Chapter

Introduction to AIS

Learning Objectives
1. To describe the purpose and importance of

learning AIS. 2. To explain AIS objective: collects and stores data processes data for decision and provides adequate controls. 3. To identify components of AIS, i.e. people, procedure, Information technology.

Learning Objectives
4. To describe AIS subsystems i.e. transaction processing system, general ledger/financial reporting system, management reporting system. 5.To familiarize with the concepts of accounting independence. 6.To elaborate three different level of decision making i.e. structured decision, semi structured decision and unstructured decision.

Learning Objectives
7.To explain how AIS can assist in decision making process. 8. To elaborate different roles of accountants as: System user System auditor System design

Topic to Cover

The Information System Organisational Structure and 1.1 The Information System 1.3 Organizational Structure Environment Accounting Function Environment and Accounting Definition of AIS Accounting Information and 1.1.1 Definition of AIS Independence AIS Framework Decision Making 1.1.2 AIS Framework 1.4 Accounting Information Transaction Processing System Accountants Roles in AIS 1.2 Transaction Processing System and Decision Making Overview of TPS (TPS) 1.5 Accountants Roles in AIS Components of TPS 1.2.1 Overview of TPS 1.2.2 Components of TPS

Learning Objective 1

1.1 The Information System Environment

What is Accounting?
is a Accounting
system that Identifies

Records information Relevant Reliable Comparable to help users make better decisions. that is Communicates

Info vs. data

Data is facts that are collected, stored and processed (edited, summarized, or refined) by an information system.

Information is data that has been organized and processed so that it is meaningful and useful to users to make decision, resolve conflicts, and/or reduce uncertainty.

Information in Business
Information is a business resource: ... needs to be appropriately managed ...is vital to the survival of contemporary businesses

Internal & External Flows of Information

Top Management
Middle Management Operations Management Customers Operations Personnel Day-to-Day Operations Personnel

Stakeholders

Suppliers

Internal Information Flows

Horizontal flows of information used primarily at the operations level to capture transaction and operations data (detailed information) Vertical flows of information downward flows--instructions, quotas, and budgets upward flows--aggregated transaction and operations data

Information Requirements
Each user group has unique information requirements. The higher the level of the organization, the greater the need for more aggregated information and less need for detail.

What is a System?
A group of two or more interrelated components or subsystems that serve a common purpose System or subsystem? A system is called a subsystem when it is viewed as a component of a larger system. A subsystem is considered a system when it is the focus of attention.

System Decomposition vs. Subsystem Interdependency

System Decomposition the process of dividing the system into smaller subsystem parts Subsystem Interdependency Effective functioning and harmonious interactions of all subsystems All vital subsystem must be functioning or overall system will fail to meet its objective

Examples of Systems
Biological cell human body Mechanical water heater computer Others solar system mathematics

E = mc2

Learning Objective 1

1.1.1 Definition of AIS

What is an Information System?

An information system is the set of formal procedures by which data are collected, processed into information, and distributed to users.

Information System Objectives in a Business Context The goal of an information system is to support ...the stewardship function of management. ...management decision making. ...the firms day-to-day operations (transaction processing).

Transactions
A transaction is a business event that is processed by IS. 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 organizations information system e.g., an airline reservation--no commitment by the customer

Transactions

Financial Transactions Nonfinancial

Information System

User Decisions Information

Transactions

What is Accounting Information Systems?

Accounting is an information system which identifies, collects, processes, and communicates economic information about an entity to a wide variety of people regardless of the technology captures and records the financial effects of the firms transactions distributes transaction information to operations personnel to coordinate many key tasks

What is Accounting Information Systems?

The functions of an AIS are to: Collect, record and store data about events, resources, and agents. Transform that data into information that management can use to make decisions about events, resources, and agents. Provide adequate controls to ensure that the entitys resources (including data) are: Available when needed Accurate and reliable

Why Study Accounting Information Systems?

Its fundamental to accounting.
Accounting is an information-providing activity, so students/accountants need to understand: How the system that provides that information is designed, implemented and used. How financial information is reported How information is used to make decisions Other accounting courses (FA, MA, tax, and audit) focus on how the information is provided or reported and used, whereas an AIS course places greater emphasis on: How the data is collected and transformed into information How the availability, reliability, and accuracy of the data/information is ensured AIS courses are not number-crunching courses

Why Study Accounting Information Systems?

The skills are critical to career success.
Auditors need to evaluate the accuracy and reliability of information produced by the AIS. Tax accountants must understand the clients AIS adequately to be confident that it is providing complete and accurate information for tax planning and compliance work. In private industry and not-for-profits, accounting systems work is considered the most important activity performed by accountants AIS is one of the largest systems In management consulting, the design, selection, and implementation of accounting systems is a rapid growth area.

