Operations Managment

CHAPTER 1 - Directly responsible for

The Information System: An controlling day-to-day operations
accountant's Perspective
Middle Management
The Information Environment - Accountable for short-term
Accounting information systems planning and coordination of
(AIS) activities necessary to
- are specialized subset of accomplish organizational
information systems that objectives
processes financial transactions.
Top Management
Information flows - Responsible for longer-term
- are the flows of information into planning and setting top
and out of an organization. organizational objectives

Trading partners Horizontal Flow

- is a category of external user, - Supports operations-level tasks
- including customer sales and with highly detailed information
billing information, purchase about the many business
information for suppliers, and transactions affecting the firm
inventory receipts information. - Information about sale and
shipment of goods, use of labor
Stakeholders and materials in production
- are entities either inside or process, and internal transfers of
outside an organization that have resources from 1 department to
a direct or indirect interest in the another
firm.
Vertical Flow
- Distributed information downward
from senior managers to junior
managers and operations
personnel in the form of
instructions, quotas, and budgets

INFORMATION OBJECTIVES
Three fundamental objectives that are
common to all organizations:
● To support the firm’s day-to-day
operations.
 ● To support management decision
making.
● To support the stewardship
function of management

AN INFORMATION SYSTEMS
FRAMEWORK
Information System
- is the set of formal procedures by
which data are collected,
processed into information, and
distributed to users.

Management Information System

(MIS)
- is a system that processes
nonfinancial transactions not
normally processed by traditional
accounting information systems.

Transaction
- is an event that affects or is of The Accounting Information System
interest to the organization and is Transaction Processing System
processed by its information (TPS)
system as a unit of work. - is an activity composed of three
major subsystems—
Financial Transaction ● the revenue cycle,
- is an economic event that affects ● the expenditure cycle, and
the assets and equities of the ● the conversion cycle.
organization, is measured in
financial terms, and is reflected in General Ledger/Financial Reporting
the accounts of the firm. System (GL/FRS)
- is a system that produces
Nonfinancial transactions traditional financial statements,
- are events that do not meet the such as income statements,
narrow definition of a financial balance sheets, statements of
transaction. cash flows, tax returns, and other
reports required by law.
Management Reporting System General Ledger/Financial Reporting
(MRS) Systems
- is a system that provides the ● GLR & FRS
internal financial information - 2 closely related
needed to manage a business. subsystems
- viewed as a single
The Management Information System integrated system because
Management information System of their operational
(MIS) interdependency
- Processes nonfinancial
transactions that are not normally ● GL
processed by traditional AIS - Comes from transaction
cycle subsystems
The Need to Distinguish between AIS - Summaries of transaction
and MIS activity are processed to
update genera ledger
control accounts

● FRS
- Measures status of
financial resources and
changes in those
resources and
communicates this
AIS SUBSYSTEMS information to external
Transaction Processing System users
- Converts economic events into
financial transactions, records ● Nondiscretionary reporting
financial transactions in - is a type of reporting in
accounting records, and which the organization has
distributes essential financial few or no choices in the
information to operations information it provides.
personnel - Much of this information
- Groups similar types into consists of traditional
transaction cycles financial statements, tax
- 3 Transaction Cycles returns, and other legal
- Revenue Cycle documents.
- Expenditure Cycle
- Conversion Cycle
Management Reporting System DATA VERSUS INFORMATION:
- Provides internal financial Data
information needed to manage a - are facts,
business - which may or may not be
- Examples: budgets, variance processed (edited, summarized,
reports, cost-volume-profut or refined) and
analyses, and reports using - which have no direct effect on the
current cost data user.
● Discretionary reporting
- is a type of reporting in Information
which the organization can - causes the user to take an action
choose what information to that he or she otherwise could
report and how to present not, or would not, have taken.
it.

A GENERAL MODEL FOR AIS

general model for AIS
- is a model that describes all
information systems, regardless
of their technological architecture.

End Users
End users
- are users for whom the system is
built. Data Sources
- 2 Groups: - are financial transactions that
● External users enter the information system from
- include creditors, either internal or external
stockholders, potential sources.
investors, regulatory
agencies, tax authorities, Data Collection
suppliers, and customers. - Is the first operational stage in
● Internal users the information system.
- include management at all
levels of the organization Data Processing
as well as operations - is a group that manages the
personnel. computer resources used to
perform the day-to-day
processing of transactions.
 ● Retrieval
Database Management - Task of locating and
Database extracting an existing
- is a physical repository for record from database for
financial data. processing
● Deletion
Data Attribute - Task of permanently
- Most elemental piece of removing obsolete or
potentially useful data in redundant record from
database database
● Attribute
- Is a logical and relevant
characteristic of an entity about
which the firm captures data
● Primary Key
- Unique dentifier attribute

Record
- Is a complete set of attributes for
a single occurrence within an
entity class
Information Generation
File / Table Information generation
- Complete set of records of an - is the process of compiling,
identical class arranging, formatting, and
- Organization’s database is the presenting information to users.
entire collection of such files
Qualitative Characteristics of Useful
DATABASE MANAGEMENT TASKS: Information
Database management Relevance
- is a special software system that - Contents must serve a purpose
is programmed to know which - Present only relevant data in its
data elements each user is reports
authorized to access. Timeliness
- 3 fundamental tasks: - Information must be no older than
● Storage time frame of action it supports
- Assigns keys to new Accuracy
records and stores them in - Information must be free from
their proper location in material errors
database - Material error exists when
amount of inaccuracy in
 information causes the user to Production
make poor decisions or to dail to - Production planning involves
make necessary decisions scheduling the flow of materials,
Completeness labor, and machinery to efficiently
- No piece of information essential meet production needs.
to a decision or task should be - Quality control monitors the
missing manufacturing process at various
Summarization points to ensure that the finished
- Information should be aggregated products meet the firm’s quality
in accordance with user’s needs standards.
- Maintenance keeps the firm’s
Feedback machinery and other
Feedback manufacturing facilities in running
- is a form of output that is sent order.
back to the system as a source of Marketing
data. Distribution
Personnel
Organizational Structure and AIS Finance
- Physical AIS comprise
technologies of various types and
configurations as well as people
and tasks from across the
organization.
- The sales processing system,
which is a subsystem of the
revenue cycle, includes the
following organization functions:
sales, credit, inventory control,
warehousing, shipping, billing,
accounts receivable, general
ledger, and data processing.

