CHAPTER 1 EXTERNAL USERS

1. TRADING PARTNERS
ACCOUNTING INFORMATION SYSTEM - customer sales and billing information, purchase
information for suppliers, and inventory receipts
information
INFORMATION IN BUSINESS 2. STAKEHOLDERS
- entities outside (or inside) the organization with a
Information is a business resource that: direct or indirect interest in the firm
▪ needs to be appropriately managed External Stakeholders - Stockholders, financial
▪ is vital to the survival of contemporary institutions, and government agencies, e.g.
businesses financial statements, tax returns, and stock
transaction information
Inside stakeholders - accountants and internal
auditors.

WHAT IS A SYSTEM?
- A group of interrelated multiple components or
subsystems that serve a common purpose.
●​ Multiple Components - A system must
contain more than one part.
●​ Relatedness - A common purpose relates
the multiple parts of the system
●​ Subsystem - when it is viewed as a
component of a larger system ;
considered as a system when it is the
focus of attention
Operations management ●​ Purpose - A system must serve at least
- directly responsible for controlling day-to-day one purpose, but it may serve several.
operations
Middle management
- accountable for the short-term planning and
System Decomposition versus system Interdependency
coordination of activities SYSTEM DECOMPOSITION
Top management ▪ the process of dividing the system into smaller
- responsible for longer-term planning and setting subsystem parts
organizational objectives SYSTEM INTERDEPENDENCY
▪ distinct parts are not self-contained
▪ they are reliant upon the functioning of the other
INTERNAL INFORMATION FLOWS parts of the system
HORIZONTAL FLOWS OF INFORMATION ▪ all distinct parts must be functioning or the
- used primarily at the operations level to capture system will fail
transaction and operations data. ▪ a system’s ability to achieve its goal depends on
- supports operations-level tasks with highly the effective functioning and harmonious
detailed information interaction of its subsystems
- e.g. sale and shipment of goods, the use of labor
and materials in the production process, and INFORMATION SYSTEM
internal transfers of resources from one - the set of formal procedures by which data are
department to another collected, processed into information, and
distributed to users. (INPUT > PROCESS > OUTPUT)
VERTICAL FLOWS OF INFORMATION
- distributes information downward from senior ACCOUNTING INFORMATION SYSTEM (AIS)
managers to junior managers and operations - Accepts input, which are converted through
personnel in the form of instructions, quotas, and various processes into output information that
budgets goes to users
▪ DOWNWARD FLOWS— instructions, quotas, TRANSACTION
and budgets - is a business event.
▪ UPWARD FLOWS - an event that affects or is of interest to the
— aggregated transaction and operations organization and is processed by its information
data system as a unit of work
FINANCIAL TRANSACTION
INFORMATION REQUIREMENTS - economic events that affect the assets and
▪ Each user group has unique information equities of the organization
requirements. - e.g., purchase of an airline ticket
▪ The higher the level of the organization, the NON FINANCIAL TRANSACTION
greater the need for more aggregated information - all other events processed by the
and less need for detail. organization’s information system
▪ Higher level > need more aggregated info - e.g., an airline reservation — no
▪ Lower level > need more detailed info commitment by the customer
 ➢​Non Discretionary Reporting because the
TRANSACTION organization has few or no choices in the
information it provides.

3. MANAGEMENT REPORTING SYSTEM (MRS)

-​ produces special-purpose reports for
internal use
-​ provides internal management with
special-purpose financial reports and
information needed for decision making
-​ e.g. budgets, variance reports, and
WHAT IS AN ACCOUNTING INFORMATION SYSTEM? responsibility reports Discretionary
Accounting is an information system. reporting because the organization can
▪ It identifies, collects, processes, and choose what information to report and how
communicates economic information about a to present it.
firm using a wide variety of technologies.
▪ It captures and records the financial effects of GENERAL MODEL FOR AIS
the firm’s transactions.
▪ It distributes transaction information to
operations personnel to coordinate many key
tasks.

AIS vs MIS
Accounting Information Systems (AIS) process
▪ financial transactions; e.g., sale of goods
▪ non financial transactions that directly affect
the processing of financial transactions; e.g.,
addition of newly approved vendors
Management Information Systems (MIS) process
▪ non financial transactions that are not
normally processed by traditional AIS;
▪ e.g., tracking customer complaints

DATA VERSUS INFORMATION

DATA INFORMATION

are facts, which may - it is processed data

or may not be -it causes the user to
processed (edited, take an action that he
summarized, or or she otherwise could
refined) and have no not, or would not,
direct effect on the have taken.
user.

▪ If output from the information system fails to

AIS SUBSYSTEMS cause users to act, the system serves no purpose
and has failed in its primary objective.
1. TRANSACTION PROCESSING SYSTEM (TPS)
- supports daily business operations with
numerous reports, documents, and messages DATA sources
for users throughout the organization ▪ Data sources are financial transactions that
3 TRANSACTION CYCLE enter the information system from internal and
1. The Revenue Cycle external sources.
2. The Expenditure Cycle ▪ External financial transactions
3. The Conversion Cycle - are the most common source of data for
most organizations.
2. GENERAL LEDGER/ FINANCIAL REPORTING SYSTEM (GL/FRS) - E.g., sale of goods and services, purchase of
- produces financial statements and reports inventory, receipt of cash, and disbursement
- e.g. the income statement, balance sheet, of cash (including payroll)
statement of cash flows, tax returns, and other ▪ Internal financial transactions
reports required by law - involve the exchange or movement of
➢​Summaries of transaction cycle activity are resources within the organization.
processed by the GLS to update the general - E.g., movement of raw materials into
ledger control accounts. work-in-process (WIP),
➢​The FRS measures and reports the status of application of labor and overhead to WIP,
financial resources and the changes in transfer of WIP into finished goods inventory,
those resources. and depreciation of equipment
 ▪ The formal process by which this is accomplished
TRANSFORMING DATA INTO INFORMATION is called the system development life cycle.
Functions for transforming data into information ▪ Three (3) basic types of commercial software are
according to the general AIS model: 1.​ Turnkey systems
1. DATA COLLECTION 2.​Backbone systems
▪ Capturing transaction data 3.​Vendor-supported systems.
▪ Recording data onto forms
▪ Validating and editing the data
2. DATA PROCESSING
ORGANIZATIONAL STRUCTURE
The structure of an organization helps to allocate:
• Classifying
▪ responsibility
• Transcribing
▪ authority
• Sorting
▪ accountability
• Batching
Segmenting by business function is a very
• Merging
common method of organizing.
• Calculating
• Summarizing
• Comparing functional areas
3. DATA MANAGEMENT ▪ Inventory/Materials Management
▪ Storing - purchasing, receiving and stores
▪ Retrieving ▪ Production
▪ Deleting - production planning, quality control, and
maintenance
▪ Marketing
▪ Distribution
▪ Personnel
▪ Finance
▪ Accounting
▪ Computer Services

