Chapter 6 Transaction Processing & Financial Reporting Systems Overview PDF

CHAPTER 6 TRANSACTION PROCESSING & FINANCIAL REPORTING SYSTEMS OVERVIEW XAUDCIS HOLY ANGEL UNIVERSITY A Financial Transaction is...  an economic event that affects the assets and equities of the firm, is reflected in its accounts, and is measured in monetary terms.  similar types of transa...

CHAPTER 6 TRANSACTION PROCESSING & FINANCIAL REPORTING SYSTEMS OVERVIEW XAUDCIS HOLY ANGEL UNIVERSITY A Financial Transaction is...  an economic event that affects the assets and equities of the firm, is reflected in its accounts, and is measured in monetary terms.  similar types of transactions are grouped together into three transaction cycles: the expenditure cycle, the conversion cycle, and the revenue cycle. Relationship between Transaction Cycles Each Cycle has Two Subsystems  Expenditure Cycle: time lag between the two due to credit relations with suppliers:  physical component (acquisition of goods)  financial component (cash disbursements to the supplier)  Conversion Cycle :  the production system (planning, scheduling, and control of the physical product through the manufacturing process)  the cost accounting system (monitors the flow of cost information related to production)  Revenue Cycle: time lag between the two due to credit relations with customers :  physical component (sales order processing)  financial component (cash receipts) Manual System Accounting Records  Source Documents - used to capture and formalize transaction data needed for transaction processing  Product Documents - the result of transaction processing  Turnaround Documents - a product document of one system that becomes a source document for another system Manual System Accounting Records  Journals - a record of chronological entry  special journals - specific classes of transactions that occur in high frequency  general journal - nonrecurring, infrequent, and dissimilar transactions  Ledger - a book of financial accounts  general ledger - shows activity for each account listed on the chart of accounts  subsidiary ledger - shows activity by detail for each account type Flow of Economic Events Into the General Ledger Accounting Records in a Computer-Based System EXPLANATION OF STEPS IN FIGURE: 1. Compare the AR 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 source documents that can be pulled from their files and verified. If necessary, confirm these source documents by contacting the customers.  Audit Trail Source General Financial Journal Document Ledger Statements Financial General Source Statements Journal Ledger Document Accountants should be able to trace in both directions. Sampling and confirmation are two common techniques.  Example of Tracing an Audit Trail Verifying Accounts Receivable Accounts Receivable Control Account-General Ledger Accounts Receivable Subsidiary Ledger (sum of all customers’ receivables) Sales Journal Cash Receipts Journal Sales Order Deposit Slip Shipping Notice Remittance Advice  Computer-Based Systems  The audit trail is less observable in computer-based systems than traditional manual systems.  The data entry and computer programs are the physical trail.  The data are stored in magnetic files.  Computer Files  Master File - generally contains account data (e.g., general ledger and subsidiary file)  Transaction File - a temporary file containing transactions since the last update  Reference File - contains relatively constant information used in processing (e.g., tax tables, customer addresses)  Archive File - contains past transactions for reference purposes Documentation Techniques  Documentation in a CB environment is necessary for many reasons.  Five common documentation techniques:  Entity Relationship Diagram  Data Flow Diagrams  Document Flowcharts  System Flowcharts  Program Flowcharts Entity Relationship Diagram (ERD)…  isa documentation technique 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)  agents (inventory control clerk, vendor, production worker) Cardinalities…  represents the numerical mapping between entities:  one-to-one  one-to-many  many-to-many  Cardinalities Entity Relationship Entity Sales- 1 1 Car Assigned Type person 1 M Customer Places Order M M Vendor Supply Inventory Data Flow Diagrams (DFD)…  use symbols to represent the processes, data sources, data flows, and entities in a system  represent the logical elements of the system  do not represent the physical system Data Flow Diagram Symbols Entity Data Store Name Name N Process Description Direction of data flow Documents Flowcharts…  illustratethe relationship among processes and the documents that flow between them  contain more details than data flow diagrams  clearly depict the separation of functions in a system Symbol Set for Document Flowcharts Terminal showing source Calculated batch total or destination of documents and reports Source document or report On-page connector Manual operation Off-page connector File for storing source Description of process documents and or comments reports Accounting records Document flowline (journals, registers, logs, ledgers) Sales Department Credit Department Warehouse Shipping Department Customer Customer Order Prepare Sales Orders Sales Order #1 Sales Sales Order #1 OrderSales #1 Order #1 First Stages in Constructing Document Flowchart Showing Areas of Activity  Sales Department Credit Department Warehouse Shipping Department Sales A Customer Order #1 Sales Order2 Customer Sales Checks Order Credit Order 4 Credit Records Sales Picks Stock Prepare Records Order3 Goods