Introduction to Accounting Information Systems PDF

14.08.2024 CHAPTER 1 Introduction to Accounting Information Systems John Timmy Merjudio, CPA, MBA, CLSSBB Department of Accountancy San Pedro College of Business Administration 1 CHAPTER OUTLIN...

14.08.2024 CHAPTER 1 Introduction to Accounting Information Systems John Timmy Merjudio, CPA, MBA, CLSSBB Department of Accountancy San Pedro College of Business Administration 1 CHAPTER OUTLINE Overview of Accounting Information System (AIS) Role and importance of AIS in Business Components and functions of AIS Types of information system Fundamentals of Computerized Information System Role of Accountant in AIS Types of Audit in AIS ASSESSMENT Quiz Group discussion Reflection Paper (Accounting Information System in Modern World) Introduction to Accounting Information Systems 2  14.08.2024 OVERVIEW OF ACCOUNTING INFORMATION SYSTEM What is accounting? Accounting is a vital process that involves the systematic recording, summarizing, analyzing, and reporting of financial transactions to provide insights into a business's financial health and performance. It encompasses activities such as bookkeeping, financial statement preparation, and overall financial management. It has been called as the language of business What is information? Information is a business resource and vital to the survival of the business organization. Its flow could be external or internal Introduction to Accounting Information Systems 3 OVERVIEW OF ACCOUNTING INFORMATION SYSTEM What is system? A system is a group of two or more interrelated components or subsystems that serve a common purpose Elements of systems are multiple components, relatedness, system vs subsystem and purpose What is information system? set of formal procedures by which data are collected, processed into information, and distributed to the users Introduction to Accounting Information Systems 4  14.08.2024 OVERVIEW OF ACCOUNTING INFORMATION SYSTEM What is accounting information system (AIS)? subsystem that process financial and nonfinancial transactions that directly affect the processing of financial transactions system of collecting and processing transaction data and communicating financial information to decision-makers FRAMEWORK FOR INFORMATION SYSTEM Introduction to Accounting Information Systems 5 OVERVIEW OF ACCOUNTING INFORMATION SYSTEM AIS subsystem are composed of transaction processing system, general ledger/financial reporting system and management reporting system Transaction Processing System Support daily business operations with numerous reports, TPS documents, and messages for users throughout the organization General Ledger/Financial Reporting System AIS Subsystem Produce traditional financial statements, such as the income statement, balance sheet, statement of cash flows, tax returns and GL/FRS others required by law Management Reporting System Provides internal management with special-purpose financial reports and information needed for decision making such as budget, MRS variance reports and subsystem Introduction to Accounting Information Systems 6  14.08.2024 ROLE & IMPORTANCE OF AIS IN BUSINESS Importance of Accounting Information System in Business Improving the quality and reducing the costs of products and services Improving efficiency Sharing knowledge Improving the efficiency and effectiveness of its supply chain Improving the internal control structure Improving decision making Introduction to Accounting Information Systems 7 KEY COMPONENTS AND FUNCTION OF AIS General Model of AIS Introduction to Accounting Information Systems 8  14.08.2024 COMPONENTS AND FUNCTION OF AIS Six components of AIS Functions People Collect and store data Procedures and Instructions Data Transform data into Software Used information IT infrastructure Provide adequate control Internal controls and security measures Introduction to Accounting Information Systems 9 TYPES OF INFORMATION SYSTEM Accounting Information Composed of transaction processing systems, GL/ Financial reporting system and management reporting systems. System (AIS) Computerized system that processes, records, and provide reports of consolidated transaction in real time Comprehensive framework that leverages technology to gather, process, store, and disseminate information to Management Information support managerial functions within an organization. It serves as the backbone of modern management, ensuring System (MIS) that decision-makers are equipped with accurate, timely, and relevant data to steer their organizations toward success. Sophisticated computer-based applications designed to assist decision-makers in solving complex problems and Decision Support System making strategic choices. By harnessing advanced analytics, data modelling, and artificial intelligence, DSS provide (DSS) invaluable insights, enabling managers to navigate uncertainties, explore alternatives, and make well-informed decisions. Executive Support System Designed to assist senior management in strategic