aCCOUNTING INDEPENDENCE
▪ Information reliability requires accounting
independence.
▪ Accounting activities must be separate and
independent of the functional areas
maintaining resources.
▪ Accounting supports these functions with
information but does not actively participate.
4. INFORMATION GENERATION ▪ Decisions makers in these functions require
▪ Compiling that such vital information be supplied by an
▪ Arranging independent source to ensure its integrity.
▪ Formatting
▪ Presenting
THE COMPUTER SERVICES FUNCTION
CHARACTERISTICS OF USEFUL INFORMATION (CARTS)
▪ Regardless of physical form or technology, useful
information has the following characteristics:
▪ Completeness: all information essential to a
decision or task is present
▪ Accuracy: free from material errors
▪ Relevance: serves a purpose
▪ Timeliness: no older than the time period of the
action it supports
▪ Summarization: aggregated in accordance
with the user’s needs

Information System Objectives in a Business Context

The goal of an information system is to support:
▪ the stewardship function of management ORGANIZATION OF IT FUNCTION IN A CENTRALIZED SYSTEM
▪ management decision making
▪ the firm’s day-to-day operations

ACQUISITION OF Information SystemS

(1) they develop customized systems from
scratch through in-house systems development
activities, and
(2) they purchase preprogrammed commercial
systems from software vendors
ORGANIZATIONAL STRUCTURE FOR A DISTRIBUTED PROCESSING
SYSTEM

DATA REDUNDANCY PROBLEMS

▪ Data Storage
Potential Advantages of DDP - excessive storage costs of paper documents
▪ Cost reductions in hardware and data entry tasks and/or magnetic form
▪ Improved cost control responsibility. ▪ Data Updating
▪ Improved user satisfaction since control is closer - changes or additions must be performed
to the user level. multiple times
▪ Backup of data can be improved through the use ▪ Currency of Information
of multiple data storage sites. - potential problem of failing to update all affected
files
▪ Task-Data Dependency
Potential DISAdvantages of DDP - user’s inability to obtain additional information
▪ Loss of control as needs change
▪ Mismanagement of company resources
▪ Data Integration
▪ Hardware and software incompatibility - separate files are difficult to integrate across
▪ Redundant tasks and data multiple users
▪ Consolidating tasks usually segregated
▪ Difficulty attracting qualified personnel
▪ Lack of standards THE EVOLUTION OF IS MODELs
THE DATABASE MODEL
MANUAL PROCESS MODEL
▪ Transaction processing, information processing,
and accounting are physically performed by
people, usually using paper documents.
▪ Useful to study because:
- helps link AIS courses to other accounting
courses
- often easier to understand business
processes when not shrouded in technology
- facilitates understanding internal controls

THE EVOLUTION OF IS MODEL

THE FLAT-FILE MODEL An REA Data Model Example
REA MODEL ADDITIONAL NOTES
▪ The REA model is an accounting framework
for modeling an organization’s
●​ MANUAL PROCESSES
- economic resources; e.g., assets
- economic events; i.e., affect changes in ●​ FLAT-FILE MODEL
resources ●​ DATABASE MODEL
- economic agents; i.e., individuals and
departments that participate in an ●​ DATABASE MODEL
economic event. ADVANTAGES:
- Interrelationships among resources, - Elimination of data redundancy.
- Single update
events and agents
- Current Values
▪ Entity-relationship diagrams (ERD) are
often used to model these relationships.
●​ REA (Resource, Events & Agents) MODEL
REA is an accounting framework for modeling an
ACCOUNTANTS AS INFORMATION SYSTEM USERS organization’s critical resources, events, and
▪ Accountants must be able to clearly convey their agents (REA) and the relationships between
needs to the systems professionals who design the them.
system.
▪ The accountant should actively participate in ●​ ENTERPRISE RESOURCE PLANNING (ERP)
systems development projects to ensure - is an information system model that enables an
appropriate systems design. organization to automate and integrate its key
business processes.
ACCOUNTANTS AS SYSTEM DESIGNERS - ERP breaks down traditional functional barriers
▪ The accounting function is responsible for the by facilitating data sharing, information flows, and
conceptual system, while the computer function is the introduction of common business practices
responsible for the physical system. among all organizational users.
▪ The conceptual system determines the nature of
the information required, its sources, its
destination, and the accounting rules that must
be applied.

ACCOUNTANTS AS SYSTEM AUDITORS

▪ External Auditors
- attest to fairness of financial statements
- assurance service: broader in scope than
traditional attestation audit
▪ IT Auditors
- evaluate IT, often as part of external audit
▪ Internal Auditors
- in-house IS and IT appraisal services
 CHAPTER 1 ➢​CASH DISBURSEMENTS SYSTEM
When the obligation created in the purchases
system is due, the cash disbursements system
INTRODUCTION TO TRANSACTION authorizes the payment, disburses the funds
to the vendor, and records the transaction by
PROCESSING reducing the cash and accounts payable
accounts.
​ ACCOUNTS PAYABLE ​ XXX
AN OVERVIEW OF TRANSACTION PROCESSING ​ ​ CASH​ ​ ​ XXX
➢​PAYROLL SYSTEM
FINANCIAL TRANSACTION - collects labor usage data for each
An economic event that affects the assets and employee, computes the payroll, and
equities of the firm, is reflected in its accounts, and disburses paychecks to the employees.
is measured in monetary terms. PAYROLL
- is a special-case purchases and cash
To deal efficiently with such volume, business firms disbursements system.
group similar types of transactions into ➢​FIXED ASSET SYSTEM
transaction cycles. - processes transactions pertaining to the
acquisition, maintenance, and disposal of its
fixed assets. These are relatively permanent
TRANSACTION CYCLES items that collectively often represent the
Figure 2-1 shows the relationship of these cycles organization’s largest financial investment.
and the resource flows between them. - (eg .land, buildings, furniture, machinery, and
motor vehicles)

