ACCT 406 LECTURE NOTES.pptx

Accounting Information Systems

(AIS)

Overview of AIS

o _{The impact of organizational structure on AIS} o _{The evolution of AIS}

o _{The role of accountants as users, designers, and auditors of}

The Information Environment of the Firm

o _{What is a business process?} o _{A business process:}

- _{has a goal}

- _{uses resources}

- _{has specific inputs and outputs}

- _{has a number of activities that are performed in some order} - _{may affect more than one organizational unit}

Basic Business Processes

o _{Manufacturing operations} o _{Inbound sales/logistics}

o _{Outbound sales/logistics} o _{Sales/services}

o_Marketing

o_{Human resource} o_Accounting

o_Finance

o_{Research and development} o_Governance

Business Process Cycles

- _{The revenue cycle}

- _{The expenditure cycle}

- _{The production/conversion cycle}

- _{The human resources and payroll cycle} - _{The financing cycle}

Information & Business Process

- _{Organized/processed data}

- _{Processed data used in decision making}

o

_{Information overload means too much information –}

Value of Information

Benefits

o_{Reduce uncertainty} o_{Improve decisions} o_{Improve planning} o_{Improve scheduling}

Costs

o_Time

o_Resources o_Production o_Distribution

Useful Information Characteristics

o _Reliability

o _Completeness o _Timeliness

o _{Understandability} o _{Verifiability}

Information and Decisions (Main users

of Accounting Information)

Internal Users

o_{Managers at different levels}

in an organization

- _{Operations management} - _{Middle management}

- _{Top/strategic} management o_Employees External Users o_Stockholders o_Creditors o_Investors

o_{Government agencies} o_Customers

Hardware &

Software Data Information

The term information systems suggest the use of information technology to provide information to users

Information Systems

A system is a group of two or more interrelated components or subsystems designed to serve a common purpose

Elements of a System

o _{Multiple components} o _{Relatedness/Interaction} o _Purpose/goal

- _{Goal conflict: occurs when components act in their own interest with}

no regard to overall goal

- _{Goal congruence: occurs when components acting in their own}

interest contribute toward overall goal

Processed

Processed

Types of Information Systems

o _{Expert System (ES)}

o _{Decision Support Systems (DSS)}

o _{Electronic Data Processing System (EDP)} o _{Accounting Information Systems (AIS)}

System Thinking

o _{A set of principles that can be used to understand complex}

entities

o _{A socially created mechanisms through which symbolic}

forms of knowledge are created

o _{A symbolic forms of knowledge concerning’… temporal and}

Systems Thinking (Con’t)

- _{Hard system thinking} - _{Soft system thinking}

o _{Distinction based on two criteria}

- _{objective/subjective (ontological dimension)} - _{Stable/unstable (contextual dimension)}

Hard System Thinking

o _{Systems are structured as mechanistic, functional and objective}

oriented

o _{Can be described with formal notation} o _{Can be understood with rational analysis}

o _{Can be modelled using quantitative techniques}

Problem

o _{Hard systems thinking cannot take into account qualitative}

Soft Systems Thinking

o _Problem

- _{Cannot be described with formal notation}

Categorization of Systems by Nature

o _{An open system:}

- _{Is a system that is interactive with the environment, exchanging}

information, energy and/or raw materials for information, goods and/or services produced by the system.

- _{It is generally self-regulating, and capable of growth, development, and}

more importantly, adaptation.

o _{A closed system:}

- _{Is a system that does not interact with the environment.}

- _{Fixed and often automatic relationships exist between system components.} - _{It is generally incapable of growth, or any form of development/adaptation,}

Categorized by Type

o _{Dynamic system} o _{Continuous system} o _{Abstract system}

o _{Natural system}

System Decomposition & Interdependency

- _{The process of dividing the system into smaller subsystem parts}

- _{Convenient way of representing, viewing and understanding the}

relationships among subsystems o _{System interdependency}

- _{A system’s ability to achieve its goal depends on the effective functioning}

and harmonious interaction of its subsystem

- _{If a vital subsystem fails or becomes defective and can no longer meet its}

specific objective, the overall system will fail to meet its objective

o _{Information system designers need to identify critical subsystems,} anticipate the risk of their failure, and design cost-effective control procedures to mitigate the risk

