Accounting Information Systems An Introduction Chapter 1 Accounting Information Systems An Introduction Dr. Hisham Madi

What is a System? A group of interrelated multiple components or subsystems that serve a common purpose System or subsystem? A system is called a subsystem when it is viewed as a component of a larger system. A subsystem is considered a system when it is the focus of attention

Introduction PURPOSE.A system must serve at least one purpose a system provides a measure of time, electrical power, or information, serving a purpose is its fundamental justification

An Example of an Artificial System An automobile is an example of an artificial system the automobile system serves only one purpose: providing conveyance

An Example of an Artificial System

An Example of an Artificial System SYSTEMDECOMPOSITION. Decomposition is the process of dividing the system into smaller subsystem parts This is a convenient way of representing, viewing, and understanding the relationships among subsystems. Each subordinate subsystem performs one or more specific functions to help achieve the overall objective of the higher-level system

An Example of an Artificial System SUBSYSTEM INTERDEPENDENCY.A system’s ability to achieve its goal depends on the effective functioning and harmonious interaction of its subsystems If a vital subsystem fails or becomes defective and can no longer meet its specific objective, the overall system will fail to meet its objective

Introduction What is an Information System? An information system is the set of formal procedures by which data are collected, processed into information, and distributed to users

Introduction Transactions A transaction is a business event. Financial transactions economic events that affect the assets and equities of the organization (sales, and purchase). Nonfinancial transactions all other events processed by the organization’s. adding new supplier of raw materials.

Introduction Financial Transactions User Information Decision System Making Information Nonfinancial Transactions 10

Introduction What is Accounting Information Systems? Applying information technology (IT) to accounting systems Financial accounting Managerial accounting Auditing Taxation It identifies, collects, processes, and communicates economic information about a firm using a wide variety of technologies

Introduction Accounting information systems exists at the intersection of two important disciplines: (1) accounting and (2) information systems An Accounting Information System (AIS) Data and processing procedures Creates needed information for users

Accounting Versus Management Information System Accounting Information Systems (AIS) process financial transactions; e.g., sale of goods and nonfinancial transactions that directly affect the processing of financial transactions; e.g., addition of newly approved vendors. Management Information Systems (MIS) process nonfinancial transactions that are not normally processed by traditional AIS; e.g., tracking customer complaints, production planning, control, sales forecasting.

AIS Subsystems AIS subsystems process financial transactions and nonfinancial transactions that directly affect the processing of financial transactions. The AIS is composed of three major subsystems: The transaction processing system (TPS), converting economic events into financial transactions, recording financial transactions in the accounting records (journals and ledgers), and distributing essential financial information to operations personnel to support their daily operations

AIS Subsystems the general ledger/financial reporting system (GL/FRS), which produces the traditional financial statements, such as the income statement, balance sheet, statement of cash flows, tax returns, and other reports required by law The management reporting system (MRS), which provides internal management with special-purpose financial reports and information needed for decision making such as budgets, variance reports, and responsibility reports

Accounting Versus Management Information System IS AIS GLS/FRS TPS MRS MIS Finance Marketing Production HRS Distribution AIS versus MIS? 11

The General AIS Model

Data Sources Data sources are financial transactions that enter the information system from internal and external sources. External financial transactions are the most common source of data for most organizations. E.g., sale of goods and services, purchase of inventory, receipt of cash, and disbursement of cash (including payroll). Internal financial transactions involve the exchange or movement of resources within the organization. E.g., movement of raw materials into work-in-process (WIP), application of labor and overhead to WIP, transfer of WIP into finished goods inventory, and depreciation of equipment.

Information Versus Data Raw facts No organization or meaning Have not processed (edited, summarized, or redefined) Have no direct effect on the users. Information Processed data Meaningful to users Cause the user to take an action.

Transforming the 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

Transforming the Data into Information Data Collection Capturing transaction data Recording data onto forms Validating and editing the data Data Processing Merging Calculating Summarizing Comparing

Transforming the Data into Information Data Management Storing Retrieving Deleting Information Generation Compiling Arranging Formatting Presenting

Characteristics of Useful Information Relevance: serves a purpose Timeliness: no older than the time period of the action it supports Accuracy: free from material errors Completeness: all information essential to a decision or task is present Summarization: aggregated in accordance with the user’s needs

The Importance of IT to Accountants Accountants often help clients make software and hardware purchases Auditors must evaluate computerized systems Often asked to evaluate the efficiency and effectiveness of existing system Understanding is vital to passing most certification exams

The Role of the Accountant Accountants are primarily involved in three ways: as system users, designers, and auditors ACCOUNTANTS AS USERS As end users, 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 Auditing is a form of independent attestation performed by an expert—the auditor—who expresses an opinion about the fairness of a company’s financial statements External Auditing attest to fairness of financial statements IT Auditors evaluate IT, often as part of external audit, The IT auditor attests to the effectiveness of a client’s IT controls to establish their degree of compliance with prescribed standards

The Role of the Accountant Internal Auditing Internal auditors perform a wide range of activities on behalf of the organization, including conducting financial statement audits, examining an operation’s compliance with organizational policies, reviewing the organization’s compliance with legal obligations, evaluating operational efficiency, detecting and pursuing fraud within the firm, and conducting IT audits.

The Role of the Accountant External auditors represent third-party outsiders, whereas internal auditors represent the interests of management