AC 2104 Accounting Information Systems MW 7:30-

9:00 AM

Chapter 1: The Information System: An Accountant’s Perspective

Key Terms

Accounting information systems (AIS). It is a formal process for collecting data, processing the data into
information, and distributing that information to users with the purpose of to collecting, storing, and
processing financial and accounting data and produce informational reports that managers or other interested
parties can use to make business decisions. An accounting information system can be a manual system but
most accounting information systems are computer-based.
Attest function. It is a service where public confidence in the reliability of internally produced financial
statements rests directly on their being validated by an independent expert auditor and an example of this is
auditing.
Auditor. An individual authorized to review and verify the accuracy of financial records and ensure that
companies comply with tax laws. They protect businesses from fraud, point out discrepancies in accounting
methods and, on occasion, work on a consultancy basis, helping organizations to spot ways to boost
operational efficiency.
Centralized data processing. All data processing of an organization is performed by one or more large
computers housed at a central site that serve users throughout the organization.
Cloud computing. It is an accounting software that is hosted on remote servers and it provides accounting
capabilities to businesses in a fashion similar to the SaaS (Software as a Service) business model. Data is sent
into the “cloud," where it is processed and returned to the user.
Commercial software. It is a computer software that is produced for sale or serves commercial purposes and
is usually propriety software, but it some instances it may be public-domain.
Conceptual system. It involves specifying the criteria for identifying delinquent customers and the
information that needs to be reported. In this system, an accountant determines the nature of the information
required, its sources, its destination, and the accounting rules that need to be applied.
Custom software. It is the solution that is specially developed for some specific user or organization, which
is the contrast to the widely used mass market software. It also includes solutions that have been designed to
run on some specific hardware.
Data. Data are facts, which may or may not be processed (edited, summarized, or refined) and have no direct
effect on the user.
Database. It is an organization’s physical repository for financial and nonfinancial data and it may be in the
form of a filing cabinet or a computer disk.
Database management. It involves three fundamental tasks which are storage, retrieval, and deletion and it
allows individuals to organize, store and retrieve data from a computer. It can also describe, the data storage,
operations and security practices of a database administrator throughout the life cycle of the data.
Data collection. It is the first operational stage in the information system and it is considered the most
important stage with the objective to ensure that event data entering the system are valid, complete, and free
from material errors.