AIS Defined

- _{Is a collection of resources designed to transform data into}

information

- _{Involves the collection, processing, storing, and reporting data and}

information

- _{A unified structure for the processing and conversion of economic}

Components of an AIS

Six main components namely;

o _{Operators (People using the system)}

o _{Manual/automated procedures and instructions for collecting,} processing and storing data

o _{Data about the organization and its business processes}

o _{Software used to process the data collected and generate} information

o _{Information technology infrastructure: computers, peripherals,} networks etc

The Information Systems (IS) Framework

o _{An IS consists of a set of formal procedures by which data are collected,} processed into information, and distributed to users

o _{But two broad classes of IS include the MIS and AIS}

- _{MIS and AIS are often distinguished. However their functions are}

often integrated to achieve operational efficiency

- _{The distinction between MIS and AIS centers on the transaction}

concept which is highly regulated by the SOX. Eg. Every business organization is legally bound to correctly process transactions involving sales, purchases and cash disbursements

- _{In the AIS inputs called transactions are accepted and are converted}

IS

AIS MIS

GL/FRS TPS MRS FMS _MS DS HRM

EC CC RC

PS CAS SPS

CDS PPCS CRS

PPS FAS

Financial Transaction and Non-financial Transaction

o _{A transaction is an event that affects or is of interest to the}

organization and is processed by its information system as a unit of work

o _{A financial transaction is an economic event that affects the assets}

and equities of the organization, is reflected in its accounts, and is measured in monetary terms

o _{Non-financial transactions are non-economic events that do not meet}

the narrow definition of a financial transaction but needs to be processed by the AIS as a transaction. Eg adding a new supplier of raw materials to the list of valid suppliers

Examples of MIS Application in Functional Areas

o _{Finance – portfolio management systems, capital budgeting systems}

o _{Marketing – market analysis, new product development, product}

analysis

o _{Distribution – warehouse organization and scheduling, delivery}

scheduling, vehicle loading and allocation models

o _{Personnel – human resource management systems, job skill tracking}

User Decisions Information

Systems Financial

Transactions

Non-Financial Transactions

Transaction

Elements of the AIS Function

o _{The AIS is composed of 3 major subsystems}

- _{The transaction processing system (TPS) which supports daily business}

operations with numerous reports, documents and messages for users throughout the organization

- _{The general ledger/financial reporting system (GL/FRS) which produces}

the traditional financial statements, such as the income statement, statement of financial position, statement of cash flows, tax returns, and other reports required by law

- _{The management reporting systems (MRS) which produces internal}

management with special purpose financial reports and information needed for decision making such as budgets, variance reports, and responsibility reports.

Elements of the AIS General Model

The model describes all information systems regardless of their technological architecture

o _{End Uses}

o _{Data sources} o _{Data collection} o _{Data processing}

o _{Database management} o _{Information generation} o _Feedback

Functions of AIS

- _{A decision-facilitating function} - _{A decision-mediating function}

o _{As a decision facilitation function, it is concerned with the provision of} - _{Financial accounting information (structured and transaction}

oriented)

- _{Management accounting information (unstructured and decision}

oriented)

- _{Financial management information (unstructured and}

o _{As a decision-mediating function, AIS is concerned with:} - _{Sustaining and reinforcing organizational operations}

(transaction processing)

- _{Supporting decision making (information management)} - _{Discharging stewardship obligations (internal control)}

- _{Fulfilling legal, social and political responsibilities (external}

The IT Function

o _{Centralized data processing model – the IT activities are consolidated}

and managed as a shared organizational resource

o _{Areas of operations include:} - _{Database administration} - _{Data processing}

- _{System development and maintenance (system professionals, end}

users, stakeholders)

o _{Distributed data processing (DDP) system: reorganizing the IT}

function into smaller information processing units that are distributed to end users and placed under their control

Advantages of DDP

o _{Increased user satisfaction} o _{Improved user efficiency}

Disadvantages of DDP

o _{Loss of control – one of the most serious disadvantage} o Inefficient use of resources

o _{Destruction of audit trails}

o _{Inadequate segregation of duties}

o An increased potential for programming errors and system failure

Objectives of AIS

AIS has three main objectives, i.e. to support:

o _{The stewardship function of management} o _{Management decision making}

Trends in AIS

- _{Collect and store data about organizational:} - _{Activities, resources and personnel}

