The General Ledger System account (such as AR—control) for a corresponding subsidiary

ledger in the transaction processing system. The FRS draws

 a hub connected to the other systems of the firm through upon the GL master to produce the firm’s financial statements.
spokes of information flows The MRS also uses this file to support internal information
reporting.
 Summaries of these transactions flow into the GLS and  The general ledger history file has the same format as the GL
become sources of input for the management reporting master. Its primary purpose is to provide historical financial
system (MRS) and financial reporting system (FRS). The bulk data for comparative financial reports.
of the flows into the GLS comes from the transaction  The journal voucher file is the total collection of the journal
processing subsystems. vouchers processed in the current period. This file provides a
record of all general ledger transactions and replaces the
 Note, however, that information also flows from the FRS as
traditional general journal.
feedback into the GLS. We shall explore this point more
 The journal voucher history file contains journal vouchers for
thoroughly later. In this section we review key elements of the
past periods. This historical information supports
GLS.
management’s stewardship responsibility to account for
THE JOURNAL VOUCHER resource utilization. Both the current and historical journal
voucher files are important links in the firm’s audit trail.
 The source of input to the general ledger is the journal  The responsibility center file contains the revenues,
voucher, expenditures, and other resource utilization data for each
responsibility center in the organization. The MRS draws upon
 represent summaries of similar transactions or a single unique these data for input in the preparation of responsibility reports
transactioN for management
 The budget master file contains budgeted amounts for
 identifies the financial amounts and affected general ledger revenues, expenditures, and other resources for responsibility
(GL) accounts. centers. These data, in conjunction with the responsibility
center file, are the basis for responsibility accounting, which is
 Routine transactions, adjusting entries, and closing entries are discussed later in the chapter.
all entered into the GL via journal vouchers. Because a
responsible manager must approve journal vouchers, they
offer a degree of control against unauthorized GL entries.

THE GLS DATABASE

 The general ledger master file is the principal file in the GLS
database. This file is based on the organization’s published
chart of accounts. Each record in the GL master is either a
separate GL account (for example, sales) or the control
 information are interested in the performance of the
organization as a whole
 SOPHISTICATED USERS WITH HOMOGENEOUS
INFORMATION NEEDS
-Because the community of external users is vast and their
individual information needs may vary, financial statements
are targeted at a general audience. They are prepared on the
proposition that the audience comprises sophisticated users
with relatively homogeneous information needs. In other
words, it is assumed that users of financial reports understand
the conventions and accounting principles that are applied
and that the statements have information content that is useful

FINANCIAL REPORTING PROCEDURES

POTENTIAL RISKS IN THE GL/FRS

 Unposted journal entries The process begins with a clean slate at the start of a new fiscal year.
 Subsidiary not equal to G/L control accounts Only the balance sheet (permanent) accounts are carried forward
 Inappropriate access Improperly prepared to the G/L journal from the previous year. From this point, the following steps occur:
entries 1. Capture the transaction. Within each transaction cycle, transactions
 Debits not equal to credits are recorded in the appropriate transaction file.
 Poor audit trail 2. Record in special journal. Each transaction is entered into the
 Lost or damaged data journal. Recall that frequently occurring classes of transactions, such
 Account balances that are wrong because of unauthorized or as sales, are captured in special journals. Those that occur
incorrect journal vouchers infrequently are recorded in the general journal or directly on a journal
voucher.
The Financial Reporting System 3. Post to subsidiary ledger. The details of each transaction are
posted to the affected subsidiary accounts.
 The law dictates management’s responsibility for providing
4. Post to general ledger. Periodically, journal vouchers, summarizing
stewardship information to external parties. This reporting
the entries made to the special journals and subsidiary ledgers, are
obligation is met via the FRS. Much of the information
prepared and posted to the GL accounts. The frequency of updates to
provided takes the form of standard financial statements, tax
the GL will be determined by the degree of system integration.
returns, and documents required by regulatory agencies such
5. Prepare the unadjusted trial balance. At the end of the accounting
as the Securities and Exchange Commission (SEC).
period, the ending balance of each account in the GL is placed in a
 The primary recipients of financial statement information are
worksheet and evaluated in total for debit–credit equality.
external users, such as stockholders, creditors, and
6. Make adjusting entries. Adjusting entries are made to the
government agencies. Generally speaking, outside users of
worksheet to correct errors and to reflect unrecorded transactions
during the period, such as depreciation

