Information - business resource.

It is vital to the generally viewed as a single integrated

survival of the contemporary business organization. system.
- produces the traditional financial
Operations management - directly responsible for statements
controlling day-to-day operations. 3. Management Reporting System - provides
internal management with special-purpose
Middle management is financial reports and information needed for
accountable for the short-term planning and decision making.
coordination of activities necessary to accomplish
organizational objectives MANAGEMENT INFORMATION SYSTEM
4 FUNCTIONS:
Top management is responsible for longer-term 1. Financial Management Systems (Portfolio
planning and setting Management System, Capital Budgeting
organizational objectives. Systems)
2. Marketing Systems (Market Analysis, New
SYSTEM - a group of 2 or more interrelated Product Development, Product Analysis)
components or subsystems that serve a common 3. Distribution Systems (Warehouse
purpose. Organization and Scheduling, Delivery
Scheduling, Vehicle Loading and Allocation)
● Multiple Components - A system must 4. Human Resource Systems (Job Skill
contain more than one part. Tracking System, Employee Benefits
● Relatedness - A common purpose relates System)
the multiple part of the system.
● Subsystem - A system which is viewed as a END USERS
part of a larger system. 1. Internal Users - include management at
every level of the organization, as well as
Information System - is the set of formal procedures operations personnel.
by which data are collected, processed into 2. External Users - include creditors,
informations, and distributed to users. stockholders, potential investors, regulatory
agencies, tax authorities, suppliers, and
Transaction - an event that affects or is of interest to customers.
the organization and is processed by its information
system as a unit of work. DATA VS. INFORMATIONS
Data - are facts, which may or may not be processed
Financial Transaction - an economic event that affects and have no direct effect on the user.
the assets and equities of the organization, is
reflected in its accounts, and is measured in monetary Information - are processed data which ensures the
terms. user to take an action that he or she otherwise could
not, or would not have taken.
Nonfinancial Transactions - events that do not meet
the definition of a financial transaction. IMPORTANT TERMS
● DATA SOURCES - financial transactions that
ACCOUNTING INFORMATION SYSTEM enter the information system from both
Three Major Subsystems: internal and external sources.
1. Transaction Processing System - supports ● DATA COLLECTION - the first operational
daily business operations with numerous stage in the information system. The
reports, documents, and messages for users objective is to ensure that data entering the
throughout the organization system are valid, complete and free from
- Central to overall function of the material errors.
information system. ● DATA PROCESSING - once collected, data
2. General Ledger/Financial Reporting System usually requires processing to produce
- are two closely related subsystem. informations.
Because of their operational ● DATABASE - is the physical repository for
interdependency, however, they are financial and nonfinancial data.
 ● FILE - a complete set of records of an a. THE PRODUCTION SYSTEM
identical class. (planning, scheduling and control of
the physical product through the
DATABASE MANAGEMENT TASKS: manufacturing process)
1. STORAGE - assigns keys to new records b. THE COST ACCOUNTING
and stores them in their proper location in SYSTEM (monitors the flow of cost
the database. information related to production)
2. RETRIEVAL - task of locating and extracting 3. The Revenue Cycle
an existing record from the database for ● Physical Component (Sales order
processing. processing)
3. DELETION - task of permanently removing ● Financial Component (cash
obsolete or redundant records from the receipts)
database.
MANUAL SYSTEM ACCOUNTING RECORDS
CHARACTERISTICS OF USEFUL INFORMATION ● SOURCE DOCUMENTS - used to capture
1. RELEVANCE and formalize transaction data needed for
2. TIMELINESS transaction processing
3. ACCURACY ● PRODUCT DOCUMENTS - the result of
4. COMPLETENESS transaction processing
5. SUMMARIZATION ● TURNAROUND DOCUMENTS - a product
6. FEEDBACK document of one system that becomes a
source document for another system.
INFORMATION SYSTEM OBJECTIVES: ● JOURNALS - a record of chronological entry
1. To support the stewardship function of ○ Special Journals - specific classes
management. of transactions that occur in high
2. To support management decision making frequency
3. To support the firm’s day to day operations. ○ General Journal - nonrecurring,
infrequent, and dissimilar
3 COMMON APPROACHES TO BUSINESS transactions.
SEGMENTATION: ● LEDGER - a book of financial accounts
1. Geographic location ○ General Ledger - shows activity for
2. Product line each account listed on the chart of
3. Business function accounts.
○ Subsidiary Ledger - shows activity
THREE TRANSACTION CYCLES: by detail for each account types.
1. The Expenditure Cycle
SUBSYSTEMS:
● PURCHASING/ACCOUNTS
PAYABLE
● CASH DISBURSEMENTS
● PAYROLL
● FIXED ASSETS COMPUTER-BASED SYSTEMS
TWO SUBSYSTEMS with time lag due to - The audit trail is less observable in this
credit relations with suppliers: system rather than traditional manual
a. PHYSICAL COMPONENT systems.
(Acquisition of Goods) PHYSICAL TRAIL - data entry and
b. FINANCIAL COMPONENT (cash computer programs
disbursements to the supplier) *Data are stored in magnetic files.
2. The Conversion Cycle
SUBSYSTEMS: COMPUTER FILES
● PRODUCTION PLANNING AND ● MASTER FILE - generally contains account
CONTROL data (general ledger and subsidiary ledger)
● COST ACCOUNTING ● TRANSACTION FILE - a temporary file
TWO SUBSYSTEM containing transactions since the last update.
 ● REFERENCE FILE - contains relatively ● MANAGEMENT
constant information used in processing (tax ● STAKEHOLDERS
tables, customer addresses)
● ARCHIVE FILE - contains past transactions FOUR MAIN AREAS OF BUSINESS ETHICS
for reference purposes. 1. Equity
2. rights
CARDINALITIES - represents the numerical mapping 3. Honesty
between entities: 4. Exercise of Corporate Power
one to one
one to many COMPUTER ETHICS - concerns the social impact of
many to many computer technology (hardware, software, and
telecommunications)
DATABASE BACKUP PROCEDURE
- Destructive updates leave no backup MAIN COMPUTER ETHICS ISSUES?
● PRIVACY
COMPUTER BASED ACCOUNTING SYSTEMS ● SECURITY - ACCURACY AND
Two broad classes of systems: CONFIDENTIALITY
1. Batch systems ● OWNERSHIP OF PROPERTY
2. real-time systems ● EQUITY IN ACCESS
● ENVIRONMENTAL ISSUES
BATCH PROCESSING ● ARTIFICIAL INTELLIGENCE
Batch - group of similar transactions that are ● UNEMPLOYMENT AND DISPLACEMENT
accumulated over time and then processed together. ● MISUSE OF COMPUTER