FUNCTIONAL SEGMENTATION
Segments
- are functional units of a business
organization.
Materials Management
● Purchasing
● Receiving
● Stores
 packages are sometimes called
turnkey systems because they
often can be implemented by the
user with little or no modification.

The Value of Information

Reliability
- is the property of information that
makes it useful to users.

Accounting Independence
Independence
- is the separation of the
record-keeping function of
accounting from the functional
areas that have custody of
physical resources.

Data Processing
Centralized data processing
- is a model under which all data
processing is performed by one
or more large computers, housed
at a central site, that serve users
throughout the organization.
Distributed data processing (DDP) Turnkey systems
- is reorganizing the IT function - are completely finished and
into small information processing tested systems that are ready for
units (IPUs) that are distributed to implementation.
end users and placed under their Custom software
control. - is software built to individual
specifications.
Systems Development and - Custom systems are more
Maintenance expensive than commercial
SYSTEMS DEVELOPMENT: packages.
Commercial software Systems development life cycle
- is pre-coded software that a user - is the software development
purchases from a software process.
vendor. Commercial software
Enterprise resource planning (ERP) Cloud computing
- is a system assembled of - is a location-independent
prefabricated software computing variant of IT
components. outsourcing whereby shared data
SYSTEMS MAINTENANCE centers deliver hosted IT services
over the Internet.
Database Administration - These services fall into three
categories:
Network Administration
Network ● Software as a service (SaaS)
- is a collection of interconnected - is a software distribution
computers and communications model in which service
devices that allows users to providers host applications
communicate, access data and for client organizations
applications, and share over a private network or
information and resources. the Internet
Network administration
- is being responsible for the ● Infrastructure as a service
effective functioning of the (IaaS)
software and hardware that - is the provision of
constitute the organization’s computing power and disk
network. space to client firms who
- This involves configuring, access it from desktop
implementing, and maintaining PCs.
network equipment. - The client firm can
configure the infrastructure
Outsourcing the IT Function for storage, networks, and
IT outsourcing other computing needs,
- is contracting with a third-party including running
vendor to take over the costs, operating systems and
risks, and responsibilities data processing
associated with maintaining an applications.
effective corporate IT function,
including management of IT ● Platform as a service (PaaS)
assets and staff and delivery of IT - enables client firms to
services such as data entry, data develop and deploy onto
center operations, applications the cloud infrastructure
development, applications consumer-generated
maintenance, and network applications using facilities
management.
 provided by the PaaS fair presentation of a client firm’s
vendor. financial statement.

The Role of Accountants in AIS Substantive tests

- Accountants are involved in both - are tests that determine whether
the design and the audit of AIS. database contents fairly reflect
- Accountants play a prominent the organization’s transactions.
role on systems development
teams as domain experts. Attest Service versus Advisory
- The IT professionals on the team Services
are responsible for the physical Tests of controls
system. - are tests that establish whether
internal controls are functioning
ACCOUNTANTS AS SYSTEM properly.
DESIGNERS
Conceptual system IT auditing
- is the production of several - is the review of the
alternative designs for a new computer-based components of
system. an organization.
- The audit is often performed as
Physical system part of a broader financial audit.
- is the medium and method for
capturing and presenting the Internal Audits
information. Internal auditing is the appraisal
function housed within the organization.
Data storage
- is an efficient information system External versus Internal Auditors
that captures and stores data
only once and makes this single Fraud Audits
source available to all users who
need it. The Role of the Audit Committee

Auditor Designer/Auditor Duality

- is an expert who expresses an
opinion about the fairness of a
company’s financial statements.

Attest function
- is an independent auditor’s
responsibility to opine as to the
 CHAPTER 2 - involves the acquisition of
Introduction to Transaction materials, property, and labor in
Processing exchange for cash.
- The actual disbursement of cash
may occur at a different point
An Overview of Transaction after the receipt of the goods or
Processing services, based on a credit
relationship.
The most common financial transactions
- These financial transactions have
are economic exchanges with external
a physical component and a
parties.
financial component.
These include the sale of goods or - The subsystems of the
services, the purchase of inventory, the expenditure cycle include:
discharge of financial obligations, and ● Purchases/accounts payable
the receipt of cash on account from system
customers. ● Cash disbursement system
● Payroll system
Financial transactions are common
● Fixed asset system
business events that occur regularly.

Financial Transaction
Conversion Cycle
- is an economic event that affects - involves tracing the cost flows in
the assets and equities of the the transformation of raw
firm, is reflected in its accounts, materials into finished goods, a
and is measured in monetary primary concern of cost
terms. accounting courses.
- are common, repetitive events - The conversion cycle (for
that involve external parties manufacturing companies) has
(customers or suppliers) or two typical subsystems:
internal events (depreciation, use ● Production system (materials
of materials, etc.). planning, scheduling,
- Similar transactions are grouped releasing, controlling)
into cycles. ● Cost accounting system (flow
The Transaction Cycles of costs for inventory
valuation, budgeting,
The three primary transaction cycles decisions)
(expenditure, conversion, and revenue
cycles) and their typical subsystems. Revenue Cycle

Expenditure Cycle - involves tracing a customer's

order through delivery (physical
 component) and payment - triggers created at
(financial component), which may beginning of the
occur at two points in time. transaction to capture
- The subsystems of the revenue data.
cycle include: - documents that capture
● Sales order processing (order, and formalize transaction
credit, shipping, billing) data needed for
● Cash Receipts (collecting, processing by their
depositing, recording) respective transaction
cycles. (sales order)
● Product documents:
- are the results of
transaction processing
(invoices, paychecks,
remittance advice ).
● Turnaround documents:
- are product documents
that become source
documents for another
system. (e.g., the part of
the bill that gets returned
with your check).
Accounting Records
- are documents, journals, or
ledgers used in transaction
cycles.
Manual Systems