(2) CONVERSION CYCLE

- provides value added through its products
or services
➢​ PRODUCTION SYSTEM
- involves the planning, scheduling, and
control of the physical product through the
manufacturing process.
- ex. determining raw material requirements,
authorizing the work to be performed and the
release of raw materials into production, and
directing the movement of the work-in process
through its various stages of manufacturing.
➢​ COST ACCOUNTING SYSTEM
- monitors the flow of cost information related
to production.
(1) EXPENDITURE CYCLE - used for inventory valuation, budgeting, cost
- incurs expenditures in exchange for resources control, performance reporting, and
- Acquisition of materials, property, and labor in management decisions, such as make-or-buy
exchange for cash. decisions.

Figure 2-1 shows the flow of cash from the Manufacturing firms convert raw materials into
organization to the various providers of these finished products through formal conversion cycle
resources. Most are based on a credit relationship operations. The conversion cycle is not usually
between the trading parties. formal and observable in service and retailing
establishments. Nevertheless, these firms still
●​ PHYSICAL COMPONENT
engage in conversion cycle activities that
(the acquisition of the goods)
culminate in the development of a salable product
●​ FINANCIAL COMPONENT
or service. These activities include the readying of
(the cash disbursement to the supplier)
products and services for market and the
allocation of resources such as depreciation,
NOTE: A separate subsystem of the cycle
building amortization, and prepaid expenses to
processes each component. The major subsystems
the proper accounting period.
of the expenditure cycle are outlined below.
➢​PURCHASES/ ACCOUNTS PAYABLE SYSTEM However, unlike manufacturing firms,
- recognizes the need to acquire physical merchandising companies do not process these
inventory (such as raw materials) and places activities through formal conversion cycle
an order with the vendor. When the goods subsystems.
are received, the purchases system records
the event by increasing inventory and
establishing an accounts payable to be paid
at a later date.
INVENTORY​ ​ XXX
​ ​ ​ ACCOUNTS PAYABLE ​ XXX
(3) REVENUE CYCLE B. PRODUCT DOCUMENTS
- the result of transaction processing rather
- receives revenue from outside sources than the triggering mechanism for the process.
- Firms sell their finished goods to customers - For example, a payroll check to an employee is
through the revenue cycle, which involves a product document of the payroll system.
processing cash sales, credit sales, and the receipt
of cash following a credit sale. Figure 2-3 extends the example in Figure 2-2 to
➢​ SALES ORDER PROCESSING (PHYSICAL COMPONENT) illustrate that the customer’s bill is a product
The majority of business sales are made on document of the sales system.
credit and involve tasks such as preparing
sales orders, granting credit, shipping
products (or rendering of a service) to the
customer, billing customers, and recording the
transaction in the accounts (accounts
receivable, inventory, expenses, and sales).
➢​ CASH RECEIPTS ( FINANCIAL COMPONENT)
For credit sales, some period of time (days or
weeks) passes between the point of sale and
the receipt of cash. Cash receipts processing
includes collecting cash, depositing cash in
the bank, and recording these events in the
accounts (accounts receivable and cash).

ACCOUNTING RECORDS
MANUAL SYSTEMS C.TURNAROUND DOCUMENTS
Beginning with traditional records used in manual
- are product documents of one system that
systems (documents, journals, and ledgers) and
become source documents for another system.
then examining their magnetic counterparts in
- contains important information about a
computer-based systems.
customer’s account to help the cash receipts
system process the payment.
DOCUMENTS
- provides evidence of an economic event and may This is illustrated in Figure 2-4. The customer
be used to initiate transaction processing. Some receives a perforated two-part bill.
documents are a result of transaction processing. ●​ TOP - actual bill, BOTTOM - remittance advice
Customers remove the remittance advice and
TYPES OF DOCUMENTS (SPT) return it to the company along with their payment
(typically a check).
A. SOURCE DOCUMENTS
- Economic events result in some documents One of the problems designers of cash receipts
being created at the beginning (the source) of systems face is matching customer payments to
the transaction. the correct customer accounts.
- are used to capture and formalize transaction
data that the cycle needs for processing.

The economic event (the sale) causes the sales

clerk to prepare a multipart sales order, which is
formal evidence that a sale occurred. Copies of
this enter the sales system and are used to convey
information to various functions, such as billing,
shipping, and accounts receivable. The
information in the sales order triggers specific
activities in each of these departments.
Figure 2-2 shows the creation of a source
document.
JOURNALS (2) GENERAL JOURNAL
- Used to record nonrecurring, infrequent, and
- is a record of a chronological entry. dissimilar transactions.
- Documents are the primary source of data for - ex. periodic depreciation and closing entries
journals.
- holds a complete record of transactions and
thus provides a means for posting to accounts.

Figure 2-5 shows a sales order being recorded in

the sales journal (see the following discussion on
special journals).

Often, there is a time lag between initiating a

transaction and recording it in the accounts.

Figure 2-7 shows one page from a general journal.

As a practical matter, most organizations have

replaced their general journal with a journal
PRIMARY TYPES OF JOURNALS voucher system.
(1) SPECIAL JOURNAL
- are used to record specific classes of JOURNAL VOUCHER
transactions that occur in high volume. - a special source document that contains a
single journal entry specifying the general
ledger accounts that are affected.
- used to record summaries of routine
transactions, nonroutine transactions, adjusting
entries, and closing entries.

LEDGERS
- is a book of accounts that reflects the financial
effects of the firm’s transactions after they are
posted from the various journals
- indicates the increases, decreases, and current
balance of each account.

