2Chapter 2—AIS processes Business activitiesBusiness cyclesData Processing Cycle
3Business ActivitiesBasic business activities an organization engages in?Buying buildings/equipmentHiring/training employeesPurchasing inventorySelling goods/servicesPaying VendorsAcquiring capital
4Basic Business Processes A set ofGive-Get exchanges
5Effective AIS Each activity requires different types of information. Information may be financial or non-financialSource of information may be internal or externalAn effective AIS needs to be able to integrate this information
7Business cyclesLike business activities for the AIS to capture, process, reportRevenueExpenditureSome companies split out Fixed Assets as there own cyclePR (in book = HR)ProductionTreasury (in book = Financing)
8What is missing? FINANCIAL REPORTING Most companies now consider the activities around this process a separate cycleActivities include?Journal entriesFinancial disclosureManagement review
10Things to keep in mindThousand of transactions can occur within a cycle, but there are relatively few types of transactions in a cycle.Every transaction cycle relates to other cycles and interfaces with the general ledger/reporting system (i.e. Financial Close Cycle), which generates information for management and external parties.Accounting software packages often separate into modules that mirror cycles.Not every company uses every cycle.
11Chapter 2 – Problem 2.9 Answer to Problem 2.9: Classify each of the following items as belonging in the revenue, expenditure, human resources/payroll, production, or financing cycle.Purchase raw materials –Expenditure cyclePayoff mortgage on factory –Treasury cycleHire a new assistant controller –Payroll cycleEstablish a $10,000 credit limit for customer XYZ company –Revenue cycle
12Chapter 2 – Problem 2.9 (cont) Answer to Problem 2.9 (cont):Classify each of the following items as belonging in the revenue, expenditure, human resources/payroll, production, or financing cycle.e) Pay for raw materials –Expenditure cyclef) Disburse payroll checks to factory workers -PR cycleg) Record goods received from vendor –h) Update the allowance for uncollectible accounts –Financial Reporting cycle (book=Revenue)Decide how many units to make next month – Production cycleProduction cycle
13Data Processing “Cycle” An important function of the AIS is to efficiently and effectively process the data about a company’s transactions.The “data processing cycle’s” 4 steps:Data inputData storageData processingInformation output
14i.e. Collect data Capture the data Implement control procedures Record in journalsGeneral for rare or adjustingSpecialized for standardizedPost to ledgersPrepare reports
15Data Input Usually triggered by a business activity What is captured? Timing of the event (when)Characteristics (what is affected)Participants (who)
16Data Input: Internal control considerations A number of small actions can improve the accuracy and efficiency of data input:Document design (manual)Multiple copiesSpace for approval sign-offPre-numberedInput (automated)Fill-in based on key dataAutomatic numberingSmart fieldsMatching to existing data
17Data Storage Data needs to be organized for easy and efficient access With automated systems, master tables (chart of accounts, vendor, customer, inventory, etc.) set-up, content and access is critical to integrity of system
18Data storage: Internal control considerations Sequence codes: consecutive numbering to prevent gaps and/or duplicatesSub-ledgers/journals: provide more details for like transactions and enhance information retrieval/supportSmart coding: means of grouping items (G/L account, vendors, inventory, customers, etc.) for analysisAudit trail: adequate documentation to allow tracing of a transaction from beginning to end or from end back to beginning (i.e. posting references, document numbers, bundling)
20Data Processing Updating data-recording the transaction i.e. purchase of raw material, record a customer saleChanging data-update to existing permanent recordsi.e. change a customer address, change the name of a vendorAdding data-add a new permanent recordi.e. add new G/L account, add new inventory itemDeleting data-delete permanent record (be very careful do not destroy existing audit trail, usually involves lack of activity in the current period at least)i.e. remove non-active customer
21Data (Computer) processing Master/transaction filesBatch/real-time/on-lineQueries/reportsI am going to spend little time on this, but expect you to use the terms and concepts pretty readily…ask questions if you need to.
22Data processing: Internal control considerations Access, Access, AccessEdit reports: provides potential errors in data (i.e. unusual account balances (negative cash, credit balance for an expense account)IT Segregation of duties
23Information outputDocuments – generated for internal or external use; can be printed or stored electronically (i.e. paychecks, invoices, purchase orders)Reports – used by employees to control operational activities and by manages to make decisions and design strategies (i.e. general ledger, variance analysis, inventory turnover)Queries – ad hoc user requests for specific information; often system display only (i.e. vendor address, customer credit limit)
24Information output: Internal control considerations Confidentiality – develop means to restrict access to certain data (SS#s, pricing data, costing, etc.)Timeliness – information should be available when needed (invoices, M/E reports, audit schedules) by user, not restricted by system processingVersion Control – user should be able to readily determine information “as of” date. Is it as of a certain date/time period (today, M/E, Year-to-date), last processing update, real-time? Previous (historical) data availability should also be based on user needs.