- _{Transform data into information enabling}

management to:

- _{Plan, execute, control and evaluate}

- _{Activities, resources and personnel} - _{Provides adequate control to safeguard:}

o

_{AIS and Value Added}

- _{Improves quality and reduces costs} - _{Improves efficiency}

- _{Improves knowledge sharing} - _{Improves supply chain}

- _{Improves internal control} - _{Improves decision making}

o

_{AIS and Decision Making}

- _{Reduces uncertainty}

- _{Provides feedback on previous decisions} - _{Provides accurate and timely information}

o

_{AIS and Value Chain}

- _{Value chain includes the set of activities a product or}

service moves along before it comes out as an output to be sold to a customer

- _{At each activity the product or service gains value} - _{The activities are primary and supporting in nature}

Inbound Logistics

Outbound Logistics

Marketing /Sales

Operations Service

o _{Inbound logistics – receiving, storing, and distributing materials}

that an organization uses to produce goods and/or services and sold to customers

o _{Operations – activities that transform inputs into final products}

and/or services

o _{Outbound logistics – distribution of finished goods to customers} o _{Marketing/sales – promote sales (advertising and customer}

services)

Firm Infrastructure

Human Resources

Technology

Purchasing

o _{Firm Infrastructure – includes the accounting, finance, legal and}

general administrative activities that allow an organization to function

o _{Human Resources – recruiting, training benefits and compensation} o _{Technology – research and development, IT websites, etc}

o _{Purchasing – procurement of raw materials and others to ensure the}

Impact of Organizational Structure on AIS Design

o _{Organizations have limited resources; thus investments in}

AIS should have greatest impact on ROI

o _{Organizations need to understand:} - _{IT developments}

- _{Business strategy}

Business Strategy

IT

Developments Organizational _Culture

AIS

Internal Influences

o _{The knowledge base and intellectual capacity of the}

company

o _{The organizational structure of the company}

o _{The complexity of information demands and requirements} o _{Internal management features/factors}

External Influences

o Relate to political influence such as company law requirements

o _{Other legal/political requirements imposed by quasi-governmental}

organizations

o Social influences such as professional reporting standards requirements

o _{Economic influences such as market regulatory requirements (GSE}

and other international stock exchange requirements)

o Industry standards and regulation

o _{Technological influences such as hardware/software techniques}

Contextual Issues

o _{Typically, four key contexts are possessed by AIS} - _{Procedural/processing context}

- _{Organizational and relational context} - _{Functional context}

Procedural/Processing Context

- _{Data collection}

- _{Data maintenance} - _{Data management} - _{Data control}

Organizational and Relational Context

o _{AIS assists in:}

- _{Defining business strategies/policies}

- _{Embedding information into tactical decision-making}

processes

- _{Providing useful information for operational and control}

Functional Context

- _{Revenue cycle}

- _{Expenditure cycle} - _{Conversion cycle} - _{Finance cycle}

- _{Human resource and payroll cycle} - _{Management cycle}

Social and Political Context

… created by the combined pressures of:

o _{Internal influences} o _{External influences}

… conditioned by the requirements of:

o _{Internal users} o _{External users}

Evolution of AIS Models

o _{The flat-file model} o _{The database model} o _{The REA model}

The Role of the Accountant

Accountants are involved in the information systems in 3 ways:

o _{System users}

o _{System designers} o _{System auditors}

Acquisition of Information Systems

in-house systems development activities (system development life cycle).

o _{Purchasing preprogrammed commercial systems from}

software vendors

- _{Turnkey systems} - _{Backbone systems}

ERPs and e-Commerce

o _{Functions and data storage techniques of Generic ERPs compared to the}

flat-file or database system

o _{ERP configurations related to servers, databases and bolt-on software} o _{Data warehousing and online analytical processing}

o _{Internal controls and auditing issues in ERP as prescribed by the SAS}

78/COSO framework

o _{Inter-organizational use of networks to support distributed data processing} o _{Business-to-business transactions conducted via electronic data}

interchange (EDI) systems

o _{Internet-based commerce including customer and}

What is an ERP?

o _{An AIS model that enables an organization to automate and}

integrate its key business processes.

