Summary AIS [Hall]

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Summary - AIS [Hall]

  • 1 The information system: an accountant's perspective

  • What is a system?

    A system is a group of two or more interrelated components or subsystems that serve a common purpose 

    A system can be natural (nature made) and artificial (manmade).

  • Which four elements of a system have to be kept in mind?

    A system exists of multiple components

    The multiple parts have to show relatedness so a common objective can be reached.

    A system is called a subsystem when it is viewed in relation to the larger system of which it is a part. The authors use the trms interchangeably.

    A system must serve at least one purpose.

  • What is an information system?

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

  • What is a transaction?

    A transaction is an event that affects or is of interest to the organization and is processed by its information system as a unit of work.

  • What is a financial transaction?

    An economic event that affects the assets and equities of the organization, is reflected in its accounts, and is measured in monetary terms.

  • What are nonfinancial transactions?

    Events that do not meet the narrow definition of a financial transaction.

  • What are the three majoor subsystems of the AIS?

    1. The transaction processing system (TPS), which supports daily business operations with numerous reports, documents, and messages for users throughout the organization. The TPS deals with business events that occur frequently. It consists of three transaction cycles: revenue cycle, expenditure cycle and conversion cycle. These three will be explained in later chapters.

    2. The general ledger/financial reporting system (GL/FRS), which produces the traditional financial statements, such as the income statement or balance sheet and other reports required by law.

    3. The management reporting system (MRS), which provides internal management with special-purpose financial reports and information needed for decision making such as budgets, variance reports, and responsibility reports.

  • What is data?

    Data are facts, which may or may not be processed (edited, summarized or refined) and

    have no direct effect on the end user.

  • What is information?

    Information causes the user to take an action that he or she otherwise could not, or would not, have taken. It produces a certain (non-) response. Simply defined as processed data.

  • What are external financial transactions?

    External financial transactions are economic exchanges with other business entities and individuals outside the firm.

  • What is data collection?

    The objective of data collection is to ensure that event data entering the system are valid, complete and free from material bias. It is very important for data collection procedures to be relevant (depends on needs of user) and efficient (data should be collected only once).

  • What is data processing?

    It includes the transformation of data into information

  • What is a database?

    A database is a physical repository for financial and non-financial data and its contents can be represented in a logical hierarchy attribute, record, file.

  • What is the data attribute?

    The data attribute is the most elemental piece of potentially useful data in the database. An attribute is a logical and relevant characteristic of an entity about which the firm captures data.

  • What is a record?

    A record is a complete set of attributes for a single occurrence within an entity class. To find a particular record within the database, we must be able to identify it uniquely.

  • What is a file?

    A file is a complete set of records of an identical class.

  • What are the three fundamental tasks of database management?

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

  • What is information generation?

    Information generation is the process of compiling arranging, formatting, and presenting information to users.

  • What characteristics should useful information have?

    relevance, timeliness, accuracy, completeness, summarization.

  • What is feedback?

    A form of output that is sent back to the system as a source of data

  • What are the objectives of information systems?

    To support the stewardship function of management.

    To support management decision making.

    To support the firm’s day-to-day operations.

  • Which two options are there for the acquisition of information systems?

    Buying a commercial IS or developing it in-house

  • What are the three basic types of commercial software?

    turnkey systems, backbone systems and vendor-supported systems. 
    Turnkey systems are completely finished and tested systems that are ready for implementation. 
    Backbone systems consist of a basic system structure on which to build. 
    Vendor-supported systems are custom systems that client organizations purchase commercially rather than develop in-house --> the software vendor designs, implements and maintains the system for its client.

  • What are the common approaches to structure organizations?

    1. Geographic location

    2. Product line For firms producing multiple diversified products.

    3. Business function Based on tasks (marketing, accounting, productions etc.)

  • What is the accounting function and what roles does it have?

    The accounting function manages the financial informational resource of the firm. It has two important roles in transaction processing.

    1. Accounting captures and records the financial effects of the firm’s transactions.

    2. The accounting function distributes transaction information to operations personnel to coordinate many of their key tasks.

  • What is reliable information?

    Reliable information is that information which has the following attributes: relevance, accuracy, completeness, summarization and timeliness.

  • What are the two extremes to structure the IT function?

    Centralized data processing and distributed data processing

  • What is centralized data processing?

    All data processing is performed by one or more large computers housed at a central side that serve users throughout the organization. IT activities are consolidated and managed as a shared organization resource (1-9). End users compete for these resources on the basis of need. The IT function is usually treated as a cost center whose operating costs are charged back to the end users.

  • Which areas of operation are included in centralized data processing?

    Database administration: A special independent group, headed by the database administrator, is responsible for the security and integrity of the database.

    Data processing: This group manages the computer resources used to perform the day-to-day processing of transactions. It may consist of the following functions:

    1. Data control – Was responsible for receiving batches of transactiondocuments for processing from end users and then distributing computer output back to users. Today this function is usually automated and distributed back to the end users.