Manual Systems

- utilize documents to provide

evidence of an economic event.
- The document may either initiate
the transaction processing or be
a result of processing.
- There are three types of
documents discussed in this
chapter:
● Source documents:
 -used to denote certain
types of special journals.
- For example, the payroll
journal is often called the
payroll register.
● General Journal:
- nonrecurring, infrequent,
and dissimilar
transactions.
- These events appear in
chronological order.
- Journal voucher systems
help keep these
Journals
transactions controlled.
- are records of chronological
entry. (date)
- Documents are the primary
source of data for journals.
- Each transaction requires a
separate journal entry.
- There may be a time lag between
when the source document is
prepared and when the journal
entry is made.
- There are two types of journals:
● Special Journals:
- group like types of
transactions, and are more
efficient.
- Periodic posting to the
general ledger and
subsidiary ledgers is
required from the special
journals.
- Common special journals:
sales, purchasing, cash
receipts, cash
disbursements.
● Registers
Ledgers:

- book of accounts that reflects the

financial effects of the firm’s
transactions after they are posted
from the various journals.
- by account type, show the
account balances, or the financial
effects of the transactions on the
related account(s).
- Two types of ledgers:
● General ledger:
- beginning, current activity,
ending balance and
control accounts for
subsidiary ledger totals
● Subsidiary ledger:
- Groups of similar
individual accounts
(customers for accounts
receivable, vendors for
accounts payable, specific
inventory items for
inventory, specific
machines for fixed assets,
etc.).

The Audit Trail

- It is important that managers,

accountants, and auditors be
able to follow the audit trails of
data through the accounting
system.
 - If records are kept properly, an Computer-Based Systems
accountant should be able to
Types of Files in computer-based
trace forward from source
accounting systems include:
documents to the journals to the
ledger(s) to the financial ● Master files:
statements, as well as to vouch - contain account data that
back from the financial are updated from
statements to the ledger(s) to the transaction data: ledgers.
journals to source documents. ● Transaction files:
- By tracing forward from source - temporary file
documents, auditors can verify - hold records from events
the completeness of the that will change master
recording of assets, and by files: journals.
vouching back from the recorded ● Reference files:
entry to the source documents, - hold the transaction
auditors can better verify the processing standards or
existence of assets claimed to be rules: vendors, prices.
owned. - file that stores the data
- Confirmation refers to the used as standards for
auditing technique of asking processing transactions.
individual customers or suppliers ● Archive files:
to agree with the recorded - are historical files of past
balance for their account. journals and ledgers.
- file that contains records of
Audit Trail
past transactions that are
- is a set of accounting records retained for future
that trace transactions from their reference.
source documents to the financial
statements.
- is of utmost importance in the
conduct of a financial audit.
- The external auditor’s
responsibility involves, in part, the
review of selected accounts and
transactions to determine their
validity, accuracy, and
completeness.

DIGITAL ACCOUNTING RECORDS

large updating, and currency of
information.
● Data Capture and Storage
○ Data storage is an efficient
information system that
captures and stores data
only once and makes this
single source available to
all users who need it.
● Data Updating
○ Data updating is the
periodic updating of data
stored in the files of an
organization.

File Structures
● Digital file structures and storage
techniques vary widely among
transaction processing systems.
● Some structures are effective at
processing all records in large
master files.
● Some file structures are better for
directly locating and processing a
single record in a large file.
● The legacy systems are
mainframe systems implemented
THE DATABASE MODEL
in the late 1960s through the
1980s. ● The database model is a
symbolic model of the structure
of, and the associations between,
THE FLAT-FILE MODEL an organization’s data entities.
● The flat-file model is an ● The database management
environment in which individual system (DBMS) is a software
data files are not related to other system that controls access to
files. the data resource.
● There are three significant ● The most striking difference
problems in the flat-file between the database model and
environment: data storage, data the flat-file model is the pooling of
data into a common database
 that all organizational users ● is a documentation technique
share. used to represent the relationship
among data entities in a system.

Rectangles represent entities (nouns).

Entities can be:

● Resources: automobile, cash,

inventory, a college major.
● Events: ordering inventory,
receiving cash, payment,
shipment, selecting a major.
Documentation Techniques ● Agents: salesperson, vendor,
customer, student.
● Visual images convey vital
system information more Diamonds represent relationships
effectively and efficiently than (verbs). Relationships have inherent
words. cardinalities representing the maximum
● This chapter explains six number of records in one file that relate
documentation techniques: to one record in another file.
● Data flow diagrams, Cardinality is the numeric mapping
● Entity-relationship diagrams, between entities
● Document flowcharts,
● System flowcharts ● 1:1 (one to one): one
● Program flowcharts salesperson is assigned to
● Record layout diagrams one automobile.
● 1:M (one to many): one
Data Flow Diagrams and Entity customer may owe on many
Relationships Diagrams invoices.
Data Flow Diagrams (DFDs) ● M:M (many to many): many
inventory items are purchased
● is the use of a set of symbols in a from many vendors
diagram to represent the
processes, data sources, data DFDs model the processes of a system.
flows, and process sequences of ER diagrams model the data that is
a current or proposed system. used or affected by the system. Each
data store in a DFD represents a
Entity-Relationship (ER) Diagrams corresponding data entity in the ER
● Depict the established diagram.
relationships between entities Data Model
(resources, events, agents).
- is the blueprint for what ultimately Flowcharts
will become the physical
Flowcharts
database.
● represent the physical
relationship between key entities.
● They explain how, where, and by
whom processes are
accomplished:
● Document flowcharts:
○ manual system
components and
processes.
● Systems flowcharts:
○ contain both computerized
system components and
processes.
● Program flowcharts:
○ describe the logic of
application programming.