JOURNALS - show chronological effect of activity

LEDGERS - show activity by account type.
Figure 2-6 shows a special journal for recording
sales transactions. 2 BASIC TYPES OF LEDGERS
As you can see, the sales journal provides a (1) GENERAL LEDGERS (GL)
specialized format for recording only sales - which contain the firm’s account information in
transactions. At the end of the processing period the form of highly summarized control accounts
(month, week, or day), a clerk posts the amounts in - summarizes the activity for each of the
the columns to the ledger accounts indicated . organization’s accounts.
- provides a single value for each control
For example, the total sales will be posted to account, such as accounts payable, accounts
account number 401. receivable, and inventory
OTHER SPECIAL JOURNALS To actually collect the cash this asset represents,
- Cash Receipts Journal however, the firm must have certain detailed
- Cash Disbursements Journal information about the customers that this
- Purchases Journal summary figure does not provide. It must know
- Payroll Journal which customers owe money, how much each
customer owes, when the customer last made
REGISTER/LOG payment, when the next payment is due, and so
- denote certain types of special journals. on. The accounts receivable subsidiary ledger
- Payroll journal/ payroll register. contains these essential details.
For example, a receiving register is a log of all
receipts of raw materials or merchandise
ordered from vendors. Similarly, a shipping
register is a log that records all shipments to
customers.
 balance in the corresponding general ledger
control account.

By periodically reconciling summary balances

from subsidiary accounts, journals, and control
accounts, the completeness and accuracy of
transaction processing can be formally assessed.

THE AUDIT TRAIL

The accounting records described previously
provide an audit trail for tracing transactions from
source documents to the financial statements. Of
the many purposes of the audit trail, most
important to accountants is the year-end audit.

EXTERNAL AUDITOR
- periodically evaluates the financial
statements of publicly held business
organizations on behalf of its stockholders and
other interested parties.
- The auditor’s responsibility involves, in part,
the review of selected accounts and
The general ledger presented in Figure 2-9 shows
transactions to determine their validity,
the beginning balances, the changes, and the
accuracy, and completeness.
ending balances as of a particular date for several
different accounts.

(2) SUBSIDIARY LEDGERS

- which contain the details of the individual
accounts that constitute a particular control
account.

Subsidiary ledgers are kept in various accounting

departments of the firm, including inventory,
accounts payable, payroll, and accounts
receivable. This separation provides better control
and support of operations.

MASTER FILE - General Ledger/ Subsidiary Ledger​

ARCHIVE FILE - Journal
REFERENCE FILE - Credit File
TRANSACTION FILE - Sales orders

CONFIRMATION
- the audit of AR often includes this procedure
- This involves contacting selected customers to
determine if the transactions recorded in the
accounts actually took place and that customers
agree with the recorded balance.

Information contained in source documents and

subsidiary accounts enables the auditor to
Figure 2-10 illustrates that the total of account identify and locate customers chosen for
balances in a subsidiary ledger should equal the confirmation. The results from reconciling the AR
subsidiary ledger with the control account and
from confirming customers’ accounts help the -ex. the payroll program may refer to a tax table
auditor form an opinion about the accuracy of to calculate the proper amount of withholding
accounts receivable as reported on the balance taxes for payroll transactions.
sheet. The auditor performs similar tests on all of - Other reference files include price lists used for
the client firm’s major accounts and transactions preparing customer invoices, lists of authorized
to arrive at an overall opinion about the fair suppliers, employee rosters, and customer credit
presentation of the financial statement. The audit files for approving credit sales. The reference
trail plays an important role in this process. file in Figure 2-11 is a credit file.

D. ARCHIVES FILE
- contains records of past transactions that are
retained for future reference. These transactions
form an important part of the audit trail.
-ex. journals, prior-period payroll information,
lists of former employees, records of accounts
written off, and prior-period ledgers.

THE DIGITAL AUDIT TRAIL

COMPUTER-BASED SYSTEMS Let’s walk through the system represented in

Figure 2-11 to illustrate how computer files provide
TYPES OF FILES an audit trail.
- The audit trail is less observable in computer
1. CAPTURING THE ECONOMIC EVENT
based systems than traditional manual systems,
In this example, sales are recorded manually on
but they still exist.
source documents, just as in the manual system.
- The data entry and computer programs are the
physical trail. 2. CONVERT SOURCE DOCUMENTS TO DIGITAL FORM
- The data are stored in magnetic files. This is done in the data input stage, where the
transactions are edited and a transaction file of
Figure 2-11 illustrates the relationship of these files sales orders is produced.
in forming an audit trail. 3. UPDATE VARIOUS MASTER FILE SUBSIDIARY AND CONTROL
ACCOUNTS THAT THE TRANSACTION AFFECTS
A. MASTER FILE During the update procedure, additional editing
- generally contains account data. of transactions takes place. Some transactions
- ex. general ledger and subsidiary ledger may prove to be in error or invalid for such
- Data values are updated from transactions. reasons as incorrect account numbers, insufficient
quantities on hand, or customer credit problems.
In this example, the system determines the
B. TRANSACTION FILE available credit for each customer from the credit
- is a temporary file of transaction records used file before processing the sale.
to change or update data in a master file.
- ex. Sales orders, inventory receipts, and cash Any records that are rejected for credit problems
receipts are transferred to the error file. The remaining
good records are used to update the master files.
C. REFERENCE FILE Only these transactions are added to the archive
- stores data that are used as standards for file that serves as the sales journal. By copying the
processing transactions. valid transactions to the journal, the original
transaction file is not needed for audit trail Figure 2-12 presents the symbol set most
purposes. This file can now be erased (scratched) commonly used.
in preparation for the next batch of sales orders.

Like the paper trail, this digital audit trail allows

transaction tracing. Again, an auditor attempting
to evaluate the accuracy of the accounts
receivable figure published in the balance sheet
could do so via the following steps, which are
identified in Figure 2-11.