decision-making processes. Tailored to the needs of high-level executives, it provides comprehensive information from internal and external sources, enabling leaders to analyze (ESS) trends, assess organizational performance, and formulate long-term strategies. Office Automation System Essential tools for businesses aiming to enhance productivity, streamline workflows, and foster collaborative work environments. It refers to the integration of computer hardware, software, and network connections to optimize (OAS) routine office tasks and facilitate efficient information management. Encompasses a set of technologies, applications, and processes that analyze and transform raw data into insights Business Intelligence which are meaningful. This helps businesses to gain a comprehensive understanding of their operations, customers, and market dynamics. By employing advanced analytics and data visualization techniques, BIS empowers System (BIS) organizations to make informed decisions, identify patterns, and forecast trends, thereby gaining a competitive edge in the fast-paced business landscape. Introduction to Accounting Information Systems 10  14.08.2024 FUNDAMENTALS OF COMPUTERIZED INFORMATION SYSTEM Introduction to Accounting Information Systems 11 ROLE OF ACCOUNTANT IN AIS Three ways involvement of accountant USERS SYSTEM DESIGNERS SYSTEM AUDITORS Accounting function is the single Accountants are responsible for key Reliability of internally produced largest user of IT and all system that aspects of information system, financial statement must be proved process financial transaction impact including assessment of information by auditing the company’s system as accounting functions. As end users needs, defining the content and form part of substantive testing and accountant needs to provide clear format of output reports, specifying test of control. Reports are to be picture of their needs to system sources of data, what are the validated by independent expert designer. accounting rules and controls needed auditor. for better system integrity and efficiency Introduction to Accounting Information Systems 12  14.08.2024 TYPES OF AUDIT IN AIS External Auditing IT Auditing Internal Auditing System auditors responsibility Usually performed as a broader Conducting FS audits, examining was limited to attestation part of financial audit and attest operational compliance with function and expand its scope the effectiveness of client’s IT orgt’l policies, reviewing the and role into a broader concern controls to establish the degree organization’s compliance with of assurance of compliance with prescribed legal obligations, evaluating standards. operational efficiency, detecting and pursuing fraud within the firm, and conducting IT audits Introduction to Accounting Information Systems 13  18.08.2024 CHAPTER 2 Enterprise Resource Planning (ERP) Process and Future John Timmy Merjudio, CPA, MBA, CLSSBB Department of Accountancy San Pedro College of Business Administration 14 CHAPTER OUTLINE Overview of Enterprise Resource Planning including its evolution Components of ERP System and relationship with AIS Various ERP and AIS vendor Key business process flow using ERP The future of accounting using AIS-ERP ASSESSMENT Quiz Group discussion Video Presentation (Accounting Trend) Introduction to Accounting Information Systems 15  18.08.2024 OVERVIEW OF ENTERPRISE RESOURCE PLANNING EVOLUTION OF INFORMATION SYSTEM MODELS REA ERP (resources, ( enterprise Manual Flat-file Database events and resource Processes systems approach agents) planning) model system Introduction to Accounting Information Systems 16 OVERVIEW OF ENTERPRISE RESOURCE PLANNING What is enterprise systems? Integrates business processes and information from entire enterprise Helps coordinate the operation of business functions ERP systems are software packages that can be used for the core systems necessary to support enterprise systems What is an ERP System? Information system model that enables an organization to automate and integrate its key business processes. Facilitate data sharing, information flows, and introduction of common business practices among all organizational users. Complex and few organization produce it in-house. ERP package are sold to client per modules Recognized leaders in the market are SAP, Oracle, JD Edwards & Peoplesoft Problem with standardize modules is that they may not always meet the organizational needs Organizations that hope to successfully implement an ERP will need to modify their business processes to suit the ERP, or modify the ERP to suit their business or both. Sometimes additional software application is added to handle specific needs of the business, called bolt-ons. Key features includes Smooth and seamless flow of information across organizational boundaries Standardized environment with shared database independent of applications and integrated applications Introduction to Accounting Information Systems 17  18.08.2024 VARIOUS ERP & AIS VENDOR Introduction to