1. Deck 4 Accounting Information Systems Romney and Steinbart
Linda Batch
May 2012

2. Contents Learning Objectives
Review of the Components of a Transaction (REA)
Chapter Quiz Questions
Review the answers to Problem 17.4 and 17.6
Review Power Points for Chapters 5
Microsoft Access – Continue with the database exercise

3. Homework from Last Week
Problem 17.4 and 17.6 – hand in at the beginning of the next class
Chapter 17 pp. 492 to 502 – Read again
Chapter 17 quiz questions
Read Chapter 5 pp. 121 to 135 (whole chapter)
Read Chapter 6 pp. 149 to 167 (whole chapter)

4. Moving on to: Steps in Developing a Database (REA)
Step 1: Identify the events about which management wants to collect and store information Step 2: Identify the resources and agents affected by each event The Events Resources and Agents are Entities Each entity will be represented by a different table in a relational database Step 3: Determine the cardinalities of the relationships between entities

5. Identify the events of interest to management
Step 1 - Event
Identify the events of interest to management
A solid understanding about the activities performed in each business cycle (give / get relationships)
Revenue Cycle:
Take customer orders (neither give nor get)
Fill customer orders (give) - sale
Bill customers (neither give nor get)
Collect payment from customers (get)

6. Step 2 – Resources and Agents
Identify resources and agents
What economic resource is reduced by the give event
What economic resource is acquired by the get event
What economic resource is affected by a commitment
give inventory (or product), get cash
employee gives the inventory to the customer
employee gets the cash from the customer

7. Rules for Structuring Relationships
Every event must be linked to at least one resource entity
Every event entity must be linked to at least one other event entity
Every event entity must be linked to at least two agent entities
Order the event entities from top to bottom in the order that they occur

8. Step 3 – How are Data Cardinalities Represented on a REA Diagram?
Relationship type is based on maximum cardinality:
One-to-One:
One-to-Many:
Many-to-Many:
These relationships are not arbitrary but must reflect the organization’s business policies (pg. 505)

9. Problem 17.4
Sue’s Gallery only purchases finished paintings (it never commissions artists). It pays each artist 50% of the agreed price at the time of purchase, and the remainder after the painting is sold. All purchases are paid by check from Sue’s main checking account.
Draw an REA Diagram, complete with cardinalities, of the gallery’s expenditure cycle.
Identify Resources, Events and Agents and note this is the Expenditure Cycle

10. Problem 17.4 Build up the REA Diagram
Resources
Events
Agents
Artwork
Cash
Purchase paintings
Pay Artists
Artists
Gallery buyer
Gallery seller

11. Problem 17.4

12. Problem 17.6
Provide an example (in terms of companies with which you are familiar) for each of the business situations described by the following relationship cardinalities:
(a) A company may receive multiple cash payments on a single sale or a company may receive one payment for several sales. This scenario could take place between any vendor and any customer. The vendor is allowing customers to make multiple payments on a single invoice and is allowing customers to pay for multiple invoices with a single payment.

13. Problem 17.6
(b) A sale can include multiple items, but an item can be included in only one sale. This type of arrangement would involve individual items like art work or automobiles.
(c) In this scenario, some inventory purchases can be paid for with multiple payments, while at times a single disbursement may pay for multiple purchases. This scenario represents a revolving credit plan offered by suppliers.
(d) In this scenario, inventory purchases are to be paid for with a single payment. For example, a vendor sends a monthly bill for merchandise delivered to a customer. The supplier does not accept or allow installment payments. This is typical for many business to business transactions that involve low-priced items.

14. Problem 17.6
(e) In this scenario, a single purchase of inventory is paid for with multiple payments. For example, a car dealership makes installment payments for cars delivered from the manufacturer.
(f) In this scenario, each sale must be preceded by one and only one order. The fact that both the order and sales events are recorded implies that there is probably a time lag between taking the customer’s order and filling that order, so that the selling organization needs to be able to track the status of orders. An internet sale is an example of this type of scenario. When a customer places an order with Amazon.com, there is a time lag between the time the order is sent by the customer and the time Amazon fills the order.

15. Problem 17.6
(g) In this scenario, each sale can be comprised of multiple orders and each order can be associated with multiple sales. Thus, we have here a situation where the selling company batches orders and only ships periodically – e.g., with restaurants, suppliers may take orders daily but fill them only on Mondays and Thursdays. Moreover, suppliers may occasionally run out of some items, requiring multiple deliveries (sales) to fill a specific order.
(h) Payment upfront for a single sale similar to the way DELL sells computers; i.e., no installment payments are allowed, the customer must pay in full in advance (prior to shipment).

16. Problem 17.6
(i) In this scenario, a sale can include multiple inventory items. Also, a single inventory item can be included in multiple sales. For example, Wal-Mart customers can purchase many inventory items such as detergent, tires, and clothing items. These mass-produced inventory items can also be sold to many customers. Therefore, a sale can include a box of detergent, a set of tires, and a sweatshirt. By the same token, the same brand of detergent can be included in many different sales.
(j) Sales need not be preceded by orders, but any orders are associated with only one sale (filled individually, not batched). An example is a hardware store in which some sales are made to walk-in customers (sales without preceding orders), but which also allows contractors to place orders by phone, fax, or over the Internet in advance and then pick up the order later.