1. Compare the accounts receivable balance in the balance

sheet with the master file AR control account balance.
2. Reconcile the AR control figure with the AR subsidiary account
total.
3. Select a sample of update entries made to accounts in the AR
subsidiary ledger and trace these to transactions in the sales
journal (archive file).
4. From these journal entries, identify specific source
documents that can be pulled from their files and verified. If ENTITIES
- are external objects at the boundary of the
necessary, the auditor can confirm the accuracy and propriety of
system being modeled.
these source documents by contacting the customers in - represent sources of and destinations for data.
question. - may be other interacting systems or functions, or
they may be external to the organization. Entities
DOCUMENT TECHNIQUES should always be labeled as nouns on a DFD, such
A written description of a system can be wordy as customer or supplier.
and difficult to follow. Experience has shown that a
visual image can convey vital system information DATA STORES - represent the accounting records used
more effectively and efficiently than words. As both in each process
systems designers and auditors, accountants use
system documentation routinely. The ability to LABELED ARROWS- represent the data flows between
document systems in graphic form is thus an processes, data stores, and entities
important skill for accountants to master.
Processes in the DFD should be labeled with a
5 BASIC DOCUMENTATION TECHNIQUES descriptive verb such as Ship Goods, Update
Records, or Receive Customer Order. Process
Two commonly used systems design and
objects should not be represented as nouns like
documentation techniques are the entity
Warehouse, Accounts Receivable Dept., or Sales
relationship diagram and the data flow diagram.
Dept. The labeled arrows connecting the process
This section introduces the principal features of
objects represent flows of data such as Sales
these techniques, illustrates their use, and shows
Order, Invoice, or Shipping Notice. Each data flow
how they are related.
label should be unique—the same label should not
be attached to two different flow lines in the same
A.​ DATA FLOW DIAGRAMS DFD. When data flows into a process and out
- uses symbols to represent the entities, processes, again (to another process), they have, in some way,
data flows, and data stores that pertain to a been changed. This is true even if the data have
system. not been physically altered.
- represent the logical elements of the system
- do not represent the physical system For example, consider the Approve Sales process
- depict the logical tasks that are being performed in Figure 2-13, where Sales Order is examined for
but not who is performing them. completeness before being processed further. It
flows into the process as Sales Order and out of it
We see an example of this in Figure 2-13. as Approved Sales Order.

B.​ ENTITY RELATIONSHIP (ER) DIAGRAMS

- a documentation technique used to represent
the relationship between entities in a system.

The REA model version of ERD is widely used in AIS.

REA uses 3 types of entities:
▪RESOURCES (cash, raw materials)
▪EVENTS (release of raw materials into the
production process, ordering inventory,
receiving cash, shipping goods)
▪AGENTS (inventory control clerk, vendor,
production worker)
ENTITIES RELATIONSHIP BETWEEN ER DIAGRAMS AND
- are physical resources (automobiles, cash, or
inventory), DATA FLOW DIAGRAMS
Figure 2-15 presents the ER diagram for the DFD in
One common use for ER diagrams is to model an Figure 2-13.
organization’s database, which we examine in
detail in Chapter 9.

DATA FLOW DIAGRAMS ENTITY RELATIONSHIP DIAGRAMS

- A DFD is a model of ER diagram models

Figure 2-14 shows the symbol set used in an ER system processes the data used in or
diagram. - each data store in affected by the system
the DFD represents a
SQUARE SYMBOL - represents entities corresponding data
LINE - represents the nature of the relationship entity in the ER
between two entities. diagram
The two diagrams are related through data.
CARDINALITY
- the numerical mapping between entity instances.
- maximum number of records in one file that are C.​ SYSTEM FLOWCHARTS
related to a single record in the other file and vice - illustrate the relationship among processes and
versa. the documents that flow between them
- number of elements in a set - contain more details than data flow diagrams
- clearly depict the separation of functions in a
▪ one-to-one (1:1) system
▪ one-to-many (1:M) - graphical representation of the physical
▪ many-to-many (M:M) relationships among key elements of a system.
- These elements may include organizational
departments, manual activities, computer
programs, hard-copy accounting records
(documents, journals, ledgers, and files), and
digital records (reference files, transaction files,
archive files, and master files).
- describe the type of computer media being
employed in the system, such as magnetic tape,
magnetic disks, and terminals.

FLOWCHARTING MANUAL ACTIVITIES

Let’s assume that an auditor needs to
flowchart a sales order system to evaluate its
1:1:Each sales person is assigned to one internal controls and procedures. The auditor
automobile. will begin by interviewing individuals involved
1:M Assign a single automobile to one or more in the sales order process to determine what
salespersons who share it. they do. This information will be captured in a
M:M organization buys the same type of products set of written facts similar to those below.
from one or more vendors.
1:M A company policy to buy particular items from 1. SALES CLERK> receives hard-copy CO by mail
a single vendor
​ ​ > prepare 4 hardcopy of SO
2. SALES CLERK > send Copy 1 to credit dept
Figure 2-15
(approval)
This data model is the blueprint for what
> 3 copies and orig customer
ultimately will become the physical database.
order (filed temporarily),
pending credit approval
3.CREDIT CLERK > validates CO against
hard-copy credit records
​ > signs Copy 1 as approval
​ > return Copy 1 to sales clerk
4. SALES CLERK > receives credit approval
> files Copy 1 and CO in dept.
 > sends Copy 2 to warehouse
> Copy 3 & 4 to shipping dept.
5. WARE. CLERK > picks products from shelves
​ > records transfer in
hard-copy stock records
​ > send products and Copy 2 to
shipping department.
6. SHIPPING DEPT. > receives Copy 2 & goods
from the warehouse
​ > attaches Copy 2 as a
packing slip
​ > ships the goods to the
customer.
Finally, the clerk files Copies 3 and 4 in the STEP 2:TRANSCRIBE THE WRITTEN FACTS INTO VISUAL
shipping department. FORMAT.
The symbols used for this purpose will be selected
NOTE: CO - customer order​ from the set presented in Figure 2-17.
SO - sales order

Nevertheless, the primary objective should be

to provide an unambiguous description of the
system. With this in mind, certain rules and
conventions need to be observed:
1. The flowchart should be labeled to clearly
identify the system that it represents.
2. The correct symbols should be used to
represent the various entities in the system.
3. All symbols should be labeled.
4. Lines should have arrowheads to clearly
show the process flow and sequence of events.
5. If complex processes need additional
explanation for clarity, a text description
should be included on the flowchart or in an
attached document referenced by the We begin with the first stated fact:
flowchart. 1. A clerk in the sales department receives a
hard-copy customer order by mail and manually
prepares four (4) hard copies of a sales order.

STEP 1: LAY OUT THE PHYSICAL AREAS OF ACTIVITY

A flowchart reflects the physical system, which is
represented as vertical columns of events and
actions separated by lines of demarcation.