Pamela Mae R. Bartolaba -BSA2

 Data processing. It is the collection and manipulation of data to produce new relevant information. Tasks in the
data processing stage range from simple to complex. Examples include mathematical algorithms (such as
linear programming models) used for production scheduling applications, statistical techniques for sales
forecasting, and posting and summarizing procedures used for accounting applications.
Data sources. These are financial transactions that enter the information system from both internal and
external sources and external financial transactions are the most common source of data for most
organizations.
Data storage. It is efficient information system that captures and stores data only once and makes this single
source available to all users who need it.
Database. It is an organization’s physical repository for financial and nonfinancial data and it may be in the
form of a filing cabinet or a computer disk.
Database management. It involves three fundamental tasks which are storage, retrieval, and deletion and it
allows individuals to organize, store and retrieve data from a computer. It can also describe, the data storage,
operations and security practices of a database administrator throughout the life cycle of the data.
Discretionary reporting. It is a type of reporting where the organization can choose what information to
report and how to present it and reports are provided to the internal management of the organization which
non-mandatory in nature. Typical reports produced include budgets, variance reports, cost-volume-profit
analyses, and reports using current (rather than historical) cost data.
Distributed data processing (DDP). This involves reorganizing the IT function into small information
processing units (IPUs) that are distributed to end users and placed under their control.
End users. Refers to a consumer of a good or service, with the added connotation that he or she has an innate
know-how unique to consumers and they fall into two general groups: external and internal. External users
include creditors, stockholders, potential investors, regulatory agencies, tax authorities, suppliers, and
customers.
Enterprise resource planning (ERP). It is an information system model that enables an organization to
automate and integrate its key business processes and it breaks down traditional functional barriers by
facilitating data sharing, information flows, and the introduction of common business practices among all
organizational users.
External users. Information flows out of the organization towards external users fall into two groups which
are the trading partners and stakeholders.
Feedback. It is a form of output that is sent back to the system as a source of data and it may either be internal
or external and is used to initiate or alter a process.
Financial transaction. It is an economic event that affects the assets and equities of the organization, is
reflected in its accounts, and is measured in monetary terms and this involves sales of products to customers,
purchases of inventory from vendors, and cash disbursements.
General ledger/financial reporting system. This system produces the traditional financial statements, such
as the income statement, balance sheet, statement of cash flows, tax returns, and other reports required by
law.
General model viewing AIS. This is a general model because it describes all information systems, regardless
of their technological architecture and the elements of the general model are end users, data sources, data
collection, data processing, database management, information generation, and feedback.
Independence. This implies that accounting activities must be separate and independent of the functional
areas that maintain custody of physical resources and information reliability rests heavily on the concept of
Pamela Mae R. Bartolaba -BSA2
 accounting independence.
Information. This causes the user to take an action that he or she otherwise could not, or would not, have
taken and it is often defined simply as processed data.
Information flows. It refers to how information flows within the organization which includes horizontally
and vertically. Like the other business resources of raw materials, capital, and labor, information is vital to the
survival of the contemporary business organization. In addition, information flows out from the organization
to external users, such as customers, suppliers, and stakeholders who have an interest in the firm.
Information generation. It is the process of compiling, arranging, formatting, and presenting information to
users and information can be an operational document such as a sales order, a structured report, or a message
on a computer screen.
Information system. It is the set of formal procedures by which data are collected, processed into
information, and distributed to users.
Infrastructure as a service (IaaS). It is one of the three main categories of cloud computing. It is a service
model that delivers computer infrastructure on outsourced basis to support enterprise operations.
Internal auditing. It is an appraisal function housed within the organization and a wide range of activities on
behalf of the organization, including conducting financial statement audits, examining an operation’s
compliance with organizational policies, reviewing the organization’s compliance with legal obligations,
evaluating operational efficiency, detecting and pursuing fraud within the firm, and conducting IT audits are
performed by internal auditors.
Internal users. This includes management at every level of the organization, as well as operations personnel.
IT auditing. It is usually performed as part of a broader financial audit and it is the organizational unit
responsible for conducting it audits may fall under the assurance services group or be independent.
IT outsourcing. It is the use of external service providers to effectively deliver IT-enabled business process,
application service and infrastructure solutions for business outcomes.
Management information system (MIS). This system processes nonfinancial transactions that are not
normally processed by traditional accounting information system.
Management reporting system (MRS). This system provides internal management with special- purpose
financial reports and information needed for decision making such as budgets, variance reports, and
responsibility reports.
Network. It consists of two or more computers that are linked in order to share resources (such as printers and
CDs), exchange files, or allow electronic communications and computers on a network may be linked through
cables, telephone lines, radio waves, satellites, or infrared light beams.
Network administration. It involves a wide array of operational tasks that help a network to run smoothly
and efficiently.
Nondiscretionary reporting. It is a type of reporting where the organization has few or no choices in the
information it provides. Much of this information consists of traditional financial statements, tax returns, and
other legal documents.
Nonfinancial transactions. These are events that do not meet the narrow definition of a financial transaction
and examples of this include adding a new supplier of raw materials to the list of valid suppliers is an event
that may be processed by the enterprise’s information system as a transaction. And because it is not a financial
transaction, and the firm has no legal obligation to process it correctly—or at all.
Physical system. It is the medium and method for capturing and presenting the information and computer
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 professionals determine the most economical and effective technology for accomplishing the task.
Platform as a service (PaaS). It is the capability provided to the consumer is to deploy on to the cloud
infrastructure consumer-created or acquired applications created using programming languages, libraries,
services, and tools supported by the provider.
Reliability. It determines the value of information to a user is determined. Effective decisions require
information that has a high degree of reliability and this information must possess certain attributes—
relevance, accuracy, completeness, summarization, and timeliness to be considered reliable.
Segments. These are organized by firms to promote internal efficiencies through the specialization of labor and
cost-effective resource allocations. Managers within a segment can focus their attention on narrow areas of
responsibility to achieve higher levels of operating efficiency and there are three of the most common
approaches include segmentation by: Geographic Location, Product Line, Business Function.
Software as a service (SaaS). It is one of the three main categories of cloud computing. It is sometimes
referred to as "on- demand software" and was formerly referred to as "software plus services". It is a software
distribution model in which a third- party provider hosts applications and makes them available to customers
over the internet.
Stakeholders. They are entities either within or outside the organization with a direct or indirect interest in
the firm and some examples of stakeholders are stockholders, financial institutions, and government agencies.
Substantive tests. This is the third phase of the audit process focuses on financial data and this involves a
detailed investigation of specific account balances and transactions and some substantive tests are physical,
labor-intensive activities such as counting cash, counting inventories in the warehouse, and verifying the
existence of stock certificates in a safe.
System development life cycle. It is a formal process by which organizations obtain information systems and
is usually done in two ways: (1) they develop customized systems from scratch through in-house systems
development activities, and (2) they purchase preprogrammed commercial systems from software vendors.
Tests of controls. It is an audit procedure to test the effectiveness of a control used by a client entity to
prevent or detect material misstatements. Depending on the results of this test, auditors may choose to rely
upon a client's system of controls as part of their auditing activities.
Trading partners It refers to one of 2 or more participants in a business relationship that is continuing.
Exchanges with trading partners include customer sales and billing information, purchase information for
suppliers, and inventory receipts information.
Transaction. It is an event that affects or is of interest to the organization and is processed by its information
system as a unit of work and it encompasses both financial and nonfinancial events.
Transaction processing system (TPS). It supports daily business operations with numerous reports,
documents, and messages for users throughout the organization.