Accounting Information Systems 18 COMPONENTS OF ERP SYSTEM AND RELATIONSHIP WITH AIS Relationship of ERP and AIS An ERP system integrates various functions and departments within an organization, including accounting, human resources, sales, and production, into a single database and user interface. This integration allows for real-time data sharing and efficient communication between different parts of the organization. The Accounting Information System (AIS) within an ERP system is responsible for collecting, storing, and processing financial and accounting data. It provides financial reports, analysis, and support for decision-making. The AIS in an ERP system is often seamlessly integrated with other modules, such as inventory management, procurement, and sales, allowing for automatic updates to financial records based on operational activities. Overall, the ERP system and AIS work together to streamline processes, improve data accuracy, and provide decision- makers with timely and reliable financial information for strategic planning and control. Introduction to Accounting Information Systems 19  18.08.2024 OVERVIEW OF ENTERPRISE RESOURCE PLANNING Advantages and Disadvantages of ERP Advantages Disadvantages Provides an integrated, enterprise-wide, single Cost view of the organization’s data and financial situation Data input is captured or keyed once Amount of time required Management gains greater visibility Changes to business processes Organization gains better access control Complexity Procedures and reports are standardized Resistance Customer service improve Real time processing and increased productivity Introduction to Accounting Information Systems 20 KEY BUSINESS PROCESS FLOW USING ERP Introduction to Accounting Information Systems 21  18.08.2024 KEY BUSINESS PROCESS FLOW USING ERP Procure-to-Pay/ Purchase-to-Pay Record-to-Report Recording Cash/Bank Expense & Accounting Income Transactions Accounting Transactions Purchase Order Recording other Inventory Request to Committed Receipts of Accounting financial transactions purchase Negotiations Goods/Services Transactions (adj) Purchase Order with Supplier Invoice & Capture Release Order to Payment Purchasing Supply Order Receipts Needs Identified & Payment Purchasing and Reporting Recording Fixed Manufacturing Financial Assets Accounting Statement/MIS Accounting Transactions Reports Transactions Introduction to Accounting Information Systems 22 KEY BUSINESS PROCESS FLOW USING ERP Order to Cash Quote-to-Cash Customer Order Order Committed Quote Committed Goods/Services Client’s product Fulfillment of Customer Order Delivery specification Negotiate Quote contract Credit check Capture Invoice & Pricing structure Contract Invoice & Stock Check Receipts Processing Receipts Delivery & Potential Customers Order Received Delivery & Closed Closed Identified Introduction to Accounting Information Systems 23  18.08.2024 THE FUTURE OF ACCOUNTING USING AIS-ERP Data analytics & Robotic Process Artificial visualization tool Automation Intelligence Broader Skill Sets Accounting Advisory Services Outsourcing of Increase Focus on Accounting Activities Cyber Security Paperless office Sustainability in Accounting Gearing towards cloud-based Blockchain Workplace New Regulatory accounting Technology Culture Compliance Introduction to Accounting Information Systems 24  28.08.2024 CHAPTER 3 Systems Documentation Techniques John Timmy Merjudio, CPA, MBA, CLSSBB Department of Accountancy San Pedro College of Business Administration 26 CHAPTER OUTLINE Importance of files and documentation techniques in ERP Types of files Documentation techniques ASSESSMENT Quiz Group discussion Assignment (Flowchart Creation and Process Narrative) Introduction to Accounting Information Systems 27  28.08.2024 IMPORTANCE OF FILES AND DOCUMENTATION TECHNIQUES IN ERP Process documentation in an ERP system typically includes detailed descriptions of how specific business processes are carried out within the system. This documentation may cover procedures for entering and approving purchase orders, managing inventory, processing sales orders, generating financial reports, and more. The goal of process documentation is to standardize and streamline operations, ensure compliance with company policies and regulations, and provide a reference for training and troubleshooting. Effective file management and documentation techniques are crucial for maintaining proper records, ensuring compliance, and facilitating smooth business operations within an ERP system. Well-organized files and documentation not only enhance decision-making processes but also support auditing, regulatory requirements, and overall system integrity. Efficient documentation techniques also promote knowledge transfer and assist in training new users, thereby contributing to the long-term success of an ERP implementation. Introduction to Accounting Information Systems 28 TYPES OF FILES Audit trails in ERP/computer-based system are less observable than traditional manual