Document flowcharts

● are typically created by following

the hard copy of business forms
utilized by a company (purchase
order, customer order, etc.) from
beginning to end.
● The internal entities (entities
that perform data processing
of some sort) are presented
as columns in a document
flowchart.
● Other document flowcharting
symbols include: start/end of
processing oval, source
document, manual process,
hardcopy file, accounting
journals, registers, logs and
ledgers, batch totals, on- and
off-page connectors,
 comments, and data flow ○ Lay out the physical areas
arrows. of activity.
○ Transcribe the written facts
Batch processing
into visual format.
● refers to grouping large volumes ● Flowcharting Computer
of similar transactions to increase Processes
efficiency and to control the data ○ Transcribe the written facts
processing. into visual format.
● occurs in both manual and ● contain both manual and
computerized systems. computerized processes.
● Several sums are calculated at ● Compare the system
the initial transaction grouping flowchart to the
(e.g., total sales, total customer Manual/Document
number, the total number of flowcharting: the systems
items, etc.). flowchart has a Computer
● Then, throughout the process, Operations Department as a
these totals can be checked and column and does not have a
verified against the initial totals to Credit Department.
ensure that no transactions have ● Note that the Data Flow
been lost, were added, or were Diagram for both of these
included in error. would be identical. While
● Processing in batches adds there are physical differences,
control over this process. the same processing (the
● Batch size is determined as a “what”) is performed. Note
function of the volume of that the flowcharts (the how,
transactions, the where, by whom) are different
competitiveness of the from each other, both in terms
industry, the normal frequency of columns and symbols
of errors, the financial utilized.
implications of an undetected ● Note the flow lines for some
error, and the costs of files only go one way (read or
processing. write) while others go both
ways (read and write).
System flowcharts
Program Flowcharts
● used to show the relationship
between the key elements—input ● explain what a computer
sources, programs, and output application program does to the
products—of computer systems. data.
● Flowcharting Manual Activities
Record layout diagrams
 ● are used to reveal the internal those that do not share
structure of the records that common records.
constitute a file or database table. ○ Terminals at distributed
● The layout diagram usually sites throughout the
shows the name, data type, and organization are used for
length of each attribute (or field) receiving, processing, and
in the record. sending information on the
status of current
Detailed data structure information is
transactions.
needed for such tasks as identifying
● Many systems incorporate both
certain types of system failures,
real-time and batch processing
analyzing error reports, and designing
features.
tests of computer logic for debugging
and auditing purposes.

Transaction Processing Models

● Alternative transaction
processing models fall broadly
into two types:
○ (1) batch processing and
○ (2) real-time processing.
● Batch processing
○ involves gathering
transactions into groups or
batches and then
processing the entire
batch as a single event.
● Real-time processing systems
○ process individual
transactions continuously
as they occur.
○ is well suited to systems DIFFERENCES BETWEEN BATCH
that process lower AND REAL-TIME SYSTEMS
transaction volumes and
 period of time (a day or a
certain number of days, a
week, etc.) and then is
processed all at once, or in
a "batch." This choice of
procedure creates a time
● Information Time Frame lag between when a
○ Batch systems transaction takes place
■ are systems that and when it is recorded in
assemble the accounting system,
transactions into and only works in
groups for industries that do not need
processing. up-to-the-minute currency
○ Real-time systems in their databases to be
■ are systems that effective in the
process marketplace.
transactions ● Resources: the hardware,
individually at the programming, and training
moment the required to perform the
economic event processing.
occurs. ● Operational Efficiency refers
● Resources to the number of resources
● Operational Efficiency consumed per unit of output.
● Efficiency versus Effectiveness ○ Batch processing is
typically more efficient
when there are large
Computer-Based Accounting volumes of similar
Systems transactions.
○ Efficiency (minimizing the
Differences Between Batch and
consumption of resources)
Real-Time Systems
needs to be evaluated
The two types of computer-based concerning effectiveness
accounting systems with respect to (accomplishing your
transaction processing classes are: goals).
batch systems and real-time systems. ○ If up-to-the-minute
information is required to
● Time Lag refers to the period
properly conduct business
of time between the economic
effectively, then real-time
event and when it is recorded.
processing must be used
○ With batch processing,
(e.g., an Internet retailer,
data is collected over a set
 such as Land's End or ● Advantages of data coding in AIS
J.Crew, or an airline are:
reservation system). ○ Concisely representing
large amounts of complex
information that would
UPDATING MASTER FILES FROM otherwise be
TRANSACTIONS unmanageable.
○ Providing a means of
● Updating a master file record accountability over the
involves changing the value of completeness of the
one or more of its variable fields transactions processed.
to reflect the effects of a ○ Identifying unique
transaction. transactions and accounts
● Master file backup procedures within a file.
● If the current master file becomes ○ Supporting the audit
corrupted or is destroyed, function by providing an
corporate IT professionals can effective audit trail.
retrieve the most current
backed-up file from the archives. NUMERIC AND ALPHABETIC
CODING SCHEMES
Data Coding Schemes
● Sequential Codes
● Data coding ○ are codes that represent
○ involves creating simple items in some sequential
numeric or alphabetic order (ascending or
codes to represent descending).
complex economic ○ ADVANTAGES
phenomena that facilitate ○ DISADVANTAGES
efficient data processing. ● Block Codes
A SYSTEM WITHOUT CODES ○ A numeric block code is a
coding scheme that
● Business organizations process assigns ranges of values
large volumes of transactions that to specific attributes such
are similar in their basic as account classifications.
attributes. ○ A chart of accounts is a
● Uncoded entry takes a great listing of an organization’s
deal of recording space, is accounts showing the
time-consuming to record, and is account number and
obviously prone to many types of name.
errors. ○ ADVANTAGES
○ DISADVANTAGES
A SYSTEM WITH CODES
 ○ Alphabetic codes are
alphabetic characters
assigned sequentially.
○ ADVANTAGES:
Alphanumeric codes are
codes that allow the use of
pure alphabetic characters
embedded within numeric
codes.
○ DISADVANTAGES
BATCH PROCESSING USING
● Mnemonic Codes
REAL-TIME DATA COLLECTION
○ Mnemonic codes are
● A popular data processing alphabetic characters in
approach, particularly for large the form of acronyms and
operations, is to digitally capture other combinations that
and process aspects of the convey meaning.
transaction at the source as they ○ ADVANTAGES
occur, and process other aspects ○ DISADVANTAGES
of the transaction in batch mode.
Appendix - Data Structures
● Deadlock or “wait”
○ is a state that occurs ● Data structures
between sites when data ○ are techniques for
are locked by multiple physically arranging
sites that are waiting for records in a database.
the removal of the locks ● Organization
from the other sites. ○ refers to the way records
are physically arranged on
the secondary storage
NUMERIC AND ALPHABETIC device (e.g., a disk).
CODING SCHEMES (continued) ● Access method
○ is a technique used to
● Group Codes
locate records and
○ Group codes are used to
navigate through the
represent complex items
database.
or events involving two or
● Flat-file approach
more pieces of related
○ is an organizational
data.
environment in which
○ ADVANTAGES
users own their data
○ DISADVANTAGES
exclusively.
● Alphabetic Codes
● SEQUENTIAL STRUCTURE
○ Sequential structure
■ is a data structure
● INDEXED STRUCTURE
in which all records
○ Indexed structure
in the file lie in
■ is a class of file
contiguous storage
structure that uses
spaces in a
indexes for its
specified sequence
primary access
arranged by their
method.
primary key.
○ Indexed random file
○ Sequential access
■ is a randomly
method
organized file
■ is a method in
accessed via an
which all records in
index.
the file are
● VIRTUAL STORAGE ACCESS
accessed
METHOD STRUCTURE
sequentially.
○ Virtual storage access
○ Sequential files
method (VSAM)
■ are files that are
■ is a structure used
structured
for very large files
sequentially and
that require routine
must be accessed
batch processing
sequentially.
and a moderate
● DIRECT ACCESS
degree of individual
STRUCTURES
record processing.
○ Direct access structures
■ is the storage of
data at a unique
location, known as
an address, on a
hard disk or floppy
disk.
 primary key of a
record directly into
a storage address.
● POINTER STRUCTURE
○ Pointer structure
■ is a structure in
which the address
(pointer) of one
record is stored in
the field on a
related record.
○ Types of Pointers:
■ A physical
address pointer
● contains the
actual disk
storage
location
(cylinder,
surface, and
record
number) that
the disk
controller
needs.
■ A relative address
pointer
● contains the
relative
position of a
record in the
file.
● A logical key
pointer
contains the
● HASHING STRUCTURE
primary key
○ Hashing structure
of the related
■ is a structure
record
employing an
algorithm that
converts the
 ○ are more likely to be
client-server networks of
distributed data processing
in real-time, where
transactions are stored in
databases in real-time.