Turnkey systems. It is a computer system that has been customized for a particular application. The term
derives from the idea that the end user can just turn a key and the system is ready to go. When turnkey
systems are completely finished and tested, systems that are ready for implementation. Typically, they are
general-purpose systems or systems customized to a specific industry.

Pamela Mae R. Bartolaba -BSA2

Review Questions

1. What are the four levels of activity in the pyramid representing the business organization? Distinguish
between horizontal and vertical flows of information.
The four levels of activity are operational, operations management, middle management, and top management.
Horizontal flows support operation-level tasks. The information is highly detailed about the day-to-day
operations. Vertical flows distribute summarized information to managers at all levels, and this information
flows upward. Instructions, quotas, and budgets also flow downward.

2. What is the relationship among data, information, and an information system? Data are facts, which
may or may not be processed (edited, summarized, or refined) and have no direct effect on a user's actions.
Information causes the user to take an action that he or she otherwise could not, or would not, have taken.
Information is determined by the effect it has on the user. Thus the relation is an information system is the act of
formal procedures by which data are collected, stored, processed into information, and distributed to users.

3. Distinguish between AIS and MIS.

AISs process financial transactions that immediately affect the processing of financial transactions.
Consequently, management and accountants have greater legal responsibility for AIS applications than for MIS
applications. The MIS processes nonfinancial transactions that are outside the scope of the AIS. MIS
applications expand the information set provided to areas as production, sales, marketing, and inventory
management.

4. What are the three cycles of transaction processing systems?

The three cycles are revenue cycle, expenditure cycle, and conversion cycle.

5. What is discretionary reporting?

Discretionary Reporting refers to such reports provided to the internal management of an organization that are
non-legal and non-mandatory in nature. The organization can decide at their discretion what information to
report in these reports and the manner of presenting it.

6. What are the characteristics of good or useful information?

The characteristics of good information are relevance, accuracy, completeness, summarization, and timeliness

7. What rules govern data collection?

The rules that govern data collection are relevance and efficiency.

8 . What are the levels of data hierarchy?

The levels of data hierarchy are Data attribute (field), record, file, and database.

9. What are the three fundamental tasks of database management?

The three fundamental tasks of database management are storage, retrieval, and deletion.

10. What is feedback, and how is it useful in an information system?

Feedback is output that is sent back to the system as a source of data. Feedback is useful because it can be used
to initiate or adjust the system processes.

11. What are the fundamental objectives of all Information Systems?

The fundamental Objectives of all information systems are the following:
Pamela Mae R. Bartolaba -BSA2
 a. To support the stewardship function of management
b. To support management decision making
c. To support the firm's day to day operations

12. What is the stewardship mean, and what is its role in an information system?
Stewardship refers to management's responsibility to properly manage the resources of the firm. It's
role in the information system helps in presenting to the external users in the face of the financial
statements or reports about how the resources are being utilized effectively and efficiently.

13. List five functional areas and their sub-functions.

 MATERIALS MANAGEMENT

o Purchasing

o Receiving

o Stores

 MARKETING

o Promotion

o Advertising

o Market Research

o Sales

 DISTRIBUTION

o Warehouse

o Shipping

 PRODUCTION

o Manufacturing

o Support

 PERSONNEL

o Recruiting

o Training
Pamela Mae R. Bartolaba -BSA2
 o Benefits

o Counseling

14. Distinguish the roles of internal and external auditors.

Both internal and external auditors conduct audits. As you can see, the tasks that external and internal auditors
perform are similar. The feature that most clearly distinguishes the two groups is their respective
constituencies.Internal auditors represent the interests of the management whereas External auditors represent
the interests of third-party stakeholders in the organization,such as stockholders, creditors, and government
agencies.