systems. Its accounting records are represented by four different types of magnetic files Master File Transaction File Reference File Archive File Generally, contains Temporary file of Stores data that are used Contains records of past account data. The transaction records used as standard for transactions that are general ledger and to change or update data processing transactions. retained for future subsidiary ledger are in master file. Sales For example, payroll may references. Archive files examples of master files. order, inventory receipts refer to tax table to includes journals, prior- Data values in master and cash receipts are calculate withholding tax. period payroll files are updated from examples of transaction Other examples are price information, list of transaction files list, list of authorized former employees, suppliers, employees' records of accounts rosters and customer written off and prior- credit files period ledger Introduction to Accounting Information Systems 29  28.08.2024 ACCOUNTING RECORDS IN ERP /COMPUTER-BASED SYSTEM Introduction to Accounting Information Systems 30 DOCUMENTATION TECHNIQUES Documentation Tools 1. Data Flow Diagram (DFD) – a graphical description of data sources, data flows, transformation processes, data storage, and data destinations. 2. Flowchart – a graphical description of system. There are several types of flowcharts Document Flowchart – shows the flow of documents and information between departments or areas of responsibility System Flowchart – shows the relationship among input, processing, and output in an information system Program Flowchart – shows the sequence of logical operations a computer performs as it executes a program 3. Business Process Diagrams – graphical description of business process used by a compaby Introduction to Accounting Information Systems 31  28.08.2024 DOCUMENTATION TECHNIQUES Data Flow Diagram A graphical description of data sources, data flows, transformation processes, data storage, and data destinations. Describes flow of data within an organization Introduction to Accounting Information Systems 32 DOCUMENTATION TECHNIQUES Data Flow Diagram Guidelines for Drawing DFD Introduction to Accounting Information Systems 33  28.08.2024 DOCUMENTATION TECHNIQUES Flowchart Pictorial, analytical technique used to describe some aspect of an information system in a clear, concise and logical manner. Record how business processes are performed and how documents flow through the organization Used to analyze how to improve business processes and documents flows Flowcharting symbols are divided into four categories a. Input/output sysmbols b. Processing symbols c. Storage symbols d. Flow and miscellaneous symbols Introduction to Accounting Information Systems 34 DOCUMENTATION TECHNIQUES Flowchart Introduction to Accounting Information Systems 35  28.08.2024 DOCUMENTATION TECHNIQUES Flowchart Introduction to Accounting Information Systems 36 DOCUMENTATION TECHNIQUES Flowchart Introduction to Accounting Information Systems 37  28.08.2024 DOCUMENTATION TECHNIQUES Guidelines for Drawing Flowchart Introduction to Accounting Information Systems 38 DOCUMENTATION TECHNIQUES Business Process Diagrams Visual ways to describe different steps or activities in a business process. Introduction to Accounting Information Systems 39  28.08.2024 DOCUMENTATION TECHNIQUES Guidelines for Drawing BPD Introduction to Accounting Information Systems 40  31.08.2024 CHAPTER 4 Computer Ethics, Fraud and Internal Control John Timmy Merjudio, CPA, MBA, CLSSBB Department of Accountancy San Pedro College of Business Administration 41 CHAPTER OUTLINE Computer Ethics Sarbanes-Oxley Act and Ethical Issues Computer Fraud Sarbanes-Oxley Act and Fraud Internal Control Concepts and Techniques ASSESSMENT Quiz Group discussion Reflection Paper (Enron Scandal) Introduction to Accounting Information Systems 42  31.08.2024 Computer Ethics Business Ethics Ethics pertains to principles of conduct that individuals use in making choices and guiding their behavior in situations that involve the concepts of right and wrong Ethical behavior is necessary for a society to function in an orderly manner. Some are incorporated into laws. Proportionality is one way of making ethical decisions, which means decision must outweigh the risks. Furthermore, there must be no alternative decision that provides the same or greater benefit with less risks ( justice and minimizing risk) Computer Ethics Use of IT in business has had a major impact on society thus raises significant ethical issues regarding computer crime, working conditions, privacy and more. The 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. This includes concerns about software as well as hardware and concerns about networks connecting computers as well as computer themselves Introduction to Accounting Information Systems 43 Computer Ethics Ethical issues and concerns about usage of computer Privacy Security Ownership Equity in Environmental of property access issues