Database Backup Procedures

● Each record in a database needs

a unique identifier (field or
combination of fields) so that the
record can be updated accurately
with confidence.
● Destructive updating is when the
prior field contents are replaced
with the new field contents.
Therefore, before each update, a
backup is typically created.

Batch Processing using Real-Time Data

Collection

Real-time transaction file creation and

subsidiary ledger update with the
delayed batch mode of sales journal and
general ledger master file updating for
Alternative Data Processing efficiency purposes.
Approaches
Real-Time Processing
Legacy Systems versus Modern
Excellent for systems that process lower
Systems
transaction volumes (reducing the
● Legacy systems efficiency reason for batches) and do
○ typically use a large not share common records (eliminating
mainframe computer, are the need to “lock” master files).
batch-oriented, and can
have highly structured and
inflexible storage systems.
○ The appendix to this
chapter discusses the
details of legacy systems.
● Modern systems
REVIEWER
 CHAPTER 3 Some firms address ethical issues
ETHICS, FRAUD, AND INTERNAL through:
CONTROL
● Ethics training and awareness
Ethical Issues in Business in the workplace
● Greater commitment of top
Ethical standards are derived from management to improving ethical
societal mores and deep-rooted standards.
personal beliefs about issues of right ● Written codes of
and wrong that are not universally ethics/conduct to communicate
agreed upon. management’s expectations
(Johnson and Johnson’s “credo”
of corporate values).
● Programs to encourage moral
What is Business Ethics?
development and implement
Ethics pertains to the principles of ethical guidelines.
conduct that individuals and business ● Techniques to monitor
managers use in guiding their behavior compliance.
and choices. It involves not only
knowing what is right but also knowing
how to achieve what is right. Management is responsible to
maintain an ethical environment, to limit
opportunity and
Ethics in business can be divided into
temptation for unethical behavior within
four areas:
the company. A company’s commitment
● Equity (fairness and lawful to ethics should be above their
practices in the marketplace), commitment to short-term profits and
● Rights (individual employee efficiency.
rights),
● Honesty (behavior), and
● Exercise of corporate power Moral Reasoning Stages of
(working condition choices). Development: Kohlberg’s Stages of
Moral Development
Ethical behavior is a necessary but not
sufficient condition for business success (Kohlberg’s model was created
in the long run. (Inherently, this specifically for the framework of child
statement is saying that businesses that development and has been widely
behave unethically should be punished). criticized for promoting the inherent
value system of its author. The original
Kohlberg model organized a child’s ● Proportionality: The ethical
values development from parental benefit from a decision must
punishment/rewards to organizational outweigh the risks.
belonging/success (local maximization) ● Justice: The benefits should be
to greater social contracts/justice distributed fairly to those affected.
(forgoing one’s individual gains for the ● Minimize Risk: The decision
sake of societal gain). The should minimize all risks and
representation in the Hall textbook is an avoid unnecessary risks.
interpretation of the Kohlberg model.

Stage 1 (lowest): Punishment

orientation: obey rules to avoid What is Computer Ethics?
punishment

Stage 2: Reward orientation: obey rules

Computer Ethics is the analysis of the
to obtain the reward
impact of computer technology and the
Stage 3: Good boy/girl orientation: obey policies for the ethical use of such
rules to receive approval technology. It involves software,
hardware, and network behaviors. Three
Stage 4: Authority orientation: obey levels of computer ethics:
rules to be perceived as performing
one’s duty ● Pop ethics: staying current with
the media.
Stage 5: Social contract orientation: ● Para ethics: having real interest
obey rules to obtain the respect of peers and acquiring some skill and
and maintain self-respect knowledge in the field.
● Theoretical ethics:
Stage 6 (highest): Ethical Principle multidisciplinary application of
Orientation: rules are guided by ethical theories to computer
self-selected ethical principles that science.
promote self-esteem.