15. What is the role of a database administrator?

The database administrator is responsible for the security and integrity of data stored in a central database.

16. What is the role of the accounting function in an organization?

The accounting function plays two important roles in transaction processing. First, accounting captures and
records the financial effects of the firm’s transactions. These include events such as the movement of raw
materials from the warehouse into production, shipments of the finished products to customers, cash flows into
the firm and deposits in the bank, the acquisition of inventory, and the discharge of financial obligations.
Second, the accounting function distributes transaction information to operations personnel to coordinate many
of their key tasks. Accounting activities that contribute directly to business operations include inventory
control, cost accounting, payroll, accounts payable, accounts receivable, billing, fixed asset accounting,and the
general ledger. We deal with each of these specifically in later chapters. For the moment, however, we need to
maintain a broad view of accounting to understand its functional role in the organization.

17.) Distinguish between the centralized and distributed approaches to organizing the IT function.
In a centralized approach in organizing the IT function, all data processing is performed by one or more large
computers housed at a central site that serve users throughout the organization. The IT activities are
consolidated and managed as a shared organization resource. Whereas in a distributed approach, the IT
function is reorganized into small information processing units (IPUs) that are distributed to end users and
placed under their control. These IPUs are distributed according to business function, geographic location, or
both.

18. What is distributed data processing?

An alternative to the centralized model is the concept of distributed data processing. The topic of DDP is quite
broad, touching on such related topics as end-user computing, commercial software, networking, and office
automation. DDP involves reorganizing the IT functions into small information units that are distributed to end
users and placed under their control. IPUs may be distributed according to business function, geographic
location, or both.

19. What is ERP system?

Enterprise resource planning (ERP) is business process management software that allows an organization to
use a system of integrated applications to manage the business and automate many back office functions
related to technology, services and human resources. It is an information system model that enables an
organization to automate and integrate its key business processes. ERP breaks down traditional functional
barriers by facilitating data sharing, information flows, and the introduction of common business practices
among all organizational users. The implementation of an ERP system can be a massive undertaking that can
span several years. Because of the complexity and size of ERPs, few organizations are willing or able to
Pamela Mae R. Bartolaba -BSA2
commit the necessary financial and physical resources and incur the risk of developing an ERP system
inhouse. Hence, virtually all ERPs are commercial products. The recognized leaders in the market are SAP,
Oracle, J.D. Edwards & Co., and PeopleSoft Inc.

20. What two roles are played by accountants with respect to the information system?
The accounting function manages the financial information resource of the firm. In this regard, it plays two
important roles in transaction processing. First, accounting captures and records the financial effects of the
firm’s transactions. These include events such as the movement of raw materials from the warehouse into
production, shipments of the finished products to customers, cash flows into the firm and deposits in the bank,
the acquisition of inventory, and the discharge of financial obligations. Second, the accounting function
distributes transaction information to operations personnel to coordinate many of their key tasks. Accounting
activities that contribute directly to business operations include inventory control, cost accounting, payroll,
accounts payable, accounts receivable, billing, fixed asset accounting, and the general ledger.

21. Define the term attest function.

An attest function is the process of independent examination or review by an accountant of the validity of data
presented in financial statements of a company or organization. The American Institute of Certified Public
Accountants (AICPA), a professional services group representing CPAs and their standards and rules,
develops and publishes attest function guides.

22. Define the term financial services.

Companies in the financial services industry are in the business of managing money. Globally, the financial
services industry leads the world in terms of earnings and equity market capitalization. Large conglomerates
dominate this sector, but it also includes a diverse range of smaller companies.

23. What is IT Auditing?

IT auditing is part of a broader financial audit in which the auditor attests to the integrity of elements of the
organization’s information system that have become complicated by computer technology.

