Chapter 1: Introduction to Accounting Information Systems

●​ This chapter aims to place the subject of Accounting Information Systems (AIS) in
perspective for accountants.
●​ It begins by exploring the information environment of the firm, identifying the types of
information used, describing its flow, and presenting a framework for viewing AIS in
relation to other information system components.
●​ Information is recognized as a business resource, vital for the survival of contemporary
business organizations, similar to raw materials, capital, and labor.
●​ Vast quantities of information flow daily to decision makers and other users to meet
internal needs, and information flows out to external users like customers, suppliers, and
stakeholders.
●​ The chapter discusses the organizational structure and functional areas of a
business, paying extensive attention to the IT and accounting segments which
collaborate as purveyors of financial information.
●​ It also deals with the impact of organizational structure on AIS.
●​ Key topics include understanding the difference between accounting information
systems and management information systems, and the difference between
financial transactions and nonfinancial transactions.
●​ You should know the principal features of the general model for information
systems.
●​ The final section discusses the unique responsibility of accountants as domain
experts in the design of AIS and as auditors of AIS. Accountants offer expertise
regarding accounting procedures, rules, and conventions that need to be incorporated
into the system and are involved in specifying documentation standards and control
requirements.
●​ The chapter introduces the distinction between external auditing, internal auditing,
and advisory services as they relate to accounting information systems. (Note: More
detail on IT auditing and SOX responsibilities appears in Chapter 14).
●​ Discussions/problems in this chapter also touch upon the difference between
conceptual and physical systems.
Chapter 3: Ethics, Fraud, and Internal Control

●​ This chapter presents preliminary topics common to transaction processing cycles,

including a look at the information environment, organizational structure, and the role of
accountants. (Note: The source seems to mix Chapter 1 and 3 topics in the introduction,
but the primary focus of Chapter 3 as listed in the learning objectives and summary is on
ethics, fraud, and internal control).
●​ You should understand the broad issues pertaining to business ethics and have a basic
understanding of ethical issues related to the use of information technology.
●​ Key concepts include being able to distinguish between management fraud and
employee fraud and being familiar with common types of fraud schemes.
●​ You should be familiar with the key features of the COSO internal control framework.
The COSO framework includes five internal control components. The SEC and PCAOB
Auditing Standard No. 5 endorse COSO as a recommended framework for control
assessment.
●​ You should understand the objectives and application of both physical and IT control
activities.
●​ Physical controls are aimed at controlling the actions of people and consist of six
classes: transaction authorization, segregation of duties, supervision, accounting
records, access control, and independent verification.
●​ IT controls comprise general controls and application controls. Application controls
consist of input controls, processing controls, and output controls.
●​ The chapter also mentions output risks and controls.
●​ Concepts like check digits (input control), batch totals (input/processing control),
record counts, and internal control testing techniques (e.g., Black Box,
Through-the-Computer, Integrated Test Facility, Parallel Simulation) are discussed.
●​ The GFS backup technique is mentioned in relation to sequential files.
Chapter 4: The Revenue Cycle

●​ The objective of the revenue cycle is for firms to sell their goods and services to
customers. It involves processing cash sales, credit sales, and the receipt of cash
following a credit sale. Essentially, it converts the firm's resources into cash.
●​ Revenue cycle transactions have a physical component (e.g., shipping goods) and a
financial component (e.g., billing, cash receipt), which are processed separately.
●​ The primary subsystems are Sales order processing and Cash receipts.
●​ Sales order processing involves tasks like preparing sales orders, granting credit,
shipping products/rendering service, billing customers, and recording the transaction
(accounts receivable, inventory, expenses, sales).
●​ Cash receipts involves receiving cash, depositing cash, and recording the receipt.
●​ You should understand the fundamental tasks performed in the revenue cycle,
regardless of the technology.
●​ Be able to identify the functional departments involved (e.g., sales, credit, warehouse,
shipping, billing, cash receipts, general ledger) and trace the flow of revenue
transactions through the organization.
●​ Understand the documents, journals, and accounts that provide audit trails, maintain
historical records, support internal decision making, and sustain financial reporting.
○​ Documents: Sales order, Shipping notice, Customer invoice, Remittance advice
(form of a turnaround document), Journal voucher.
○​ Journals: Sales journal, Cash receipts journal.
○​ Accounts: Accounts Receivable (AR), Inventory, Sales, Cost of Goods Sold. Key
ledgers/files include the AR subsidiary ledger and Inventory subsidiary ledger.
●​ The chapter examines physical revenue cycle systems that lie at different points on
the technology/human continuum. This includes:
○​ Basic technology systems: Employ independent PCs primarily as
record-keeping devices.
○​ Advanced integrated systems: Integrate all business functions through a
centralized computer application.
○​ Point-of-sale (POS) systems.
○​ Electronic data interchange (EDI) and Internet sales systems.
●​ Understanding these different systems helps illustrate system functionality, efficiency
issues, workflow characteristics, and how internal control issues differ.
●​ Control techniques are discussed, applying both physical and IT controls to reduce
revenue cycle risks.
○​ Physical Controls: Transaction authorization (e.g., credit approval), Segregation
of duties (e.g., separate authorization from processing, processing orders vs.
approving credit, receiving cash vs. updating AR ledger), Supervision,
Accounting records, Access control, Independent verification (e.g., GL
department reconciliation).
○​ IT Application Controls: Input controls, Processing controls, Output controls.
●​ Batch processing concepts are illustrated (e.g., using shipping notices to create a
transaction file of sales orders, batch control totals). Updating master files involves
 editing transactions to detect errors. Records with errors are transferred to an error file,
corrected, and resubmitted. Valid transactions update master files and are added to the
archive file (sales journal).
●​ The relationship between master file subsidiary and GL control accounts is noted.
Chapter 5: The Expenditure Cycle Part I: Purchases and Cash
Disbursements Procedures