Why Study Accounting Information Systems?

The AIS course complements other systems courses
Other systems courses focus on design and implementation of information systems, databases, expert systems, and telecommunications. AIS courses focus on accountability and control.

AIS topics are tested on the new CPA exam.

Makes up about 25% of the Business Environment & Concepts section of the CPA exam.

AIS topics impact corporate strategy and culture.

AIS vs. MIS

Accounting Information Systems (AISs) process financial (e.g., sale of goods) and nonfinancial transactions (e.g., addition of newly approved vendor) that directly affect the processing of financial transactions. Management Information Systems (MISs) process nonfinancial transactions that are not normally processed by traditional AISs (e.g., tracking customer complaints).

AIS vs. MIS?

IS

AIS

MIS

GLS/FRS

TPS

MRS

Finance

Marketing

Production

HRS

Distribution

The General AIS Model

The External Environment The Information System

Database Management

External Data Sources

Data Collection

Data Processing

Information Generation

External End Users

Feedback Internal Sources of Data Internal End Users

The Business Organization Feedback

Data Source
Financial transactions that enter to the system from internal/external These data should be first captured by the system ---- source documents

Transforming the Data into Information

Functions for transforming data into information according to the general AIS model: 1. Data Collection 2. Data Processing 3. Data Management 4. Information Generation

1. Data Collection
capturing transaction data recording data onto forms source documents validating and editing the data

2. Data Processing
classifying transcribing sorting batching merging calculating summarizing comparing

3. Data Management

storing retrieving deleting

4. Information Generation

compiling arranging formatting Presenting .....information to users

Exercise

Briefly define three (3) primary Accounting Information Systems functions in the organisation.

Exercise
The Accounting Information Systems (AIS) model below shows an application of AIS. The model describes accounting information systems structure, regardless of its technological architecture

1 2 3

Hall, 2007

Exercise

REQUIRED: Label each of the empty boxes numbered as 1 to 4 above to complete the accounting information system (AIS) model.

Learning Objective 2, 3 & 4

1.1.2, 1.2.1 & 1.2.2 AIS Framework and Transaction Processing System (TPS)

AIS Framework

A. Objectives

B. Components C. Subsystems

A. AIS Objectives
What important functions does the AIS perform in an organization? 1. It collects and stores data about activities and transactions. 2. It processes data into information that is useful for making decisions. 3. It provides adequate controls to safeguard the organizations assets

B. AIS Components
An AIS consists of: People Procedures and instructions Data Software Information technology infrastructure Have 4 components: Inputs Processes Outputs feedback

C. AIS Subsystems There are 3 subsystems: 1. Transaction Processing System (TPS) 2. General Ledger/ Financial Reporting System (GL/FRS) 3. Management Reporting System (MRS)

1. Transaction Processing System (TPS)

Supports daily business operations with numerous documents and messages for users throughout the organization Converting economic events into financial transactions Recording financial transactions in the accounting records (journals and ledgers) Distributing essential financial information to operating personnel Consists of: 1. Revenue Cycle Activities of selling goods or services and collecting payment for those sales. 2. Expenditure Cycle Activities of buying and paying for goods or services. 3. Conversion Cycle Activities of converting raw materials and labor into finished goods.

2. General Ledger/Financial Reporting System

Produces financial statements and other reports required by law Consists of two closely related subsystems: (a) General Ledger System Process the summaries of transaction cycle activity from the transaction cycles to update the general ledger control accounts. (b) Financial Reporting System Measures and reports the status of financial resources and changes in those resources.

3. Management Reporting System (MRS)

Produces special-purpose reports and information for internal use budgets, variance reports, costvolume-profit analyses ad report using current (rather than historical) cost data.

Exercise

Briefly explain the difference between financial reporting system (FRS) and management reporting system (MRS). Briefly explain 3 functions of transaction processing system and its components

Learning Objective 5

1.3 Organizational Structure and Accounting Function

Why Accountants Need to Understand Organizational Structure

Two reasons: 1. To assess the information needs of users 2. To design the AIS to meet those needs

Organizational Structure The structure of an organization helps to allocate responsibility authority accountability

Responsibility, Authority and Accountability

President

Vice President Marketing

Vice President Production

Vice President Finance

Vice President Computer Services

Manager Plant 1

Manager Plant 2

Manager Plant 3

Responsibility and Authority Accountability

Manager Unit 1

Manager Unit 2

Manager Unit 3

Segmentations
Segmenting by business function/segment is a very common method of organizing business organizations. Geographic location Product line Business function Inventory/Materials Management Production Marketing Distribution Personnel Finance Accounting Computer Services

Accounting Independence
Information reliability requires accounting independence: Accounting activities/functions must be separate and independent of the functional areas maintaining custody of physical resources (assets). Ex: - Accounting monitors and records the movement of raw materials into production. - Accounting authorizes purchases of raw materials Accounting supports these functions with information but does not actively participate in the physical activities.