From the written system facts, we see that there

are four distinct areas of activity:

4 DISTINCT AREAS OF ACTIVITY CUSTOMER - source of order but not part of system
(1) SALES DEPARTMENT
OVAL - to convey a data source or destination that
(2) CREDIT DEPARTMENT is separate from the system being flowcharted.
(3) WAREHOUSE
DOCUMENT SYMBOL - signifies the hard-copy
(4) SHIPPING DEPARTMENT customer order and is labeled accordingly.
Lay out these areas of activity and label each of BUCKET-SHAPED SYMBOL - repre. a manual process.
them. This step is illustrated in Figure 2-16. ARROWS - show the direction of flow and the
sequence of events

2. The clerk sends Copy 1 of the sales order to the

credit department for approval. The other three
copies and the original customer order are filed
temporarily, pending credit approval.

3. The credit department clerk validates the

customer’s order against hard-copy credit records
kept in the credit department. The clerk signs Copy
1 to signify approval and returns it to the sales
clerk.

UPSIDE-DOWN TRIANGLE - represents the temporary file

This is a physical file of paper documents such as

a drawer in a filing cabinet or desk. Such files are
typically arranged according to a specified order.

To signify the filing system used, the file symbol will The document (Copy 2) that accompanies and
usually contain an: controls the goods, however, is shown. Typically, a
‘‘N’’ for numeric (invoice number) system flowchart shows only the flow of
‘‘C’’ for chronological (date), documents, not physical assets.
‘‘A’’ for alphabetic order (customer name).
You should keep in mind, however, that
PARALLELOGRAM transactions usually pass through manual
- shows the credit records mentioned in Fact 3. procedures in batches (groups). Before exploring
- used to depict many types of hard-copy documentation techniques further, we need to
accounting records, such as journals, subsidiary examine some important issues related to batch
ledgers, general ledgers, and shipping logs. processing.

4. When the sales clerk receives credit approval, he BATCH PROCESSING

or she files Copy 1 and the customer order in the - permits the efficient management of a large
department. The clerk sends Copy 2 to the volume of transactions.
warehouse and Copies 3 and 4 to the shipping BATCH
department. - is a group of similar transactions (such as sales
5. The warehouse clerk picks the products from the orders) that are accumulated over time and then
processed together.
shelves, records the transfer in the hard-copy
stock records, and sends the products and Copy 2
to the shipping department. 2 GENERAL ADVANTAGES
6. The shipping department receives Copy 2 and 1. Organizations improve operational efficiency by
the goods from the warehouse, attaches Copy 2 as grouping together large numbers of transactions
a packing slip, and ships the goods to the into batches and processing them as a unit of
customer. Finally, the clerk files Copies 3 and 4 in work rather than processing each event
separately.
the shipping department.
2. It provides control over the transaction process.
The accuracy of the process is established by
CIRCULAR SYMBOL LABELED “A” - an on-page connector periodically reconciling the batch against the
control figure.
In this instance, the connector replaces the lines For example, assume that the total value of a
that signify the movement of Copies 3 and 4 from batch of sales orders is $100,000. This number is
the sales department to the shipping department. recorded when the batch is first assembled and
then recalculated at various points during its
The completed flowchart is presented in Figure processing. If an error occurs during processing
2-20. (for example, a sales order is lost), then the
recalculated batch total will not equal the original
batch total and the problem will be detected.

There is no magic number for the size of a batch.

This decision is based on a number of operational,
business, and economic factors. Among these are
the volume of transactions, the competitiveness of
the industry, the normal frequency of errors, the
financial implications of an undetected error, and
the costs of processing. Depending on these attaches Copy 1 as a packing slip. Next, the clerk
factors, a system might be designed to process ships the goods (with Copy 1 attached) to the
many small batches throughout the day or an customer. Finally, the clerk records the shipment in
entire day’s activity as a single batch. the hard-copy shipping log and files Copies 2 and
3 in the shipping department.
FLOWCHARTING COMPUTER PROCESSES
LAY OUT THE PHYSICAL AREAS OF ACTIVITY
Begins by creating a template that depicts the
areas of activity similar to the one shown in Figure
2-16. The only differences in this case are that this
system has a computer operations department
but does not have a credit department.

TRANSCRIBE THE WRITTEN FACTS INTO VISUAL FORMAT.

Figure 2-22 illustrates how Facts 1, 2, and 3
translate visually.

The customer, customer order, and file symbols in

this flowchart are the same as in the previous
example. The sales clerk’s activity, however, is now
The symbol set used to construct this system automated, and the manual process symbol has
flowchart will come from both Figure 2-17 and been replaced with a computer terminal symbol.
Figure 2-21. Again, our example is based on a sales Also, because this is a data-input operation, the
order system with the following facts: arrowhead on the flowchart line points in the
1. A clerk in the sales department receives a direction of the edit and credit check program. If
customer order by mail and enters the information the terminal was also used to receive output (the
into a computer terminal that is networked to a facts do not specify such an operation),
centralized computer program in the computer arrowheads would be on both ends of the line.
operations department. The original customer
order is filed in the sales department. Recall that the emphasis in flowcharting is on the
Facts 2, 3, and 4 relate to activities that occur in physical system. For example, the terminal used by
the computer operations department. the sales clerk to enter customer orders is
physically located in the sales department, but the
2. A computer program edits the transactions,
programs that process the transactions and the
checks the customers’ credit by referencing a files that it uses and updates are stored in a
credit history file, and produces a transaction file separate computer operations department.
of sales orders.
3. The sales order transaction file is then Notice how the flow line points from the credit
processed by an update program that posts the history file to the edit program. This indicates that
transactions to corresponding records in AR and the file is read (referenced) but not changed
inventory files. (updated) by the program. In contrast, the
4. Finally, the update program produces three (3) interactions between the update program and the
hard copies of the sales order. Copy 1 is sent to the AR and inventory files are in the opposite direction.
warehouse, and Copies 2 and 3 are sent to the The relevant records in these files have been
shipping department. changed to reflect the transactions. The logic of a
5. On receipt of Copy 1, the warehouse clerk picks file update is explained later in the chapter.
the products from the shelves. Using Copy 1 and
Let’s now translate the remaining facts into visual
the warehouse personal computer (PC), the clerk symbols. Fact 4 states that the update program
records the inventory transfer in the digital stock produces three hard-copy documents in the
records that are kept on the PC. Next, the clerk computer operations department, which are then
sends the physical inventory and Copy 1 to the distributed to the warehouse and shipping
shipping department. departments. The translation of this fact is
6. The shipping department receives Copy 1 and illustrated in Figure 2-23.
the goods from the warehouse. The clerk
reconciles the goods with Copies 1, 2, and 3 and
 The symbol set used for program flowcharts is
presented in Figure 2-24.

