CAA Chap 1.pdf

UDE 2014 – COMPUTER APPLICATION IN ACCOUNTING CHAPTER 1 – SYSTEM AND ACCOUNTING CONCEPT. SYSTEMS SYSTEMS A system is a collection of interconnected elements or components that work together to achieve a common purpose or goal. It involves the integration of various parts, pr...

UDE 2014 – COMPUTER APPLICATION IN ACCOUNTING CHAPTER 1 – SYSTEM AND ACCOUNTING CONCEPT. SYSTEMS SYSTEMS A system is a collection of interconnected elements or components that work together to achieve a common purpose or goal. It involves the integration of various parts, processes, or subsystems that function harmoniously to produce desired outputs or outcomes. Systems can be found in various domains, including physical, biological, social, and technological realms. A goal achievement may differ based on how component act towards the achieving the goal. Element Goal conflict – component act on their own interest without regard for 1 overall goal Goal Congruence - components acting in their own interest contribute toward overall goal Goal Element 2 ACCOUNTING ACCOUNTING The process of recording, summarizing, analyzing, and reporting financial transactions. ACCOUNTING VS BOOKKEEPING ACCOUNTING VS BOOKKEEPING Accounting is the broader term and encompasses all aspects of financial recordkeeping, including bookkeeping, financial analysis, and reporting. Bookkeeping is the more specific term and refers to the process of recording financial transactions. In other words, bookkeeping is a subset of accounting. Bookkeepers record financial transactions, while accountants use that data to prepare financial statements, analyze financial performance, and advise clients on financial matters. ACCOUNTING VS BOOKKEEPING Accounting Bookkeeping The broader term that encompasses all aspects of The more specific term that refers to the process of financial recordkeeping. recording financial transactions. Includes bookkeeping, financial analysis, and reporting. Only records financial transactions. Uses financial data to prepare financial statements, analyze financial performance, and advise clients on Does not analyze financial data or advise clients on financial matters. financial matters. Requires a higher level of education and training. Requires less education and training. Typically performed by accountants. Typically performed by bookkeepers. DATA VS INFORMATION DATA VS INFORMATION Data are facts that are recorded and stored. Insufficient for decision making. data data Information is processed data used in decision making. data Too much information however, will make it more, not less, difficult to make decisions. This is known as Information Overload. Information INTERNAL AND EXTERNAL INFORMATION FLOW INTERNAL INFORMATION FLOWS Horizontal flows of information used primarily at the operations level to capture transaction and operations data Vertical flows of information Downward flows — instructions, quotas, and budgets Upward flows — aggregated transaction and operations data INFORMATION OBJECTIVE The goal of an information system is to support: To support the stewardship function of management, To support management decision making, and To support the firm’s day-to-day operations. INFORMATION VALUE Benefit $’s > Cost $’s BENEFITS Reduce uncertainty Improve decision Improve planning Improve scheduling COST Time spend Resources CHARACTERISTIC OF USEFULL INFORMATION Regardless of physical form or technology, useful information has the following characteristics: 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 INFORMATION SYSTEM An information system is the set of formal procedures by which data are collected, processed into information, and distributed to users. Financial Transactions Information User System Decisions Nonfinancial Information Transactions TRANSACTION A transaction is a event that affects or is of interest to the organization and is processed by its information system as a unit of work. Financial transactions economic events that affect the assets and equities of the organization e.g., purchase of an airline ticket Nonfinancial transactions all other events processed by the organization’s information system e.g., an airline reservation — no commitment by the customer ACCOUNTING INFORMATION SYSTEM Accounting is an information system. It identifies, collects, processes, and communicates economic information about a firm using a wide variety of technologies. It captures and records the financial effects of the firm’s transactions. It distributes transaction information to operations personnel to coordinate many key tasks. ACCOUNTING INFORMATION SYSTEM (AIS) VS MANAGEMENT INFORMATION SYSTEM (MIS) Accounting Information Systems (AIS) process financial transactions; e.g., sale of goods 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 ACCOUNTING INFORMATION SYSTEM (AIS) VS MANAGEMENT INFORMATION SYSTEM (MIS) IS AIS MIS Financial Marketing Distribution Human Resource GLS/FRS TPS MRS Management Systems Systems Systems Systems ACCOUNTING INFORMATION SYSTEM (AIS) SUBSYSTEMS Transaction processing system (TPS) supports daily business operations General Ledger/ Financial Reporting System (GL/FRS) produces financial statements and reports Management Reporting System (MRS) produces special-purpose reports for internal use GENERAL MODEL FOR ACCOUNTING INFORMATION SYSTEM (AIS) 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  TRANSFORMING THE DATA INTO INFORMATION Functions for transforming data into information according to the general AIS model: Data processing Information Capturing transaction data Classifying Storing generation Recording data onto forms Retrieving Validating and editing the data Transcribing Compiling Deleting Sorting Arranging Batching Formatting Merging Presenting Calculating Data Summarizing Data collection Comparing management ACCOUNTANTS’ UNIQUE ROLES IN AIS Accountants must be able to clearly convey their needs to the systems professionals who design the system. The accountant should actively participate in systems development projects to ensure appropriate systems design. Accountants are the domain experts and responsible for the conceptual design of the AIS. Conceptual system design involves specifying the criteria for identifying delinquent customers and the information that needs to be reported. As the domain expert, the accountant determines the nature of the information required, its sources, its destination, and the accounting rules that need to be applied. ACCOUNTANTS AS SYSTEM AUDITORS 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. Decisions makers in these functions require that such vital information be supplied by an independent source to ensure its integrity hence lead to accountant roles as system auditors: External (Financial) Audits Internal Audit Fraud Audit EXTERNAL (FINANCIAL) AUDIT Independent attestation regarding the fairness of the presentation of financial statements Two types of evidence Tests of controls Substantive tests INTERNAL AUDIT an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization. Different constituencies from external audit FRAUD/ FORENSIC AUDIT investigate anomalies and gather evidence of fraud that may lead to criminal conviction. Initiated When corporate management suspects employee fraud. Or, boards of directors hire fraud auditors to investigate their own suspected executives