7. Journalize and post adjusting entries. Journal vouchers for the

adjusting entries are prepared and posted to the appropriate accounts
in the GL.
8. Prepare the adjusted trial balance. From the adjusted balances, a
trial balance is prepared that contains all the entries that should be
reflected in the financial statements.
9. Prepare the financial statements. The balance sheet, income
Transaction Authorization
statement, and statement of cash flows are prepared using the
- The journal voucher is the document that authorizes an entry
adjusted trial balance. 10. Journalize and post the closing entries.
to the general ledger. journal vouchers be properly authorized
Journal vouchers are prepared for entries that close out the income
by a responsible manager at the source department
statement (temporary) accounts and transfer the income or loss to
Segregation of Duties
retained earnings. Finally, these entries are posted to the GL.
Therefore, individuals with access authority to GL accounts
11. Prepare the post-closing trial balance. A trial balance worksheet
should not:
containing only the balance sheet accounts
1. Have record-keeping responsibility for special journals or
subsidiary ledgers.
2. Prepare journal vouchers.
Controlling the FRS
3. Have custody of physical assets
Sarbanes-Oxley legislation requires that management design and Access Controls
implement controls over the financial reporting process. This includes -Unauthorized access to the GL accounts can result in errors,
the transaction processing systems that feed data into the FRS. In fraud, and misrepresentations in financial statements. SOX
previous chapters we studied control techniques necessary for the legislation explicitly addresses this area of risk by requiring
various transaction systems. organizations to implement controls that limit database access
to authorized individuals only. A number of IT general controls
Here we will examine only the controls that relate to the FRS. The designed to serve this purpose are presented in Chapter 16.
potential risks to the FRS include: Accounting Records
1. A defective audit trail. -The audit trail is a record of the path that a transaction takes
2. Unauthorized access to the general ledger. through the input, processing, and output phases of
3. GL accounts that are out of balance with subsidiary accounts. transaction processing. This involves a network of documents,
4. Incorrect GL account balances because of unauthorized or journals, and ledgers designed to ensure that a transaction
incorrect journal vouchers can be accurately traced through the system from initiation to
final disposition.
- An audit trail facilitates error prevention and correction when
the data files are conveniently and logically organized. Also,
the general ledger and other files that constitute the audit trail
 should be detailed and rich enough to (1) provide the ability to a.formalization of task - suggests that management should
answer inquiries, for example, from customers or vendors; (2) structure the firm around the tasks it performs rather than around
be able to reconstruct files if they are completely or partially individuals with unique skilla
destroyed; (3) provide historical data required by auditors; (4) b. responsibility and authority - It refers to an individual’s
fulfill government regulations; and (5) provide a means for obligation to achieve desired results. The manager’s location in
preventing, detecting, and correcting errors. the reporting channel influences the scope and detail of the
Independent Verification information reported
-portrayed the general ledger function as an independent c. Span of control - It refers to the number of subordinates directly
verification step within the accounting information system. The under his or her control. The size of the span has an impact on the
FRS produces two operational reports—journal voucher listing organization’s physical structure.
and the GL change report—that provide proof of the accuracy Firms can have either:
of this process. The journal voucher listing provides relevant - Narrow span of control
details about each journal voucher posted to the GL. The - Broad span of control
general ledger change report presents the effects of journal
d. management by exception - suggests that managers should
voucher postings to the GL accounts.
limit their attention to potential problem areas (that is, exceptions)
Audit Implication of XBRL
rather than being involved with every activity or decision.
TAXONOMY CREATION: incorrect taxonomy results in invalid
mapping that may cause material misrepresentation of 2. Management function, level, and decision type
financial data.
TAXONOMY MAPPING ERROR: ensure that appropriate
taxonomy and tags have been applied.
VALIDATION OF INSTANCE DOCUMENTS: impact on
auditor responsibility as a consequence of real-time
distribution of financial statements.