Many argue that computer ethics are no

Every business decision has ethical different in nature than traditional issues
risks and benefits. Your ethical (property rights, copyright, trade secrets,
responsibility is the balancing between patent laws). The following issues of
these consequences. The following concern involve computer ethics and
principles have been provided for may generate class discussions:
guidance on these decisions:
● Privacy: how much information through other people’s files, or
about you is available to others? using a business’ computer for
How much information about personal purposes?
yourself do you really own?
● Security (Accuracy and
Confidentiality): How can you
Managers must establish and maintain a
avoid authorized/unauthorized
system of internal controls to ensure the
individuals accessing or changing
integrity and reliability of their data.
your computerized information?
Where is the balance between
safe data and open shared
resources? Fraud and Accountants
● Ownership of Property: Can an
individual own ideas? Media?
Source or object code? Do
copyright laws and patents Fraud is a false representation of a
restrict the progress of material fact made by one party to
technology? another party with the intent to deceive
● Equity in Access: Does the and to induce the other party to rely on
economic status of an individual the fact to his or her detriment. Many
restrict him/her from access to a times, alleged fraud is just poor
career in information technology? management decisions or adverse
● Environmental Issues: Do business conditions.
high-speed printers cause less
Common law asserts that for an act to
responsibility for reducing paper
be considered fraudulent, it must meet
waste?
five requirements:
● Artificial Intelligence: Who is
responsible for the decisions that 1. There must be a false
an expert system or a bot might representation, statement or a
make on behalf of a business? nondisclosure.
● Unemployment and 2. There must be a material fact, a
Displacement: When a business substantial factor in inducing
downsizes employees because a someone to act.
computer now performs their 3. There must be intent to deceive.
jobs, is that business responsible 4. The misrepresentation must have
to retrain the displaced resulted in justifiable reliance
employees? causing someone to act.
● Misuse of Computers: How do 5. The deception must have caused
you feel about copying software, injury or loss to the victim of the
MP3 music files, snooping fraud.
Business fraud is an intentional commit fraud and should look at the top
deception, misappropriation of assets, management of the companies they
or manipulation of financial data to the audit to find the answers to questions
advantage of the perpetrator. Two types such as :
of fraud discussed in this chapter are
employee fraud and management fraud. ● Personal: Do any of the
managers have a lot of debt? Are
Employee fraud is committed by they living beyond their means?
non-management personnel and usually Are they gambling? Do they
consists of an employee taking cash or abuse substances?
other assets for personal gain and ● Environment: Are economic
concealing their actions. conditions unfavorable?
● Business: Does the company use
Management fraud is committed at several different banks, none of
higher levels and usually does not which see the company’s entire
involve the direct theft of an asset. It is financial picture? Are there close
generally more difficult to detect for the associations with any supplier?
following reasons:
Financial Losses From Fraud
● The fraud occurs at levels that
are above internal control
mechanisms.
● The fraud occurs by managers The opportunity seems to be the overall
who can manipulate financial most important factor associated with
statements through either the fraud. Opportunity can be defined as
expense allocations or revenue control over assets or access to assets.
recognition. Opportunity is characterized in this
● The misappropriation of assets dataset with a higher management
can be covered up with complex position, which is mostly filled by older,
transactions, often involving third more educated males at this time in
parties. history.

Factors That Contribute to Fraud Fraud Schemes

The three broad categories of fraud schemes

Forces that interact to motivate an
to be discussed in this class are fraudulent
individual to commit fraud can be financial statements, corruption, and asset
categorized as situational pressures misappropriation.
(high), opportunity (high), and personal
characteristics/ethics (low).

Auditors should look to many places to Fraudulent Financial Statements

determine management’s motivations to
For financial statements to be services, management functions,
fraudulent, the statement itself must human resources, broker or
bring financial benefit to the perpetrator, dealer, investment adviser, or
either direct or indirect. The investment banking services,
manipulation of the financial statement legal services, expert services
cannot just be a vehicle to hide the unrelated to the audit, and any
fraudulent act. other service that the PCAOB
determines impermissible.
Underlying problems include: ● Corporate governance and
responsibility through the board
● Lack of auditor independence
of directors’ audit committee, who
● Lack of director independence
need to be independent of the
● Questionable executive
company, and be the ones who
compensation schemes
hire and manage the external
● Inappropriate accounting
auditors. Public corporations are
practices
prohibited to make loans to their
Sarbanes-Oxley Act – July 2002, executive officers and directors,
passed by US Congress and signed by and attorneys must report
President Bush. This act reforms evidence of material violations of
oversight and regulation of public securities laws or breaches of
company directing and auditing. Its fiduciary duty to the CEO, CFO or
principle reforms involve: PCAOB.
● Disclosure requirements include
● The creation of an accounting all off-balance sheet transactions,
oversight board (PCAOB) SEC filings containing a
empowered to set auditing, statement by management
quality control, and ethics asserting that they are
standards, to inspect registered responsible for creating and
accounting firms, to conduct maintaining adequate and
investigations, and to take effective internal controls and that
disciplinary actions. the officers certify that the
● Auditor independence: Engaged accounts fairly present the
auditors cannot provide other financial condition and results of
services to their clients including: operations. Knowingly filing false
bookkeeping, AIS design and certification is a criminal offense.
implementation, appraisal or ● Penalties for fraud and other
valuation services, fairness violations, such as making it a
opinions, or contribution-in-kind federal offense for destroying
reports, actuarial services, documents or audit work papers,
internal audit outsourcing to be used in an official
 proceeding or actions against ● Charges to expense accounts.
whistleblowers. ● Lapping: an employee who has
access to customer checks and
Corruption to accounts receivable records
steals some money, and then
Corruption involves collusion with an
uses the next check that comes
outside entity. The four principal types of
in to cover the last amount stolen
corruption include:
(so that the customers never
● Bribery: Offering, giving, or notice). This can continue until
receiving things of value to the employee leaves the
influence an official in the company or takes a vacation, or
performance of his/her lawful is switched to another position.
duties (before the fact). ● Transaction Fraud: involves
● Illegal Gratuities: Offering, deleting, altering, or adding false
giving, requesting, or receiving transactions to divert assets to
something of value because of an the perpetrator (false invoices,
official act that has been taken false paychecks, etc.).
(after the fact). ● Computer Fraud Schemes:
● Conflicts of Interest: When an Computer environments are
employee acts on the behalf of a subject to their own kinds of
third party during the discharge of fraud. Computer fraud can
duties or has self-interest in the include theft of assets by:
activity being performed. ○ altering computer data
● Economic Extortion: Threat or records,
use of force (including economic ○ altering the logic of
sanctions) by an individual or software programming,
organization to obtain something ○ theft or illegal use of
of value. computer information,
○ theft, copying, or
Asset Misappropriation destruction of software,
and
Asset Misappropriation is the most ○ theft, misuse, or
common form of fraud, the CFE found destruction of hardware.
85 percent of fraud cases to be asset
misappropriations. Transactions
involving the case, checking accounts,
inventory, supplies, equipment, and Computer assets are vulnerable to theft
information are the most vulnerable or destruction at each phase of the
assets. Examples of asset accounting information system.
misappropriation schemes include:
● Data Collection: This phase of output, either on-screen or in
the system is most vulnerable hard copy. It can also involve
because it is very easy to change scavenging (searching through
data as it is being entered into the trash cans of a company for
the system. Fraudulent discarded outputs) or
transactions or dollar amounts eavesdropping (listening to
can be keyed into the system and electronic transmissions). The
thefts can thus be covered up. information must have the
Data must be valid, complete, following characteristics:
free from material errors, ● Relevance: It affects the
relevant, and efficiently collected. employee’s decisions regarding
● Masquerading is an the task at hand.
unauthorized user entering the ● Timeliness: It can be no older
system as an authorized user. than the time period of the action
● Piggybacking is tapping into the that it supports.
telecommunication lines and ● Accuracy: It must be free of
latching onto an authorized user material errors.
who is logging into the system. ● Completeness: No essential
Once inside, the perpetrator can piece of information is missing.
go their own way. ● Summarization: Information is
● Data Processing: Frauds can be aggregate in accordance with the
a program or operation fraud. user’s needs.
● Program fraud includes altering
programs to allow illegal access,
introduce a virus, or alter a
program’s logic to cause incorrect Internal Control Concepts and
data processing. Procedures
● Operation fraud is the misuse of
Foreign Corrupt Practices Act of 1977
company computer resources, for
example, for personal use or Requires companies registered with the
personal business. SEC to:
● Database Management: Fraud
at this phase of the system ● Keep records that fairly and
involves altering, destroying, or reasonably reflect the
stealing the company's data transactions of the firm and its
either in storing, retrieving, or financial position, and
deleting tasks. ● Maintain a system of internal
● Information Generation: Frauds control that provides reasonable
here involves misrepresentation, assurance that the organization’s
theft, or misuse of the computer objectives are met.
Internal Control in Concept management override, and
changing conditions.

