
to safeguard assets by restricting physical
access to them

INDEPENDENT VERIFICATION
• independent checks of the accounting system to identify errors
and misrepresentations.