17. Chapter 5 – Computer Fraud
Learning Objectives
Explain the threats faced by modern information systems.
Define fraud and describe the process one follows to perpetuate a fraud.
Discuss who perpetrates fraud and why it occurs, including:
the pressures, opportunities, and rationalizations that are present in most frauds.
Define computer fraud and discuss the different computer fraud classifications.
Explain how to prevent and detect computer fraud and abuse.

18. Threats to AIS Natural Disasters and Terrorist Threats
Software Errors and/or Equipment Malfunction
Unintentional Acts (Human Error)
Intentional Acts (Computer Crimes)

19. What is Fraud Gaining an unfair advantage over another person
Individuals who commit fraud are referred to as white-collar criminals.
Legally for an act to be fraudulent there must be:
A false statement, representation, or disclosure
A material fact that induces a person to act
An intent to deceive
A justifiable reliance on the fraudulent fact in which a person takes action
An injury or loss suffered by the victim

20. Forms of Fraud Misappropriation of assets
Theft of a companies assets.
Largest factors for theft of assets:
Absence of internal control system
Failure to enforce internal control system
Fraudulent financial reporting
“…intentional or reckless conduct, whether by act or omission, that results in materially misleading financial statements” (The Treadway Commission).

21. Reasons for Fraudulent F/S
Deceive investors or creditors
Increase a company’s stock price
Meet cash flow needs
Hide company losses or other problems
The Association of Certified Fraud Examiners found that an asset misappropriation is 17 times more likely than fraudulent financial reporting but the amounts involved are much lower.

22. SAS #99 – The Auditors Responsibility to Detect Fraud
SAS – Statement on Auditing Standards
Auditors responsibility to detect fraud
Understand fraud
Discuss risks of material fraudulent statements
Among members of audit team
Obtain information
Look for fraud risk factors
Identify, assess, and respond to risk
Evaluate the results of audit tests
Determine impact of fraud on financial statements
Document and communicate findings
Incorporate a technological focus

23. Who Perpetuates Fraud and Why?
Very little difference between the general public and those that perpetuate white collar crime
Most have no prior criminal history
Most are upstanding citizens in the community
A growing number of computer fraud perpetuators seek monetary gain from their actions
Malicious software is big business
Cyber-criminals are at top FBI priority because they have moved from isolated and uncoordinated attacks to organized fraud schemes targeting individuals and businesses.

24. The Fraud Triangle - Pressure
Opportunity
Rationalization
Employee
Financial
Emotional
Lifestyle
Financial Reporting
Industry Conditions
Mgmt Characteristics
Employee Pressure Triangle
Financial Statement Pressure Triangle

25. The Fraud Triangle - Opportunity
Pressure
Opportunity
Rationalization
Condition or situation that allows a person or organization to:
Commit the fraud
Conceal the fraud
Lapping
Kiting
Convert the theft or misrepresentation to personal gain
Opportunity
Commit
Conceal
Convert

26. The Fraud Triangle - Rationalization
Pressure
Opportunity
Rationalization
Justification of illegal behavior:
Justification
I am not being dishonest.
Attitude
I don’t need to be honest.
Lack of personal integrity
Theft is valued higher than honesty or integrity.
Rationalization
Justification
Attitude
Lack of Peronal Integrity

27. Fraud Triangle Summary
Usually all three elements need to exist before an employee will perpetuate a fraud
Fraud can be prevented by eliminating one or more fraud triangle elements
Pressure
Opportunity
Rationalization

28. Computer Fraud - Classifications
Input Fraud
Alteration or falsifying input
Processor Fraud
Unauthorized system use
Computer Instructions Fraud
Modifying software, illegal copying of software, using software in an unauthorized manner, creating software to undergo unauthorized activities
Data Fraud
Illegally using, copying, browsing, searching, or harming company data
Output Fraud
Stealing, copying, or misusing computer printouts or displayed information

29. Preventing and Detecting Fraud and Abuse Table 5-5 pg.134
Make Fraud Less Likely to Occur
Organizational Culture
Adopt an organizational structure, management style, operating style, and risk appetite that minimizes the risk of fraud
Active involved independent audit committee
Train employees on ethical considerations
Increase the Difficulty of Committing Fraud
Develop a strong system of internal controls
Segregate the functions of authorization, recording, and custody
Proper segregation of duties between functions
System access to authorized personnel

30. Preventing and Detecting Fraud and Abuse Table 5-5 pg.134
Improve Detection Methods
Create an audit trail of individual transactions
Conduct periodic internal and external audits
Install fraud detection software
Implement a fraud detection hotline
Reduce Fraud Losses
Maintain adequate insurance
Develop comprehensive fraud contingency, disaster recovery, and business continuity plans
Store backup copies of program and data files in a secure off-site location
Use software to monitor system activity and recover from fraud

31. Homework
TBD