●​ The objective of the expenditure cycle is to convert the organization’s cash into
physical materials and human resources needed to conduct business. This chapter
concentrates on systems for acquiring raw materials and finished goods from suppliers.
●​ The process is split into two phases: the physical phase (acquisition) and the
financial phase (disbursement of cash), often treated as independent transactions
processed through separate subsystems.
●​ The two major subsystems are the purchases processing subsystem and the cash
disbursements subsystem.
●​ You should recognize the fundamental tasks constituting these processes.
●​ Be able to identify the functional areas involved (e.g., inventory control, purchasing,
receiving, accounts payable, cash disbursements, general ledger) and trace the flow of
transactions.
●​ Understand the documents, journals, and accounts that support audit trails, decision
making, and financial reporting.
○​ Purchases Processing:
■​ Tasks: Monitor inventory levels (often triggered by revenue cycle, Chapter
4), Prepare purchase requisition (when inventory drops to reorder point),
Prepare purchase order (PO), Receive inventory, Update inventory
records, Set up Accounts Payable (AP).
■​ Documents: Purchase requisition, Purchase order (PO), Blind copy of PO
(control for receiving), Receiving report.
■​ Journals: Purchases journal, Voucher register (if using a voucher system).
■​ Accounts/Files: Inventory, Purchases, AP subsidiary ledger, Vouchers
payable file.
○​ Cash Disbursements:
■​ Tasks: Identify liabilities due (review open AP file), Prepare cash
disbursement (check), Update accounts payable, Post to general ledger.
■​ Documents: AP packet (PO, receiving report, supplier's invoice),
Supplier's invoice, Check, Cash disbursement voucher.
■​ Journals: Check register / Cash disbursements journal.
■​ Accounts: Accounts Payable, Cash.
●​ The chapter reviews physical systems at different points on the technology/human
continuum, illustrating functionality, efficiency, workflow, and how internal control issues
differ. This includes basic and advanced technology systems.
●​ Key controls include:
○​ Supervision in the receiving department.
○​ The use of a blind copy PO to force the receiving clerk to count and inspect
goods.
○​ The three-way match (reconciling PO, receiving report, and invoice) to approve
vendor invoices.
○​ Maintaining a valid vendor file.
 ○​ Segregation of duties (e.g., purchasing, receiving, AP, cash disbursements).
○​ Independent verification by the general ledger department.
●​ Some organizations may not use an AP subsidiary ledger or purchases journal, relying
on other methods like a voucher system.
Chapter 6: The Expenditure Cycle Part II: Payroll Processing and Fixed
Asset Procedures

●​ This chapter continues the discussion of the expenditure cycle, focusing on payroll
processing and fixed asset procedures.
●​ Similar to previous cycles, it provides a conceptual overview (logical tasks, key entities,
information flows) and examines operational features, risks, and controls for physical
systems.
●​ You should recognize the fundamental tasks for both processes.
●​ Identify the functional departments involved and trace transaction flows.
●​ Specify the documents, journals, and accounts that provide audit trails, maintain
historical records, and support decision making and financial reporting.
●​ Payroll Processing:
○​ Tasks: Collecting time data (e.g., time cards), Preparing payroll (calculating
earnings, deductions), Distributing paychecks, Updating records (employee
records, payroll register).
○​ Documents: Time cards/sheets, Personnel action form (for changes), Labor
distribution summary/job ticket (used by cost accounting to allocate direct labor).
○​ Journals: Payroll register.
○​ Accounts: Wages expense, various payroll liabilities, cash.
○​ Controls: Segregation of duties is crucial (e.g., separating authorization of pay
rates from payroll preparation, separating payroll preparation from distribution of
paychecks). Authorization for changes in employee pay rates should be
separate. Supervisors should not distribute paychecks.
○​ Payroll outsourcing is presented as an option companies pursue.
●​ Fixed Asset Procedures:
○​ Tasks: Acquiring fixed assets, maintaining fixed assets, disposing of fixed assets,
calculating and recording depreciation.
○​ Documents: Purchase requisition, Purchase order, Receiving report, Supplier's
invoice (as per Chapter 5 processes for acquisition), Depreciation schedule.
○​ Accounts: Fixed asset accounts, Accumulated Depreciation, Depreciation
Expense.
○​ Controls: Proper authorization for acquisitions and disposals, adequate records
for tracking assets and depreciation, physical security, periodic verification of
existence.
Chapter 7: The Conversion Cycle