Sales Orders Signed Sales Order #1 Customer Sales Picks Order Order2 Goods Sales Order #1 Sales Sales Order #1 OrderSales #1 Sales Order #1 Order 4 Sales Signed Sales Order3 N Order #1 Sales Order2 N Distribute SO and File A Customer Sales Customer Order Signed Sales Order #1 Order 4 Sales Finished Document Flowchart Order3 Sales Showing Areas of Activity N Order2 System Flowcharts…  are used to represent the relationship between the key elements--input sources, programs, and output products--of computer systems  depict the type of media being used (paper, magnetic tape, magnetic disks, and terminals)  in practice, not much difference between document and system flowcharts Systems Flowchart Symbols Terminal input/ Hard copy output device Computer process Process flow Real-time Direct access storage (online) device connection Video display device Magnetic tape Sales Department Computer Operations Department Warehouse Shipping Department Customer Edit and Credit Hist Credit Check File Customer Order Sales Orders Terminal AR File Update Program Inventory First Stages in Constructing System Flowchart Showing Areas of Activity Sales Department Computer Operations Department Warehouse Shipping Department Customer Sales A Edit and Credit file Order1 Credit Check Customer Sales Order Order 3 Picks Stock Sales Sales Records Order2 Goods Orders Terminal AR File Update Sales Picks Program Order1 Goods Customer Inventory Sales Order Order2 Sales Order3 N A N Sales Sales Order 3 Order1 Sales Order2 Sales Order1 Customer Finished System Flowchart Showing All Facts Translated into Visual Symbols Program Flowcharts… illustrate the logic used in programs Program Flowchart Symbols Terminal start or Logical process end operation Input/output operation Decision Flow of logical process Modern Systems versus Legacy Systems  Modern systems characteristics:  client-server based and process transactions in real time  use relational database tables  have high degree of process integration and data sharing  some are mainframe based and use batch processing  Some firms employ legacy systems for certain aspects of their data processing.  Accountants need to understand legacy systems.  Legacy systems characteristics:  mainframe-based applications  batch oriented  early legacy systems use flat files for data storage  later legacy systems use hierarchical and network databases  data storage systems promote a single-user environment that discourages information integration Updating Master Files: Primary Keys (PK) and Secondary Keys (SK)  Database Backup Procedures Destructive updates leave no backup. To preserve adequate records, backup procedures must be implemented, as shown below: The master file being updated is copied as a backup. A recovery program uses the backup to create a pre-update version of the master file. Computer-Based Accounting Systems  Two broad classes of systems:  batch systems  real-time systems  Batch Processing A batch is a group of similar transactions that are accumulated over time and then processed together.  The transactions must be independent of one another during the time period over which the transactions are accumulated in order for batch processing to be appropriate.  A time lag exists between the event and the processing.  Batch Processing/Sequential File Unedited Sales Keying Transactions Orders catches clerical errors Errors Edit Run correct errors and resubmit Edited Transactions rearranges the transaction data by Sort key field so that it is in the same Run sequence as the master file Transactions Old Master (father) AR Update changes the values in the master file to Run reflect the transactions that have occurred AR Transactions (eventually transferred to an archive file) New Master (son)  Steps in Batch Processing/Sequential File  Keystroke - source documents are transcribed by clerks to magnetic tape for processing later  Edit Run - identifies clerical errors in the batch and places them into an error file  Sort Run - places the transaction file in the same order as the master file using a primary key  Update Run - changes the value of appropriate fields in the master file to reflect the transaction  Backup Procedure - the original master continues to exist and a new master file is created Advantages of Batch Processing  Organizations can increase efficiency by grouping large numbers of transactions into batches rather than processing each event separately.  Batch processing provides control over the transaction process via control figures. Real-Time Systems…  process transactions individually at the moment the economic 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  oftentimes have longer systems development time Why Do So Many AIS Use Batch Processing?  AIS processing is characterized by high-volume, independent transactions, such are recording cash receipts checks received in the mail.  The processing of such high-volume checks can be done during an off-peak computer time.  This is one reason why batch processing maybe done using real-time data collection. DATA CODING SCHEMES  SEQUENTIAL CODES  BLOCK CODES  GROUP CODES  ALPHABETIC CODES  MNEMONIC CODES  GENERAL LEDGER SYSTEMS  General Ledger Systems acts as a hub connected to other systems.  Becomes sources of input for other systems  Flows as a feedback into the GLS.  GLS provide data to MRS & FRS  41 IS Functions of GLS  General ledger systems should: Input  collect transaction data promptly and accurately.  classify/code data and accounts.  