Artificial Unemployment & Misuse of Intelligence Displacement computers Introduction to Accounting Information Systems 44  31.08.2024 Computer Ethics Ten Commandments of Computer Ethics Defined by Computer Ethics Institute Introduction to Accounting Information Systems 45 Sarbanes-Oxley Act and Ethical Issues Public outcry surrounding ethical misconduct and fraudulent acts by executives of Enron, Global Crossing, Tyco, Adelphia, WorldCom, and others spurred Congress into passing the American Competitiveness and Corporate Accountability Act of 2002. This wide-sweeping legislation, more commonly known as the Sarbanes-Oxley Act (SOX), is the most significant securities law since the Securities and Exchange Commission (SEC) Acts of 1933 and 1934. SOX has many provisions designed to deal with specific problems relating to capital markets, corporate governance, and the auditing profession. At this point, we are concerned primarily with Section 406 of the act, which pertains to ethical issues Section 406 – Code of Ethics for Senior Financial Officers Section 406 of SOX requires public companies to disclose to the SEC whether they have adopted a code of ethics that applies to the organization’s chief executive officer (CEO), CFO, controller, or persons performing similar functions. If the company has not adopted such a code, it must explain why. A public company may disclose its code of ethics in several ways: (1) included as an exhibit to its annual report, (2) as a posting to its Web site, or (3) by agreeing to provide copies of the code upon request Introduction to Accounting Information Systems 46  31.08.2024 Sarbanes-Oxley Act and Ethical Issues Section 406 – Code of Ethics for Senior Financial Officers The SEC has ruled that compliance with Section 406 necessitates a written code of ethics that address the following ethical issues: Internal Conflict of Full and Fair Legal Reporting of Accountability Interest Disclosures Compliance Code Violations Organization should provide Company’s code full, fair, of ethics should accurate, timely Codes of ethics Code of ethics An effective outline and should require must provide ethics program procedures for understandable employees to mechanism to must take dealing conflict disclosures in follow applicable permit prompt appropriate of interest the documents, governmental internal action when between reports, and laws, rules and reporting of code violations personal and financial regulations. ethics violation. occur. professional statements that relationship. it submits to SEC & to the public. Introduction to Accounting Information Systems 47 Computer Fraud Fraud Denotes false representation of material fact made by one party to another party with the intent to deceive and induce other party to justifiably rely on the fact to his or her detriment. A fraudulent act must meet the following five conditions: (1) False representation, (2) Material fact, (3) Intent, (4) Justifiable reliance, (5) Injury or loss Two Levels of Fraud Employee Fraud - is generally designed to directly convert cash or other assets to the employee’s personal benefit. Typically, the employee circumvents the company's internal control system for personal gain. If a company has an effective system of internal control, defalcations or embezzlements can usually be prevented or detected. Employee fraud usually involves three steps: (1) stealing something of value (an asset), (2) converting the asset to a usable form (cash), and (3) concealing the crime to avoid detection. T Management Fraud- is more insidious than employee fraud because it often escapes detection until the organization has suffered irreparable damage or loss. Management fraud usually does not involve the direct theft of assets. Top management may engage in fraudulent activities to drive up the market price of the company’s stock. This may be done to meet investor expectations or to take advantage of stock options that have been loaded into the manager’s compensation package. Management fraud typically contains three special characteristics The fraud is perpetrated at levels of management above the one to which internal control structures generally relate. 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. If the fraud involves misappropriation of assets, it frequently is shrouded in a maze of complex business transactions, often involving related third parties. Introduction to Accounting Information Systems 48  31.08.2024 Computer Fraud Fraud Triangle Introduction to Accounting Information Systems 49 Computer Fraud Computer Fraud Use of computers, the internet, internet devices, and internet services to defraud people or organization of resources. Illegal and unauthorized use of computer systems to deceive or manipulate data for personal gain. Some ERP Fraud Type Financial fraud Data theft System Unauthorized Vendor Fraud Manipulation transactions Introduction to Accounting Information Systems 50  31.08.2024 Sarbanes-Oxley Act and Fraud The act establishes a framework to modernize