24. Distinguish between conceptual and physical systems.

The conceptual system involves specifying the criteria for identifying delinquent customers and the
information that needs to be reported. The accountant determines the nature of the information required, its
sources, its destination, and the accounting rules that need to be applied. On the other hand, the physical
system is the medium and method for capturing and presenting the information. The computer professionals
determine the most economical and effective technology for accomplishing the task. Discussion

25. What is the role of the audit committee of the board of directors?
The audit committee is responsible for participating in the annual audit, making recommendations for hiring
independent auditors, reviewing financial policies and practices, and monitoring compliance with legal and
regulatory matters. The audit committee makes recommendations for selecting independent auditors to conduct
the annual audit, but the board makes the ultimate decision in hiring independent auditors.

26.Who initiates fraud audit within the organization?

Managers often initiate the fraud audit within the organization, because they are given stock options on their
compensation package or in order to meet the expectations of the investors. And in order to achieve or to take
advantage of that they tend to do fraudulent activities that drive up
the stock market prices. People behind this fraud can escape its detection not until when the organization suffers
irreparable damage or loss.

27.When can external auditors rely on the work performed by internal auditors?
The external auditors can rely on the work of internal auditors when internal audit function is effective, has
Pamela Mae R. Bartolaba -BSA2
prepared adequate internal audit plans, documented the internal audit findings, and adhered to appropriate
professional standards.

28. Name the tests that auditors perform to gather evidence.

The tests that auditors perform to gather evidence are analytical review, inquiry, observation, inspection and
recalculation.

29. What characteristic conceptually distinguishes internal and external auditing?

The feature that most clearly distinguishes the two groups is their respective constituencies. External auditors
represent third-party outsiders, whereas internal auditors represent the interests of management

30. What is the role of network administration?

Network administrators are responsible for maintaining computer networks and solving any problems that may
occur with them.

Pamela Mae R. Bartolaba -BSA2

Discussion Questions

1. Discuss the differences between internal and external users of information and their needs and
demands on an information system. Historically, which type of user has the firm catered to most?
External users of the information system of an organization are generally the stakeholders, trading
partners and government authorities. Stakeholders are entities like stockholders that have an interest in the
organization. Trading partners are the customers and suppliers. Government authorities include tax authorities
and other regulatory bodies.
Information is generally provided to them via a set format of reports, which are useful especially for potential
investors and or creditors. The information provided to external users is generally structured and provided in
pre-defined layouts. Internal users of the information system of an organization include the operations staff and
the management. The operations staff requires transactional data pertaining to day-to-day operations. The
management requires summarized reports that give an overview of the business operations. They require
information to help them with decision-making. As a whole, the information required by internal users may be
ad hoc and change over time. It tends to be less structured.

The reporting requirements of external users such as lending institutions, the IRS, the SEC, and
stockholders are subject to stringent reporting standards. Thus, firms have historically placed a very high
emphasis on the accuracy of the AISs and the reports they produce for external agencies since failure to provide
accurate and timely information carries heavy penalties. Internal users, such as managers, also need vital
information to make good decisions. Firms are beginning to realize that the needs of these internal users are also
very important to efficiently and effectively operate and plan for the future

2. Comment on the level of detail necessary for operations management, middle management, and
stockholders.
The level of detail required in the information varies between operations management, middle
management and stockholders. The level of detail necessary for the stockholders is highly aggregated and
typically follows the format prescribed by the SEC and GAAP. Much more detailed information is necessary
for middle management to plan and control operations. Highly detailed information is needed at the operations
management level in order to run the dayto-day business processes and operations. This information helps them
report upwards on the status of operations.

3. Distinguish between financial and nonfinancial transactions. Give three examples of each.
Financial transactions are economic events that affect the assets and equities of the organization, are
reflected in its accounts, and are measured in monetary terms. Examples are sales of products to customers,
purchases of inventory from vendors, and cash disbursements and receipts. Nonfinancial transactions, on the
other hand, are events that do not meet the narrow definition of a financial transaction. They include business
events that do not impact the financial statements. Examples are adding a new supplier of raw materials to the
list of valid suppliers (processed by the enterprise's information system as a transaction), a financial portfolio
management system that collects and tracks stock prices, and even an airline reservation in which there is no
commitment by the customer.

4. An information system must meet three fundamental objectives. Discuss why these adjectives cannot
effectively be met by a common set of information.
The fundamental objectives of information systems are to support the stewardship function of
management, to support management decision making and to support the firm’s day to day operations.
Managers of all areas need information from the AIS and the MIS. If the information data needed for decision
making processes are located in two or more different sources, the preparation of the reports may be
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 inefficient and expensive. In addition, a lack of coordination from two datasets can result to inconsistent and
unreliable data.