validate collected transactions/ maintain accounting controls (e.g., equal debits and credits). Process  process transaction data.  post transactions to proper accounts  update general ledger accounts and transaction files Output  record adjustments to accounts  store transaction data.  generate timely financial reports.  42 Relationship of GLS to Other Information Subsystems Figure 8-1  43 GLS Database  General ledger master file  principal FRS file based on chart of accounts  General ledger history file  used for comparative financial support  Journal voucher file  all journal vouchers of the current period  Journal voucher history file  journal vouchers of past periods for audit trail  Responsibility center file  financial data by responsibility centers for MRS  Budget master file  budget data by responsibility centers for MRS  44 Journal Voucher Layout for a General Ledger Master File Figure 8-2  45 Financial Reporting Process 1. Capture Transactions. 2. Record the Special Journal. 3. Post to Subsidiary Ledger. 4. Post to General Ledger. 5. Prepare the unadjusted trial balance. 6. Make Adjusting Entries. 7. Journalize & post adjusting entries. 8. Prepare the trial balance. 9. Prepare the FS. 10. Journalize & post closing entries. 11. Prepare the post-closing trial balance. Figure 8-4 TPS – Daily Procedures GLS-Periodic FRS – End of Period  46 GLS Reports  General ledger analysis:  listing of transactions  allocation of expenses to cost centers  comparison of account balances from prior periods  trial balances  Financial statements:  balance sheet  income statement  statement of cash flows  Managerial reports:  analysis of sales  analysis of cash  analysis of receivables  Chart of accounts: coded listing of accounts  47 Potential Risks in the GL/FRS 1. A defective audit trail. 2. Unauthorized access to the general ledger. 3. GL accounts that are out of balance with subsidiary accounts. 4. Incorrect GL account balances of unauthorized or incorrect journal vouchers.  48 Other Potential Risks in the GL/FRS  Improperly prepared journal entries  Unposted journal entries  Debits not equal to credits  Subsidiary not equal to G/L control accounts  Inappropriate access to the G/L  Poor audit trail  Lost or damaged data  Account balances that are wrong because of unauthorized or incorrect journal vouchers  49 GL/FRS Control Issues Transaction authorization - journal vouchers must be authorized by a manager at the source dept Segregation of duties – G/L clerks should not:  have recordkeeping responsibility for special journals or subsidiary ledgers  prepare journal vouchers  have custody of physical assets  50 GL/FRS Control Issues Access controls:  Unauthorized access to G/L can result in errors, fraud, and misrepresentations in financial statements.  Sarbanes-Oxley requires controls that limit database access to only authorized individuals. Accounting records - trace source documents from inception to financial statements and vice versa  51 GL/FRS Control Issues Independent verification  G/L dept. reconciles journal vouchers and summaries. Two important operational reports used:  journal voucher listing – details of each journal voucher posted to the G/L  general ledger change report – the effects of journal voucher postings on G/L accounts  52 GL/FRS Using Database Technology Figure 8-5  53 GL/FRS Using Database Technology  Advantages:  immediate update and reconciliation  timely, if not real-time, information  Removes separation of transaction authorization and processing  Detailed journal voucher listing and account activity reports are a compensating control  Centralized access to accounting records  Passwords and authorization tables as controls  54 HTML: Hyper Text Markup Language  Format used to produce Web pages  defines the page layout, fonts, and graphic elements  used to lay out information for display in an appealing manner like one sees in magazines and newspapers  using both text and graphics (including pictures) appeals to users  Hypertext links to other documents on the Web  Even more pertinent is HTML’s support for hypertext links in text and graphics that enable the reader to ‘jump’ to another document located anywhere on the World Wide Web.  55 XML: eXtensible Markup Language  XML is a meta-language for describing markup languages.  Extensible means that any markup language can be created using XML.  includes the creation of markup languages capable of storing data in relational form, where tags (formatting commands) are mapped to data values  can be used to model the data structure of an organization’s internal database  56 Comparison of HTML and XML Documents Figure 8-6  57 XBRL: eXtensible Business Reporting Language  XBRL is an XML-based language for standardizing methods for preparing, publishing, and exchanging financial information, e.g., financial statements.  XBRL taxonomies are classification schemes.  Advantages:  Business offer expanded financial information to all interested parties virtually instantaneously.  Companies that use XBRL database technology can further speed the process of reporting.  Consumers import XBRL documents into internal databases and analysis tools to greatly facilitate their decision-making processes.  58 Implications for Accounting Audit implication for XBRL  taxonomy creation: incorrect taxonomy results in invalid mapping that may cause material misrepresentation of financial data  validation of instance documents: ensure that appropriate taxonomy and tags have been applied  audit scope and timeframe: impact on auditor responsibility as a consequence of real-time distribution of financial statements THE END THANK YOU 