and reform the oversight and regulation of public company auditing. Its principal reforms pertain to (1) the creation of an accounting oversight board, (2) auditor independence, (3) corporate governance and responsibility, (4) disclosure requirements, and (5) penalties for fraud and other violations. Introduction to Accounting Information Systems 51 Internal Control Concepts and Techniques The establishment and maintenance of a system of internal control is an important management obligation. A fundamental aspect of management’s stewardship responsibility is to provide shareholders with reasonable assurance that the business is adequately controlled. Additionally, management has a responsibility to furnish shareholders and potential investors with reliable financial information on a timely basis. An organization’s internal control system comprises policies, practices, and procedures to achieve four broad objectives: To safeguard assets of the firm. To ensure the accuracy and reliability of accounting records and information. To promote efficiency in the firm’s operations. To measure compliance with management’s prescribed policies and procedures. Inherent in these control objectives are four modifying principles that guide designers and auditors of internal control systems: 1. Management responsibility 2. Methods of Data Processing 3. Limitations 4. Reasonable assurance Introduction to Accounting Information Systems 52  31.08.2024 Internal Control Concepts and Techniques Internal Control Shield PDC Model Preventive Controls – first line of defense and are passive techniques to reduce the frequency of occurrence of undesirable events. Preventing errors and fraud is far more cost-effective than detecting & correcting problems Detective Controls – second line of defense and techniques and procedures designed to identify and expose undesirable events that elude preventive control. It reveals error by comparing actual occurrences to preestablished standards. Corrective control – must be taken to reverse the effect of detected errors. This Introduction to Accounting Information Systems control fixed the problem. 53 Internal Control Concepts and Techniques COSO Internal Control Framework Control Environment - the foundation for the other four control components. The control environment sets the tone for the organization and influences the control awareness of its management and employees Risk Assessment - organizations must perform a risk assessment to identify, analyze, and manage risks relevant to financial reporting Information & Communication - The accounting information system consists of the records and methods used to initiate, identify, analyze, classify, and record the organization’s transactions and to account for the related assets and liabilities. The quality of information that the accounting information generates impacts management’s ability to take actions and make decisions in connection with the organization’s operations and to prepare reliable financial statements. Monitoring - process by which the quality of internal control design and operation can be assessed. This may be accomplished by separate procedures or by ongoing activities. COSO stands for Committee of Sponsoring Organizations of the Control Activities - Control activities are the policies and procedures used to Treadway Commissions ensure that appropriate actions are taken to deal with the organization’s identified risks. Control activities can be grouped into two distinct categories: Introduction to Accounting Information Systems physical controls and information technology (IT) 54  31.08.2024 Internal Control Concepts and Techniques Six Categories of Physical Control Two Categories of IT Control Physical Definition/Explanation IT Controls Definition/Explanation Controls Application The objectives of application controls are Transaction Ensure that all material transactions processed by Controls to ensure the validity, completeness, and Authorization the information system are valid and in accordance accuracy of financial transactions. These with management’s objectives. controls are designed to be application- Segregation of Segregation of duties can take many form such as specific. Examples include: Duties 1. Authorization 2. Asset Custody General Include controls over IT governance, IT 3. Organizational structure division Controls infrastructure, security and access to operating systems and databases, Supervision Supervision is often called a compensating control application acquisition and development, for risk in segregation of duties and program change procedures Accounting Accounting records should provide audit trail of records economic events. Access control Ensure that only authorized personnel have access to the firm’s assets. Unauthorized access exposes assets to misappropriation, damage, and theft. Independent Independent checks of the accounting system to Verification identify errors and misrepresentations Introduction to Accounting Information Systems 55