5. Do you think the transaction processing systems differ significantly between service and
manufacturing industries? Are they equally important to both sectors?
Transaction processing systems between manufacturing and services firms go through common
transaction cycles: (a) Incurs expenditures in exchange for resources or expenditure cycle; (b) Provides value
added through its products or services or known as conversion cycle; (c) Retrieves revenue from outside
sources or revenue cycle. These are equally important in both sectors because it makes the firm systematic and
builds a firm structure in its day to day operation.

6. Discuss the difference between the financial reporting system and the general ledger system.
The GLS processes the summaries from the transaction cycle activity to update the general ledger
control accounts. Other events with no formal processing cycle also enter the GLS through alternate sources.
On the other hand, the FRS measures and reports the status of financial resources and the changes in these
resources. The FRS also communicates this information primarily to external users.

7. Examine Figure 1-4 and discuss where and how problems can arise that can cause the resulting
information be bad or ineffective.
If the data collected is/are not accurate and/or not correctly entered, then the resulting information will
not be accurate. Additionally, if the data processing system is incorrectly processing information, the
resulting information will also be incorrect. If the database is not accurately maintained over time, again the
resulting information will be incorrect.

8. Discuss how the elements of efficiency, effectiveness, and flexibility are crucial to the design of an
information system.
Designed information system must meet its objectives of providing the appropriate information to its
users. The users will find an information system efficient only if it helps them to do their tasks better, faster
and accurately. The process of collecting data must be efficient. It must avoid repetition in collecting of data.
Any duplication in data collection results in wastage of time and effort of the users, making them less
efficient. An information system is effective only if it provides relevant information to the users at the right
time. If the information is irrelevant or made available to the users later than when it was required, it
becomes useless for the user. .Flexibility is the ability of a system to respond to potential internal or external
changes affecting its value delivery, in a timely and cost saving information manner, as from the definition
flexibility means time saving. This is important because if one information system is capable of doing
different tasks, this makes it more attractive to the end user. Flexibility becomes another crucial element in
designing information systems as it is made more effective that is, one information system can collect, store
and process data all at once.

9. Discuss what is meant by the statement, “The accounting system is a conceptual flow of information
that represents physical personnel, machinery, and flows of raw materials, and cash through the
organization.”
This means that the accounting system represents the operations of a firm. Workers or employees
perform their duties, machines and equipment operate, raw materials are processed into finished goods, and
cash flows are exchanged continuously between suppliers and customers. The conceptual flow of information
which is the accounting system is crucial for it allows the management to view the financial effects of these
operations in detail.

10. Discuss the importance of accounting independence in accounting information systems. Give an

Pamela Mae R. Bartolaba -BSA2

example of where this concept is important (use an example other than inventory control).
Accounting independence is important because the separation between the record-keeping functions and
the physical resources is crucial. This concept is extremely important for cash receipts operations. The person in
charge of deposits of currency and check receipts should not be allowed to reconcile the sales records to the
cash deposits and/or the bank account. If these
dutiesarenotseparated,thenthecashreceiptsclerkcanstealmoneyandcoveritupduringthe reconciliationprocess.
Moreover, this is also to ensure that the information generated by the accounting system is reliable so that users
can rely on it and formulate decisions on the basis of this information generated. Not only does the concept of
accounting independence in accounting information
system promote accuracy and effectiveness of information, it also helps in mitigating possible
occurrenceoffraudandthusservesasacontrolinsuchmanner.

11. Discuss why it is crucialthat the internal auditors report solely to the audit committee of the board of
directors and answer to no other group.
The internal auditors are responsible for detecting and pursuing fraud within the firm. If management-
level employees are involved, the internal auditors may fear losing their jobs if
theyblowthewhistleonsuchactivities.Thus,theinternalauditorsshouldreporttotheboardof
directorssothattheydonotfearanyrepercussionsoftheiractionsfromtopmanagement.

12. Contrast centralized data processing with distributed data processing. How do the roles of endusers
differ between the two approaches?
In a centralized data-processing environment, the computer services personnel are all housed in one
department where all of the systems development and maintenance takes place. End users must formally request
any additions or enhancements to the current system. In a distributed data processing (DDP) system, the
systems professionals may still be housed together or they may be located through the various segments of the
organization. End users gain more control overtheirdata and applications. DDP is becoming more and more
popular as networkingcomputersisbecomingeasierandmorecommonplace.