Every program represented in a system flowchart

should have a supporting program flowchart that
describes its logic. Figure 2-25 presents the logic
of the edit program shown in Figure 2-26. A
separate symbol represents each step of the
program’s logic, and each symbol represents one
or more lines of computer program code. The
connector lines between the symbols establish the
Fact 5 states that the warehouse clerk updates the logical order of execution.
stock records on the department PC and then
sends the physical inventory and Copy 1 to the Tracing the flowchart downward from the start
shipping department. Notice on Figure 2-23 how symbol, we see that the program performs the
this computer activity is represented. The following logical steps in the order listed:
warehouse PC is a stand-alone computer system
that is not networked into the computer
operations department like the terminal in the
sales department. The PC, the stock record update
program, and the stock records themselves are all
physically located in the warehouse. As with
manual procedures, when documenting computer
operations the flowchart author must accurately
represent the physical arrangement of the system
components. As we will see in later chapters, the
physical arrangement of system components
(both manual and computer) often plays an
important role in the auditor’s assessment of
internal control.

Finally, Fact 6 describes how the shipping

department clerk reconciles the goods with the
supporting documents, sends the goods and the
packing slip to the customer, updates the shipping
log, and files two copies of the sales order. This is
entirely a manual operation, as evidenced by the
symbols in Figure 2-23.

Note that the shipping log uses the same symbol

that is used for representing journals and ledgers.

D. PROGRAM FLOWCHARTS
- provide essential details for conducting
information technology audits
- Accountants use it to verify the correctness of
program logic and compare flowcharts to the
actual program code to determine whether the
program is actually doing what the
documentation describes.

The system flowchart in Figure 2-23 shows the

relationship between computer programs, the files
they use, and the outputs they produce. This high
level of documentation, however, does not provide
the operational details that are sometimes
needed. For example, an auditor wishing to assess
the correctness of the edit program’s logic cannot
do so from the system flowchart. This requires a
program flowchart. 1. The program retrieves a single record from the
unedited transaction file and stores it in memory.
2. The first logical test is to see if the program has
reached the end-of-file (EOF) condition for the
transaction file. Most file structures use a special
record or marker to indicate an EOF condition.
When EOF is reached, the edit program will
terminate and the next program in the system (in
this case, the update program) will be executed. As
long as there is a record in the unedited
transaction file, the result of the EOF test will be
‘‘no’’ and process control is passed to the next
logical step in the edit program.

3. Processing involves a series of tests to identify

certain clerical and logical errors. Each test,
represented by a decision symbol, evaluates the
presence or absence of a condition. For example,
an edit test could be to detect the presence of
alphabetic data in a field that should contain only
numeric data.

4. Error-free records are sent to the edited

Steps in Batch Processing/Sequential File
transaction file.
▪ KEYSTROKE
5. Records containing errors are sent to error file. - source documents are transcribed by clerks to
magnetic tape for processing later
6. The program loops back to Step 1, and the ▪ EDIT RUN
process is repeated until the EOF condition is - identifies clerical errors in the batch and
reached. places
them into an error file
E. RECORD LAYOUT DIAGRAMS ▪ SORT RUN
- used to reveal the internal structure of the - places the transaction file in the same order as
records that constitute a file or database table. the master file using a primary key
- usually shows the name, data type, and length of ▪ UPDATE RUN
each attribute (or field) in the record. Detailed data - changes the value of appropriate fields in the
structure information is needed for such tasks as master file to reflect the transaction
identifying certain types of system failures,
▪ BACKUP PROCEDURE
analyzing error reports, and designing tests of
- the original master continues to exist and a
computer logic for debugging and auditing
new master file is created
purposes. A simpler form of record layout, shown
in Figure 2-27, suits our purposes best. This type of
layout shows the content of a record. Each data B. REAL-TIME SYSTEMS
attribute and key field is shown in terms of its - process transactions individually at the moment
name and relative location. the event occurs
- have NO time lag between the economic event
and the processing
- generally require greater resources than batch
processing since they require dedicated
processing capacity; however, these cost
differentials are decreasing
- have longer systems development time

COMPUTER-BASED ACCOUNTING SYSTEMS RESOURCES

DIFFERENCES BETWEEN BATCH AND REAL-TIME SYSTEMS BATCH SYSTEMS REAL-TIME SYSTEMS
- Non-destructive update approach creates a
copy to make changes, preserving the original.
- demand fewer - require more
INFORMATION TIME FRAME organizational expensive storage
A. BATCH SYSTEMS resources devices
- The transactions must be independent of one - can use sequential - may require either
another during the time period over which the files stored on the purchase of a
transactions are accumulated in order for batch magnetic tape dedicated computer
processing to be appropriate. - use computer or an investment in
- A time lag exists between the event and the capacity only when additional computer
processing. The amount of lag depends on the the program is being capacity.
frequency of batch processing. run.
BATCH
- a group of similar transactions that are
accumulated over time and then processed
together.
OPERATIONAL EFFICIENCY Some systems employ a combination of batch and
real-time processing, while others are purely
BATCH SYSTEMS REAL-TIME SYSTEMS real-time systems.

UPDATING MASTER FILES FROM TRANSACTIONS

- improves operational - handling large - involves changing the value of one or more of its
efficiency by volumes of variable fields to reflect the effects of a
eliminating transactions each day transaction.
unnecessary activities can create
at critical points in the operational
process. inefficiencies.

EFFICIENCY V.S. EFFECTIVENESS

For example, users of an airline reservations
system cannot wait until 100 passengers (an
efficient batch size) assemble in the travel agent’s
office before their transactions are processed.