MANAGEMENT REPORTING SYSTEM

-provides business information in the form of reports and statements.

- designed to assist members of the management by providing timely
pertinent information.
- directs management’s attention to problems on a timely basis
promotes effective management and thus supports the organization’s
business objectives

FACTORS THAT INFLUENCE THE MRS

1. Management Principles - It provides insight into management

information needs. The principles that most directly influence
the MRS are:
 Type of Mngt Reports

a. Program reports -provides information to solve problems that

users have anticipated
Subclasses:
3. Problem Structure - Reflects and affects how well decision-makers *Scheduled reports - The MRS produces scheduled reports
understand and solve problems according to an established time frame. This could be daily,
Elements – data, procedure, objectives weekly, quarterly, and so on.
*On-demand reports - these reports are triggered by events,
not by the passage of time.
4. Types of Management Reports
b. . AD-HOC Reports - Ad hoc is the latin word for “as the occasion
Report objectives - reports must have value or information content requires”. It means that with this kind of reporting, users can use their
reporting and analysis solution to answer their business questions as
They should:
the occasion requires without having to request queries from IT
-reduce the level of uncertainty associated with a problem facing the
-Managers with limited computer background can quickly produce ad
decision maker
hoc reports from a terminal or PC, without the assistance of data
-influence the behavior of the decision-maker in a positive way
processing professionals.

Data Mining - is the process of selecting, exploring, and modeling

large amounts of data to uncover relationships and global patterns
that exist in large databases but are hidden among the vast amount of
facts
2 approach controllable cost behavior by focusing on budgeted costs,
actual costs, and variances from budget
*verification model - it uses a drill-down technique to either verify or
2. Profit centers - —A profit center manager has responsibility
reject a user’s hypothesis.
for both cost control and revenue generation. The
*discovery model - uses data mining to discover previously unknown
performance report for the profit center manager is
but important information that is hidden within the data.
different from that of the cost center. Nevertheless, the
-A central feature of a successful data mining initiative is a data reporting emphasis for both should be on controllable
warehouse of archived operational data. items
*A data warehouse is a relational database management system that 3. Investment Centers - The manager of an investment center
has been designed specifically to meet the needs of data mining has the general authority to make decisions that
profoundly affect the organization. Assume that a division
of a corporation is an investment center with the objective
5. Responsibility Accounting of maximizing the return on its investment assets
A kind of management accounting that is accountable for all the
management, budgeting, and internal accounting of a company. The  Behavioral considerations
primary objective of this accounting is to support all the Planning, 1. Goal congruence - Lower-level managers pursuing their
costing, and responsibility centers of a company. Every economic own objectives contribute in a positive way to the
event that affects the organization is the responsibility of and can be objectives of their superiors. A carefully structured MRS
traced to an individual manager. plays an important role in promoting and preserving goal
congruence. On the other hand, a badly designed MRS
 Set Financial Goals- Budget Process can cause dysfunctional actions that are in opposition to
The budget process helps management achieve its financial the organization’s objectives.
objectives by establishing measurable goals for each 2. Information overload - It occurs when a manager receives
organizational segment more information than he or she can assimilate. This
 Measuring and Reporting Performance happens when designers of the reporting system do not
Performance measurement and reporting take place at each properly consider the manager’s organizational level and
operational segment in the firm. This information flows upward span of control
as responsibility reports to senior levels of management 3. Inappropriate performance measure
 Responsibility Centers Performance measures should consider all relevant
To achieve accountability, business entities frequently aspects of a manager’s responsibility. In addition to
organize their operations into units called responsibility measures of general performance (such as ROI),
centers. The most common forms of responsibility centers are management should measure trends in key variables such
cost centers, profit centers, and investment centers. as sales, cost of goods sold, operating expenses, and
1. Cost centers - An organizational unit with responsibility for asset levels. Nonfinancial measures such as product
cost management within budgetary limits. The leadership, personnel development, employee attitudes,
performance report for the cost center manager reflects its and public responsibility may also be relevant in assessing
management performance