13. Discuss how conceptual and physical systems differ and which functions are responsible for each of
these systems.
The conceptual system refers to the accounting rules and policies that govern the way accounting is
handled in an organization. It represents the business requirements of the organization. It defines nature of
checks and controls to be put in place to maintain the integrity of data. It also specifies the nature of output
required from the information system. It defines format and content of the reports to be generated.
Physical system is involved in tracking and handling the implementation of the conceptual system. It defines the
kind of hardware and software to be deployed. It also defines the technologies, data storage methods and other
processes required to translate the business requirements into reallife computerized information system.

14. Why is an active board of directors audit committee important to an organization?

It is important in the organization to have an active board of directors, audit committee, for they are in
charge of overseeing financial reporting and disclosures. The committee also has the authority to initiate special
investigations in cases where it is determined that accounting practices are problematic or suspect, or when
serious issues arise with employees. This is in the case where in the employee who suspects or notices any
wrongdoing, wherein its supervisor, its next level and or CEO are seem involved with such wrongdoings.

15. Do you agree with the statement “the term IT auditor should be considered obsolete because it implies
a distinction between regular auditors and auditors who examines computerized AIS” Why or why not?
I don’t agree with the statement because IT Auditor helps management to ensure that information
systems are functional. And because of that it is not obsolete. Furthermore, an IT Auditor in reviewing a firm’s
computer and software to ensure that the company has the latest updates, virus protection mechanisms and can
recommend improvement in the data backup system.
Pamela Mae R. Bartolaba -BSA2
 Multiple Choice Questions

1.) Which of the following is NOT the purpose of the transaction processing system?
a. Managing and reporting on the status of financial investments
b. Converting economic events into financial transactions
c. Distributing essential information to operations personnel to support their daily
operations
d. Recording financial transactions in the accounting records

TPS is central to the overall function of the information system by converting economic events
into financial transactions, recording financial transactions in the accounting
records (journals and ledgers), and distributing essential financial information to operations
personnel to support their daily operations.

2.) Which of the following are the objectives of the data collection activity within the
general model for AIS?
a. Relevant and redundant
b. Efficient and relevant
c. Efficient and redundant
d. Efficient and objective

Two rules govern the design of data collection procedures: relevance and efficiency. The
information system should capture only relevant data. A fundamental task of the system
designer is to determine what is and what is not relevant. He or she does so by analyzing the
user’s needs. Only data that ultimately contribute to information (as defined previously) are
relevant. Efficient data collection procedures are designed to collect data only once.
Capturing the same data more than once leads to data redundancy and inconsistency.
Information systems have limited collection, processing, and data storage capacity. Data
redundancy overloads facilities and reduces the overall efficiency of the system.
Inconsistency among redundant data elements can result in inappropriate actions and bad
decisions.

3.) Which of the following is NOT a database management task?

a. Retrieval
b. Storage
c. Summarization
d. Deletion

Database management involves three fundamental tasks: storage, retrieval, and deletion.
The storage task assigns keys to new records and stores them in proper location in the
database. Retrieval is the task of locating and extracting an existing record from the
database for processing. After processing is complete, the storage task restores the update
record to its place in the database. Deletion is the task of permanently removing obsolete or
redundant records from the database.

4.) Which of the following is NOT a financial transaction?

a. Update valid vendor file
b. Purchase of products
c. Cash receipts
d. Sale of Inventory

Sales of products to customers, purchases of inventory from vendors and cash disbursements
are examples of financial transactions.
Pamela Mae R. Bartolaba -BSA2
 5.) The following are subsystems of the accounting information system, EXCEPT the
a. transaction processing system
b. general ledger/financial reporting system
c. human resources system
d. management reporting system

The accounting information system is composed of three major subsystems:

(1) Transaction Processing System (TPS) which supports daily business operations with
numerous reports,documents,and messages for users throughout the organization.
(2) General Ledger/Financial Reporting System(GL/FRS) which produces the traditional
financial statements such as the income statement, balance sheet, statement of cash flows,
tax returns and other reports required by law.
(3) Management Reporting System(MRS) which provide internal management with special
purpose financial reports and information needed for decision making such as budgets,
variance reports and responsibility reports.

6.) Which of the following is NOT a characteristic of effective information?

a. Relevance
b. Precision
c. Accuracy
d. Summarization

The value of information to a user is determined by its reliability. For the purpose of
information is to lead the user to a desired action. For this to happen, information must
possess certain attributes:relevance,accuracy,completeness,summarization and timeliness.
When these attributes are consistently present, information has reliability and provides value
to the user.