STEPS IN BATCH PROCESSING LEGAL DEFINITION OF FRAUD

● Keystroke ● False Representation - false statement of
● Edit Run disclosure
● Sort run ● Material Fact - a fact must be substantial in
● Update Run inducing someone to act
● Backup Procedure ● Intent to deceive - must exist
● Justifiable Reliance
ADVANTAGES OF BATCH PROCESSING
● increases efficiency FACTORS THAT CONTRIBUTE TO FRAUD
● provides control ● SITUATIONAL PRESSURES
● OPPORTUNITIES
REAL-TIME SYSTEMS - process transactions ● PERSONAL CHARACTERISTIC (ETHICS)
individually at the moment the economic event
occurs. ENRON, WORLDCOM, ADELPHIA UNDERLYING
PROBLEMS
CHAPTER 3 ● LACK OF AUDITOR INDEPENDENCE -
auditing firms also engaged by their clients
Business Ethics - finding the answers to two to perform nonaccounting activities
questions: ● LACK OF DIRECTOR INDEPENDENCE -
1. How do managers decide on what is right in directors who also serve on the boards of
conducting their business? other companies
2. Once managers have recognized what is ● QUESTIONABLE EXECUTIVE
right, how do they achieve it? COMPENSATION SCHEMES - short-term
stock options as compensation result in
short-term strategies aimed at driving up
ETHICS - needed when conflicts arise - the need to stock prices at the expense of the firm’s long
choose term health
● INAPPROPRIATE ACCOUNTING
CONFLICTS MAY ARISE BETWEEN: PRACTICES - a characteristic common to
● EMPLOYEES many financial statement fraud schemes.
 MANAGEMENT RESPONSIBILITY – establishment
EMPLOYEE FRAUD - committed by and maintenance of a system of internal control is the
non-management personnel responsibility of management’

MANAGEMENT FRAUD - perpetrated at levels of REASONABLE ASSURANCE - cost of achieving the

management above the one to which internal control objectives of internal control should not outweigh its
structure relates benefits
- Frequently involves using financial METHODS OF DATA PROCESSING - techniques of
statements to create an illusion that an entity achieving the objectives will vary with different types
is more healthy and prosperous than it of technology
actually is
LIMITATIONS OF INTERNAL CONTROL
THREE CATEGORIES OF FRAUD SCHEMES: ● Possibility of honest errors
1. FRAUDULENT STATEMENTS - misstating ● Circumvention via collusion
the FS to make the copy appear better than ● Management override
it is (management fraud) ● Changing conditions
2. CORRUPTION - (bribery)
3. ASSET MISAPPROPRIATION - most EXPOSURES OF WEAK INTERNAL CONTROLS
common type of fraud and often occurs as (RISK)
employee fraud ● DESTRUCTION of an asset
● THEFT of an asset
DATA COLLECTION FRAUD - this aspect of the ● CORRUPTION of info
system is the most vulnerable because it is relatively ● DISRUPTION of the information system
easy to change data as it is being entered into the
system. TWO TYPES IT CONTROLS
1. GENERAL CONTROLS - pertain to the
DATA PROCESSING FRAUD entitywide computer environment
● PROGRAM FRAUDS - altering programs to 2. APPLICATION CONTROLS - ensure the
allow illegal access to and/or manipulation of integrity of specific systems
data files
● OPERATIONS FRAUDS - misuse of the SIX TYPES OF PHYSICAL CONTROLS
company resources, such as using the 1. TRANSACTION AUTHORIZATION - used to
computer for personal business ensure that employees are carrying out only
authorized transactions (general - everyday
DATABASE MANAGEMENT FRAUD - altering, procedures, specific - non-routine
deleting, corrupting, destroying, or stealing an transactions)
organization’s data 2. SEGREGATION OF DUTIES
- oftentimes conducted by disgruntled or 3. SUPERVISION - compensation for lack of
ex-employee segregations; some may be built into
computer systems
INFORMATION GENERATION FRAUD - stealing, 4. ACCOUNTING RECORDS - provide an
misdirecting, or misusing computer output audit trail
5. ACCESS CONTROL - help safeguard assets
SCAVENGING - searching through the trash cans on by restricting physical access to them
the computer center for discarded output 6. INDEPENDENT VERIFICATION - reviewing
batch totals or reconciling subsidiary
INTERNAL CONTROL OBJECTIVES ACCORDING accounts with control accounts
TO AICPA SAS
1. SAFEGUARD ASSETS
2. ENSURE ACCURACY AND RELIABILITY
3. PROMOTE EFFICIENCY
4. MEASURE COMPLIANCE