BATCH SYSTEMS REAL-TIME SYSTEMS

- When time lags in - When immediate
information have no access to current Figure 2-28 presents record structures for a sales
detrimental effects on information is critical order transaction file and two associated master
the user’s to the user’s needs, files, AR and inventory.
performance and real-time processing is
operational the logical choice. PRIMARY KEY (PK)—the unique identifier
efficiencies can be Inventory file is INVENTORY NUMBER.
achieved by PK for AR is ACCOUNT NUMBER.
processing data in
batches, batch Notice that the record structure for the sales order
processing is file contains a primary key (SALES ORDER
probably the superior NUMBER) and two secondary key (SK) fields,
choice. ACCOUNT NUMBER and INVENTORY NUMBER.

WHY DO SO MANY AIS USE BATCH PROCESSING? SECONDARY KEYS (SK)

▪ AIS processing is characterized by high-volume, - are used for locating the corresponding records
independent transactions, such are recording in the master files. To simplify the example, we
cash receipts checks received in the mail. assume that each sale is for a single item of
▪ The processing of such high-volume checks can inventory.
be done during an off-peak computer time.
▪ This is one reason why batch processing maybe The update procedure in this example involves the
done using real-time data collection. following steps:
1. A sales order record is read by the system.
2. ACCOUNT NUMBER is used to search the AR
ALTERNATIVE DATA PROCESSING APPROACHES master file and retrieve the corresponding AR
record.
LEGACY SYSTEMS MODERN SYSTEMS 3. The AR update procedure calculates the new
customer balance by adding the value stored in
▪ mainframe-based ▪ client-server based the INVOICE AMOUNT field of the sales order
applications and process record to the CURRENT BALANCE field value in the
▪ batch oriented transactions in real AR master record.
▪ early legacy systems time 4. Next, INVENTORY NUMBER is used to search for
use flat files for data ▪ use relational the corresponding record in the inventory master
storage database tables file.
▪ later legacy systems ▪ have high degree of 5. The inventory update program reduces
use hierarchical and process integration inventory levels by deducting the QUANTITY SOLD
network databases and data sharing value in a transaction record from the QUANTITY
▪ data storage ▪ some are mainframe ON HAND field value in the inventory record.
systems promote a based and use batch 6. A new sales order record is read, and the
single-user processing process is repeated.
environment that
discourages
information
integration
DATABASE BACKUP PROCEDURES A SYSTEM WITH CODES
• Destructive updates leave no backup.
• To preserve adequate records, backup USES OF CODING IN AIS
procedures must be implemented, as shown below: 1. Concisely represent large amounts of complex
- The master file being updated is copied as information that would otherwise be
a backup. unmanageable.
- A recovery program uses the backup to 2. Provide a means of accountability over the
create a pre-update version of the master completeness of the transactions processed.
file. 3. Identify unique transactions and accounts
within a file.
4. Support the audit function by providing an
effective audit trail.

NUMERIC AND ALPHABETIC CODING SCHEMES

SEQUENTIAL CODES
- represent items in some sequential order
(ascending or descending)
- Used to prenumber source documents
BATCH PROCESSING USING REAL-TIME DATA COLLECTION - Track each transaction processed
ADVANTAGES DISADVANTAGES

- supports the - tells us nothing

reconciliation of a about the attributes
batch of transactions of the item
- alerts management - difficult to change
to the possibility of a and hard to make
missing or misplaced insertions as it
transaction requires renumbering
- arbitrary information

BLOCK CODES
▪ represent whole classes of items by restricting
each class to a specific range within the coding
scheme
▪ Used for chart of accounts
- The basis of the general ledger

ADVANTAGES DISADVANTAGES

- allows for the - arbitrary information

Figure 2-31 illustrates this approach with a insertion of new codes
simplified sales order system such as that used in within a block
a department store. Key steps in the process are: - Don’t have to
●​ The sales department clerk captures reorganize the coding
customer sales data pertaining to the structure
item(s) being purchased and the customer’s
account.
●​ The system then checks the customer’s GROUP CODES
credit limit from data in the customer - Represent complex items or events involving two
record (account receivable subsidiary file) or more pieces of data using fields with specific
and updates his or her account balance to meaning
reflect the amount of the sale. For example, a coding scheme for tracking sales
●​ Next the system updates the might be 04-09-476214-99, meaning:
quantity-on-hand field in the inventory
record (inventory subsidiary file) to reflect
the reduction in inventory. This provides
up-to-date information to other clerks as ADVANTAGES DISADVANTAGES
to inventory availability.
●​ A record of the sale is then added to the 1. representation of - results from its
sales order file (transaction file), which is large amounts success as a
processed in batch mode at the end of the 2. allow complex data classification tool
business day. This batch process records structures to be - they tend to be over-
each transaction in the sales journal and represented in a used (can increase
updates the affected general ledger hierarchical form that storage costs,
accounts. is logical and more promote clerical
 easily remembered by errors, and increase
humans. processing time and
3. They permit effort)
detailed analysis and - Unrelated data may
reporting both within be linked simply which
an item class and can lead to
across different unnecessarily complex
classes of items. group codes that
cannot be easily
interpreted.

ALPHABETIC CODES
- for many of the same purposes as numeric codes
- assigned sequentially (in alphabetic order) or be
used in block and group coding techniques.
- May be used to represent large numbers of items
▪ Can represents up to 26 variations per field

ADVANTAGES DISADVANTAGES

- The capacity to - as with numeric

represent large codes there is
numbers of items is difficulty rationalizing
increased the meaning of codes
that have been
sequentially assigned
- tend to have
difficulty sorting
records that are
coded alphabetically.

MNEMONIC CODES
- Alphabetic characters used as abbreviations,
acronyms, and other types of combinations
- Do not require users to memorize the meaning
since the code itself is informative – and not
arbitrary
▪ NY = New York

ADVANTAGES DISADVANTAGES

- does not require the - limited usability and

user to memorize availability
meaning; the - they have limited
code itself conveys a ability to represent
high degree of items within a class.
information about the
item that is being
represented.

NOTE:
DATA FLOW DIAGRAMS
- depict logical tasks that are being performed,
but not who is performing them
SYSTEM FLOWCHARTS
- represent relationships between key elements of
both manual and computer systems.