7.) When viewed from the highest to the most elemental level, the data hierarchy is
a. File, record, attribute.
b. Attribute, record, file.
c. Record, attribute, key.
d. Table, record, key.
e. Key, record, table.

The data attribute is the most elemental piece of potentially useful data in the database. It is
the logical and relevant characteristic of an entity about which the firm captures data.
Record is a complete set of attributes for a single occurrence within an entity class. To find a
particular record in the database, one must be able to identify it uniquely.
File is a complete set of records of an identical class. Files are constructed for other classes
of records such as inventory, accounts payable, and payroll.
THE ORGANIZATION’S DATABASE IS THE ENTIRE COLLECTION OF SUCH FILES.

8.) Which of the following is least likely to be used as evidence by an external auditor?
a. Substantive test results
b. Work performed by internal auditors who organizationally report to the
controller
c. Tests of control results
d. Work performed by internal auditors who report to the audit committee of the BOD.

External auditors represent the interests of third-party stakeholders in the organization, such
as stakeholders, creditors, and government agencies. They are independent and focus on the
Pamela Mae R. Bartolaba -BSA2
 external stakeholders and report.

9. Which of the following is NOT an objective of all information systems?

a. Support for the stewardship function of management.
b. support for management decision making
c. support for the day-to-day operations of the firm
d. all of the above are objectives

The objective of the information system is to support day-to-day operation of the

organization, to support the stewardship function of the management and to support the
management decision making process.

10. Which of the following best describes the activities of the materials management
function?
a. purchasing, receiving, and inventory control
b. purchasing, receiving, and storage
c. receiving, sales, distribution, and purchasing
d. receiving, storage, purchasing, and accounts payable
e. purchasing, storage, and distribution

The function of the Material management is to control and plan inventory of the materials
required by the particular organization. Activities of material management include three
sub-functions:1. Purchasing: This process includes ordering of the inventory from the
vendors where the level of the inventory flows down to their reorder points. 2. Receiving:
This process includes the receiving of previously ordered inventory by purchasing. And its
function is to check the physical condition of the related items. 3. Stores: In this process,
physical custody of inventory is received and released.

11. Which of the following best describes the activities of the production function?
a. maintenance, inventory control, and production planning
b. quality control, production planning, manufacturing, and payroll
c. maintenance, production planning, storage, and quality control
d. production planning, quality control, manufacturing, and maintenance
e. manufacturing, quality control, and maintenance

Production support activities ensure that primary manufacturing activities operate efficiently
and effectively. These include, but are not limited to, the following types of activities:
Production planning, quality control, maintenance.

12. Which of the following best describes the activities of the accounting function?
a. inventory control, cash receipts, accounts payable, cash disbursements, and payroll
b. fixed assets, accounts payable, cash disbursements, and cost accounting
c. purchasing, cash receipts, accounts payable, cash disbursements, and payroll
d. inventory control, accounts payable, fixed assets, and payroll
e. inventory control, cost accounting, accounts payable, cash disbursements, and
payroll

Accounting activities that contribute directly to business operations include inventory

control, cost accounting, payroll, accounts payable, accounts receivable, billing, fixed asset
accounting, and the general ledger.

Pamela Mae R. Bartolaba -BSA2

 13. Which statement best describes cloud computing?
a. Cloud computing involves long-term contracts.
b. Cloud computing is location-independent computing.
c. Cloud computing involves an organization selling its IT resources to a vendor and
leasing back IT services from the vendor.
d. Cloud computing includes fixed price contracts.
e. Cloud computing involves entering into multiple contracts with several IP service
providers to create a cloud of resources.

Cloud computing is the technique through which the delivery of the hosted services is done
with the help of the internet. The term Cloud computing is a variant of the IT outsourcing
and it is considered as a location independent computing.

14. Which of the following statements is most accurate?

a. ERP systems are commercial software packages that are sometimes called turnkey
systems because they can be implemented by the user with little or no modification.
b. Substantive tests provide evidence focused on the system controls.
c. Public accounting firms that provide attest services are not allowed under SOX to
offer IT advisory services.
d. Both small and large firms that have standardized information needs are
potential customers from commercial software.
e. External auditors may rely on the work of internal auditors only if they report to the
controller or the CEO of the client company.

Both small and large firms which have standardized information needs are the potential
customers for the commercial software.

Pamela Mae R. Bartolaba -BSA2