o _{ERP systems are multiple module packages that evolve primarily}

from traditional manufacturing resource planning (MRP II) systems.

o _{The lack of effective communication between systems in the}

traditional model is often the consequence of a fragmented system design process.

o _{Each system tends to be designed as a solution to a specific}

Objectives of ERP

o _{To integrate key business processes such as order entry, manufacturing,}

procurement and accounts payable, payroll and human resources

o To use a single computer system to serve the unique needs of each functional areas compared to the traditional model where each functional area or department has its own computer system optimized to the way it does its daily business

o To combine all the computer needs of each functional area into a single, integrated system that assesses a single database to facilitate the sharing of information and improve communications across the organization.

o To support a smooth and seamless flow of information across the organization by providing a standardized environment for a firm’s business processes and a common operational database that support communication

Features of ERPs

o _{Multiple module software packages}

o _{Emerged as a solution to integration needed for information}

transfers across organizational boundaries which was lacking in stand-alone systems but required for the trend in AIS

o _{ERPs are not custom packages designed for a specific organization}

o _{They are generalized systems that incorporate the best business}

Adoption of ERPs by Organizations

o _{To assemble ERPs a mix of pre-coded software components}

need to be matched to meet the business requirements

o _{To take full advantage of an ERP, an organization may have}

to change the way conduct its business or modify the ERP to suit its business or more likely modify both.

Core Functions of ERP

o _{Two general groups of applications characterized an ERP}

functionality

- _{Core applications or online transaction processing (OLTP)} - _{Business analysis}

o _{Core applications are those applications that operationally support}

Core Functions of ERP Con’t

o _{They are core because their failure result in the entire}

business failure.

- _{E.g. sales and distribution, business planning,}

production planning, shop floor control and logistics

o _{Business analysis applications are either obtained or}

derived and central to their successful function as data warehouse

ERP System Configurations

- _{Two-tier model} - _{Three-tier model} o _{OLTP server}

Computer 1 Computer 2 Computer 3

Applications Database

Applications and Database Layer

User Presentation Layer

Two-Tier Client Server

First Tier

Computer 1 Computer 2 Computer 3

Applications

Database

Applications Layer

User Presentation Layer

Three-Tier Client Server

First Tier Second Tier Database Layer Third tier

OLTP Server

o _{Supports mission-critical tasks through simple queries}

of operational databases

o _{Customer table} o _{Invoice table} o _{Line-item table}

OLAP Server

o _{Support management-critical tasks through analytical}

investigation of complex data associations that are captured in data warehouses.

o _{Support common analytical operations} - _{Consolidation}

- _{Drill-down permits} - _{Slicing and dicing}

Computer 1 Computer 2 Computer 3 OLTP Server OLTP Applications Operations Database User Presentation Layer

Solution to conflicting Demands by OLTP & OLAP

First Tier Second Tier Operations Database Server Third Tier OLAP Server Data Warehouse Server OLAP Applications Operations Database

Bolt-on Software

o _{Arises as a result of the ERP not driving all the processes of}

the company

o _{Provided by third party vendors}

Data Warehouse

o _{A relational or multidimensional database that supports online OLAP} o _{A database constructed for quick searching, retrieval, ad hoc queries,}

and ease of use.

o _{Data are normally extracted periodically, from an operational}

database or from public information service

o _{The process involves extracting, converting and standardizing an}

organization’s operational data from ERP and legacy systems and loading it into a central archive

Stages in Data Warehousing

o _{Extracting data from operational database} o _{Cleansing extracted data}

o _{Transforming data into the warehouse model}

Successful Data Warehouse

Implementation

o _{Installation of processes for gathering data in an ongoing basis} o _{Organization of data into meaningful information}

ERP Implementation Risks

o _{Big bang and phase-in approach}

o _{Opposition to changes in the business culture} o _{Choosing the wrong ERP}

o _{Choosing the wrong consultant} o _{High cost and cost overruns}

Internal Control and Auditing

o _{Segregation of duties} o _Supervision

o _{Accounting records}

o _{Independent verification} o _{Access controls}

Internal Control Issues Related to ERP Roles

o _{The creation of unnecessary roles} o _{The rule of least access}

ERP Products

o _Oracle

o _Microsoft o _{Soft Brands}