Exercise

Why is it important to organizationally separate the accounting function from other functions of the organization?

Learning Objectives 6

1.4 Accounting Information and Decision Making (Decision scope and structure

Characteristics of Useful information

Relevance Reliability Completeness Timeliness Understandability Verifiability Accessibility

Characteristics of Useful information

Relevant - Reduces uncertainty, improves decision makers ability to make predictions Reliable Free from error and bias and accurately represents the events or activities of the organization.

Complete - Does not omit important aspects of the underlying events or activities that is measures

Characteristics of Useful information

Timely Provided in time to enable decision makers to use it to make decisions

Understandable - Presented in a useful and intelligible format Verifiable - Two knowledgeable people acting independently each produce the same information

Why good/useful information?

1) The cost of collecting and producing information should not outweigh benefits
(2) The application should be run in a manner that places least strain on the overall system (3) In order for information to be effective, the appropriate data should be processed and the resulting information disseminated to the appropriate users. (d) The ability to react to a change is very important.

Exercise
Information refers to the data that have been

organised and processed to provide meaning to the users. Users typically use information to make decisions or to improve the decision making process. Users can make better decisions as the quantity and quality of information increase. Romney and Steinbart (2006)
Explain TWO (2) characteristics of good or useful information.

Exercisewhat information you need in deciding

1. 2. 3. 4. 5. 6. What course to choose when u apply for university? What product to produce? Where to invest? Which supplier to choose? To hire an accountant In marketing your product

Decision Structure
Decisions vary in terms of the degree to which they are structured. 3 categories: Structured decisions repetitive, routine, and understood well enough that they can be delegated Semistructured decisions need for subjective assessments and judgments. Unstructured decisions nonrecurring and nonroutine.

Decision Scope

Operational control Management control Strategic planning

Decision Scope
Decisions vary in terms of the scope of their effect. Operational control is concerned with the effective and efficient performance of specific tasks. Management control is concerned with the effective and efficient use of resources for accomplishing organizational objectives.

Decision Scope

Strategic planning is concerned with establishing organizational objectives and policies for accomplishing those objectives.

Decision Making (Scope vs. Structure)

Strategic planning -------- Unstructured Management control -------- Semi structured Operational control -------- Structured

Exercise
Mrs. Lim is a secretary at Syarikat Pelangi. She receives a list of activities that requires Board of Directors decision in a weekly meeting. The lists of activities are as follows: Extending credit limit for customer Hiring chief internal auditor Selecting basic research projects to undertakes Issuing raw materials from warehouse for production

REQUIRED: Classify each of the above activity as a structured, a semi structured or an unstructured decision. Justify the answer.

Exercise
Define structured decisions and unstructured decisions. Provide one (1) example for each type of the decisions.

Learning Objectives 8

1.5 Accountants Roles in AIS

ACCOUNTANT AS
IS USERS

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.

ACCOUNTANT AS
SYSTEM DESIGNERS

The accounting function is responsible for the conceptual system, while the computer function is responsible for the physical system. The conceptual system determines the nature of the information required, its sources, its destination, and the accounting rules that must be applied.

ACCOUNTANT AS
SYSTEM AUDITORS
External Auditors
attest to fairness of financial statements assurance service: broader in scope than traditional attestation audit

IT Auditors
evaluate IT, often as part of external audit

Internal Auditors
in-house IS and IT appraisal services

Careers In Accounting

Roles of Accountants With Respect to an AIS

Financial accountants prepare financial information for external decision-making in accordance with GAAP Managerial accountants prepare financial information for internal decision-making

Roles of Accountants With Respect to an AIS

Auditors - evaluate controls and attest to the fairness of the financial statements. Accounting managers control all accounting activities of a firm. Tax specialists - develop information that reflects tax obligations of the firm. Consultants - devise specifications for the AIS.

Exercise
Accounting Information System (AIS) is a system that collects, records and stores data about events, resources, and agents; convert them into information, and communicate those information to the users for better decision making. REQUIRED: (a) Differentiate between Accounting Information System (AIS) and Management Information System (MIS). Provide two (2) differences of each. (b) What important functions do the AIS perform in an organization? Briefly explain two (2) of them. (c) Explain the three (3) roles of accountant in an AIS.

End of Topic 1