Exposures and Risks

Internal control systems include all of
the policies, practices, and procedures Assets are subject to the risk of losses,
employed by the organization to achieve termed exposures if internal controls
four broad objectives (according to are weak in a particular area. Exposures
AICPA’s SAS#1, sec. 320): can lead to the following kinds of
problems:
● to safeguard assets of the firm,
● to ensure the accuracy and ● Destruction of the asset
reliability of accounting records ● Theft of the asset
and information, ● Corruption of information or of the
● to promote the efficiency of the information system
firm's operations, and ● Disruption of the information
● to measure compliance with system
management's prescribed
policies and procedures.

The Preventive-Detective-Corrective
Internal Control Model is a very useful
Modifying Assumptions for systems model to approach risk management.
designers and auditors include:
● Preventive controls are
● Management Responsibility: designed to reduce the
Management is ultimately opportunities for the commission
responsible. of errors or fraud. They are
● Reasonable assurance: The passive controls, meaning that
internal control system should they are integrated into the
provide reasonable rather than system in the hopes of preventing
absolute assurance. errors and fraud before they
● Data Processing Methods: The happen. They provide
methods utilized for data safeguards that are built into the
processing will change the types system's routine procedures.
of internal controls needed and ● Detective controls are designed
utilized to achieve the four to detect errors or fraud after they
objectives. have occurred. These controls
● Limitations: Every system has compare what has actually
limitations including the possibility happened with what was
of error, circumvention, supposed to happen. If deviations
occur, they are identified.
 ● Corrective controls are the recommendations of the US
measures taken to correct errors, Congress’ Committee of Sponsoring
especially material ones, once Organizations of the Treadway
they have been detected. Such Commission (COSO).
measures should be taken with
Internal Control Components
caution after the reasons for the
errors have been found. If an According to SAS No. 78, internal
error is a minor one, it may not be control consists of the control
worth analyzing and correcting. environment, risk assessment,
Auditing and Auditing Standards information and communication
activities, monitoring activities, and
control activities.

Auditors are guided in their professional Control Environment

responsibilities by GAAS (Generally
Accepted Auditing Standards), in The Control Environment is the
addition to many other Statements on foundation of internal control and sets
Auditing Standards. the tone for the organization. Important
elements of the control environment
● General qualification standards include:
refer to the background that is
necessary to be an auditor. ● The integrity and ethical values of
● Fieldwork standards refer to the management
level of investigative ● The organizational structure of
professionalism that is required the company
while conducting an audit. Note ● The role and participation level of
that the second fieldwork the board of directors and of the
standard refers to an audit committee
understanding of the internal
Is there an internal auditing department
control structure.
that reports to the audit committee?
● Reporting standards refer to the
requirements an auditor must ● Management's philosophy or
follow when rendering a approach to running the company
professional opinion. ● Delegation of responsibility and
authority
The Statement on Auditing Standards
No. 78 discusses the complex Is there proper segregation of duties
relationship between the firm’s internal between authorization, custody, and
controls, the auditor’s assessment of accounting?
risk, and the planning of audit
procedures. This statement conforms to
 ● Methods for evaluating adopting a new accounting principle that
performance impacts the financial statements.
● External influences, such as Auditors are required by SAS No. 78 to
examinations by outside parties obtain an understanding of their clients'
● The organization's policies and methods for assessing risk.
practices for managing its human
resources

SAS 78 requires the auditors to obtain Information and Communication

sufficient knowledge to assess the
Managers are responsible for
attitude and awareness of an
developing, implementing, and
organization's management, the board
maintaining a good system of
of directors, and owners to determine
Information and Communication for
the importance of internal control in their
all in the organization. The accounting
organization. Techniques they could
information system consists of the
utilize include background checks,
records and methods used to initiate,
reputation, integrity, external conditions,
identify, analyze, classify, and record the
knowledge of the client’s industry, and
organization’s transactions and account
specific business.
for the related assets and liabilities.
Management should adopt the
The quality of information generated by
provisions of the Sarbanes-Oxley Act
an organization's accounting information
by:
system will impact the reliability of the
● Separating the roles of CEO and organization's financial statements.
chairman, Auditors are required to obtain an
● Setting ethical standards, understanding of the classification of
● Establishing an Independent material transactions, the processing of
Audit Committee those transactions in the accounting
● Compensation Committees records, and the utilization of processed
● Nominating Committees data in the preparation of financial
● Access to Outside Professionals statements.