●​ A company's conversion cycle transforms (converts) input resources, such as raw

materials, labor, and overhead, into finished products or services for sale.
●​ The chapter examines the traditional production process, including basic elements
and procedures.
○​ Key documents in the traditional batch processing system include: Production
schedule, Bill of materials, Route sheet, Work order, Move ticket, and
Materials requisition.
○​ Concepts like Economic Order Quantity (EOQ) are discussed, relating to
ordering and carrying costs to determine the optimal order size.
○​ Reorder point (ROP) is the level of inventory at which a new order should be
placed.
○​ Safety stock is a buffer maintained to avoid stock-outs.
●​ The chapter also covers the traditional cost accounting system, its data flows, and
procedures. This system tracks costs through the production process (raw materials,
work-in-process, finished goods).
●​ Accounting controls in a traditional environment include using prenumbered
documents as indirect access control over assets. The general ledger department
plays a role in verifying summary data from other departments.
●​ A significant part of the chapter highlights the shift toward a world-class manufacturing
environment and the adoption of a lean manufacturing philosophy.
○​ Lean manufacturing focuses on streamlining processes and reducing waste.
The Toyota Production System (TPS) is mentioned as a philosophy underlying
lean manufacturing.
○​ Key concepts include pull processing (demand triggers production) and
Just-in-Time (JIT) manufacturing, which aims for zero defects.
○​ Value stream is the set of activities adding value to a product or service. Value
stream accounting and value stream maps (VSM) are discussed.
○​ Manufacturing Resources Planning (MRP II) is mentioned as a system
supporting production planning.
●​ The chapter also discusses the shortcomings of traditional accounting methods in
this world-class environment.
Chapter 8: Financial Reporting and Management Reporting Systems
➔​ This chapter examines an organization’s nondiscretionary (Financial Reporting System -
FRS) and discretionary (Management Reporting System - MRS) reporting systems.

➔​ It begins with a review of the General Ledger System (GLS). The GLS is characterized
as a hub connected to transaction processing systems through formal information flows.
Transaction cycles process individual events, and journal vouchers and account
summaries flow into the GLS.

➔​ The GLS database consists of files like the GL master file, GL history file, responsibility
center file, and budget master file. The GL master contains summarized account
information. The responsibility center file contains revenue, expenditure, and resource
utilization data for each center, used for responsibility reports. The budget master file
contains budgeted amounts, used with the responsibility center file for responsibility
accounting.

➔​ GLS procedures involve updates from transaction processing systems and additional
updates like reversing, adjusting, and closing entries.

➔​ The Financial Reporting System (FRS) meets management's legal responsibility for
providing stewardship information to external parties. This includes standard financial
statements, tax returns, and documents for regulatory agencies like the SEC. The
financial reporting process is presented as a multistep activity from transaction capture
to financial statement preparation.

➔​ XBRL (Extensible Business Reporting Language) is presented as an emerging

technology changing traditional financial reporting. The process involves selecting an
XBRL taxonomy (a classification scheme), cross-referencing GL accounts to taxonomy
elements (tags), using a Taxonomy Mapper tool, resulting in a database structure with
embedded tags, from which XBRL instance documents (the financial reports) are
generated and published. The internal control implications of XBRL are considered.

➔​ Controlling the GL/FRS is discussed. Journal vouchers are the documents authorizing
entries to the general ledger. Journal vouchers must be properly authorized by a
responsible manager.

➔​ Segregation of duties for the general ledger requires separating the task of updating the
general ledger from all other accounting and asset custody responsibilities. Individuals
with GL access should not have recordkeeping responsibility for special journals or
subsidiary ledgers, prepare journal vouchers, or have custody of physical assets.
Systems may provide detailed listings of journal vouchers and account activity reports to
compensate for potential risks.
➔​ Independent verification is a function of the GL. The FRS produces operational reports
that provide proof of accuracy. These include the journal voucher listing (details about
each voucher posted) and the GL change report (effects of postings to accounts).

➔​ The Management Reporting System (MRS) is distinguishable from the FRS as it is

discretionary, based on internal user needs for planning and controlling business
activities. Factors influencing the MRS design are examined. These include the type of
decision (strategic planning, tactical planning, managerial control, operational control),
management principles (authority, responsibility, formalization), problem structure
(structured, unstructured), cost-benefit analysis, integration of decision-making activities,
and behavioral considerations.

➔​ Report attributes for effective reports are relevance, summarization, exception

orientation, accuracy, completeness, timeliness, and conciseness. Examples of
programmed reports (scheduled or on-demand) are listed.

➔​ Responsibility accounting is discussed as a system where information flows downward

and upward, involving setting financial performance goals (budgets) and
reporting/measuring actual performance compared to goals. The budget process
establishes measurable goals for organizational segments. Budget information flows
downward and becomes more detailed at lower levels. Performance reports are
generated for responsibility centers like cost centers and profit centers.

➔​ Behavioral considerations include goal congruence, where lower-level managers

pursuing their own objectives contribute to the objectives of their superiors