Risk Assessment Effective accounting information

systems will:
Management must assess the risks of
their business and their environment. ● Identify and record all valid
Such risk would be increased by, for financial transactions.
example, rapid growth, new competitors, ● Provide timely information about
new product lines, organizational transactions in sufficient detail to
restructuring, entering foreign markets, permit proper classification and
implementation of new technology, or financial reporting.
 ● Accurately measure the financial designed specifically to monitor the
value of transactions so their functioning of internal controls. A good
effects can be recorded in reporting system, reviewed by
financial statements. management, is also an excellent
● Accurately record transactions in monitoring information system.
the time period in which they
occurred. Control Activities

Auditors are required to obtain sufficient Control Activities are the policies and
knowledge of the information system to procedures used to ensure that
understand: appropriate actions are taken to deal
with the identified risks. There are two
● The classes of transactions that categories, computer controls, and
are material to the financial physical controls.
statements and how those
transactions are initiated. Computer Controls can be categorized
● The accounting records and into two groups: general controls and
accounts that are used in the application controls.
processing of material
● General Controls pertain to
transactions.
pervasive, entity-wide concerns
● The transaction processing steps
such as access and approval,
involved from the initiation of a
such as human resources and
transaction to its inclusion in the
project management.
financial statements.
● Application Controls pertain to
● The financial reporting process
the details of specific systems,
used to prepare financial
such as payroll.
statements, disclosures, and
accounting estimates. Physical Controls typically relate to
manual procedures. Traditionally, there
Monitoring
are six categories of physical controls
Monitoring must be performed to activities:
determine that the internal controls are
● Transaction Authorization:
functioning as intended.
Employees should only be
Monitoring may be performed by internal carrying out authorized
auditors who periodically test controls transactions. Authorizations may
and report to management any be general or specific. General
weaknesses that could be a cause for authorization may be granted to
concern. Monitoring can also be employees to carry out routine,
performed continuously through the everyday procedures while
implementation of computer modules specific authorization may be
 needed for non-routine is unable to observe employees
transactions. who work with the system.
● Segregation of Duties: The key ● Accounting Records are the
segregations should be between source documents, journals, and
the authorizing and the ledgers of a business. These
processing of a transaction and documents provide the audit trail
between the custody of an asset for all the company's economic
and its record-keeping. The transactions. Audit trails are also
system must be designed so that created in computer-based
it would take more than one systems, but the form and
employee to successfully carry appearance of the accounting
out a fraudulent act. In a records are different from those in
computerized system, however, a manual system (hashing
many duties that must be techniques, pointers, indexes,
segregated in a manual system embedded keys). Auditors must
may be combined because understand system controls to
computers do not make errors or know their impact on the audit
commit fraud. Nevertheless, in a trails of the records.
computer-based system, ● Access Controls safeguard
segregation should exist between assets by restricting physical
the functions of program access. In computer-based
development, program systems, access controls should
operations, and program reduce the possibilities of
maintenance. Figure 3-6 computer fraud and losses from
illustrates the top 3 objectives for disasters. Access controls should
the segregation of duties. limit personnel access to central
● Supervision is referred to as a computers, restrict access to
compensating control because it computer programs, provide
comes into play when there is not security for the data processing
an adequate separation of duties center, provide adequate backup
and employees must double up for data files, and provide for
on tasks. This control is disaster recovery.
especially important for ● Independent Verification
computer-based systems as procedures identify errors and
often management must hire misrepresentations and can be
from a small supply of technically performed by both managers and
competent individuals, these computers. For example,
individuals have access to much managers can review financial
of the organization’s sensitive and management reports, and
data, and because management computers can reconcile batch
 totals or subsidiary accounts with
control accounts. Management
can assess an individual
application’s performance,
processing system integrity, and
data accuracy. Examples of
independent verification include
reconciling batch totals at various
points of processing, comparing
physical assets with accounting
records, reconciling subsidiary
ledgers with general ledger
control accounts, and reviewing
management reports.

The Importance of Internal Controls

The five components of internal control

are: environment, risk assessment,
information and communication,
monitoring, and control activities.
Understanding internal control will guide
the auditor in the planning of specific
tests to determine the likelihood and the
extent of financial statement
misrepresentation.

for further discussion click here

 CHAPTER 8 FINANCIAL REPORTING SYSTEM

Financial Reporting & Management - law dictates management’s

Reporting Systems responsibility for providing
stewardship information to
external parties
- much of information provided
takes form of standard financial
statements, tax returns, &
documents required by regulatory
agencies such as SEC
- primary recipients of financial
information are external users,
such as stockholders, creditor, &
government agencies

- Financial reports are useless w/o FINANCIAL REPORTING

management reports PROCEDURES

JOURNAL VOUCHER - insert image

1. capture transaction
- Source of input to general ledger 2. record in special journal
is journal voucher 3. post to subsidiary ledger
- a journal voucher which can be 4. post to general ledger
used to represent summaries of 5. prepare unadjusted trial balance
similar transaction, identifies the 6. make adjusting entries
financial amounts & affected 7. journalize & port adjusting entires
general ledger (GL) accounts 8. prepare adjusted trial balance
9. prepare financial statement
GLS DATABASE
10. journalize & post closing entries
● general ledger master file 11. prepare post closing trial balance
● general ledger history file
● Journal voucher file
● Journal voucher history file
● responsibility center file
● budget master file
- Insert pic
COSO CONTROL ISSUES

- Transaction authorization
- Segregation of duties
- Access controls
- Accounting records
- Independent Verification

MANAGEMENT REPORTING SYSTEM

FACTORS THAT INFLUENCE THE

MRS

- insert pyramid pic

- insert classification pic

PROGRAMMED REPORTING

RESPONSIBILITY ACCOUNTING

- insert bottom up flow

- insert cost center performance
report