    2. Data conversion – Transcribes transaction data from source (paper) documents to digital media (tape or disk) suitable for computer processing by the central computer, which is managed by the computer operations group.

    3. Computer operations – See above.

    4. Data library – safe storage for the offline data files

    Systems development and maintenance: The system development group is responsible for analyzing user needs and for designing new systems to satisfy those needs. Once a new systems has been designed and implemented, the systems maintenance group assumes responsibility for keeping it current with user needs.

  • What is distributed data processing?

    it involves reorganizing the IT function into small information processing units (IPUs) that are distributed to end users and placed under their control. IPUs may be distributed according to business function, geographic location, or both (1-11). The central IT function has been eliminated from the organization structure.

  • What are the advantages and disadvantages of DDP?

    Disadvantages of DDP – loss of control, inefficient use of resources, the destruction of audit trails, inadequate segregation of duties, an increased potential for programming errors and systems failures and the lack of standards.

    Advantages of DDP – cost savings, increased user satisfaction, and improved operational efficiency.

  • What is the manual process model?

    Is the oldest and most traditional form of accounting systems. Manual systems constitute

    the physical events, resources, and personnel that characterize many business processes. It

    includes tasks as order-taking, warehousing materials, manufacturing goods for sale,

    shipping goods to customers, and placing orders with vendors. It also includes the physical

    task of record keeping. These days, manual records are never used in practice.

  • What is the flat-file model?

    Is often associated with so-called legacy systems. These are large mainframe systems that were implemented in late 1960s through the 1980s. Organizations still use these systems extensively. The flat-file model describes an environment in which individual data files are not related to other files. End users own their data files rather than share them with other users. Thus, stand-alone applications rather than integrated systems perform data processing (1-12). 

  • What are the significant problems trough which data redundancy contributes in the flat file environment?

    • Data storage – an efficient system captures and stores data only once and makes this single source available to all users who need it. In the flat-file environment, this is not possible.

    • Data updating – organizations have a great deal of data stored in files that require periodic updating to reflect changes. When users keep separate files, all changes must be made separately for each user. This adds to the task and cost of data management.

    • Currency of information – is the problem of failing to update all the user files affected by a change in status.

    • Task-data dependency – the user’s inability to obtain additional information as his or her needs change. New information needs tend to be satisfied by procuring new data files; this adds to data redundancy, and drives data management cost higher.

    • Flat-files limit data integration – files are structured, formatted, and arranged to suit the specific needs of the owner or primary user of the data. It may exclude data attributes that are useful to other users, thus preventing successful integration of data across the organization. 

  • What is the database model?

    This model centralizes the organization’s data into a common database that is shared by other users. Access to the data resource is controlled by a database management system (DBMS). 

  • What is a DBMS?

    The DBMS is a special software system that is programmed to know which data elements each user is authorized to access. The organization’s procedures for assigning user authority are an important control issue for auditors to consider. 

  • What is a traditional system?


    It means that the organization’s IS applications (its programs) function independently of each other rather than as an integrated whole. 

  • What is the history of database systems?

    Early database management systems were designed to interface directly with existing flat-file programs. Another factor that limited integration was the structured database model. These models were inflexible and did not permit the degree of data sharing that is found in modern database models. True integration would not be possible until the arrival of the relational database model. This flexible database approach permits the design of integrated systems application capable of supporting the information needs of multiple users from a common set of integrated database tables. 

  • What is the REA model?

    It is an accounting framework for modelling an organization’s critical resources, events, and agents (REA) and the relationship between them. Once specified, both accounting and non accounting data about these phenomena can be identified, captured, and stored in a relational database. The availability of multiple views allows flexible use of transaction data and permits the development of AIS that promote, rather than inhibit, integration. 

    REA model requires that accounting phenomena be characterized in a manner consistent with the development of multiple user views. Business data must not be preformatted or artificially constrained and should reflect all relevant aspects of the underlying economic events. As such, REA procedures and databases are structured around events, rather than accounting artifacts such as journals, ledgers, charts of accounts, and double-entry bookkeeping. 

  • What are the resources, events and agents in the REA model?

    Resources: are the assets of the organization. They are defined as objects that are both scarce and under the control of the enterprise.

    Events: are phenomena that affect changes in resources. They can result from activities such as production, exchange, consumption, and distribution. It are the critical information elements of the accounting system and should be captured in a highly detailed form to provide a rich database.

    Agents: are individuals and departments that participate in an economic event. They are parties with discretionary power to use or dispose of economic resources.

  • What is enterprise resource planning?

    It is an IS 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.

    Because of the complexity and size of ERPs, few organizations are willing or able to commit the necessary financial and physical resources and incur the risk of developing an ERP system in-house.

    One of the problems with standardized modules is that they may not always meet the organization’s exact needs. 


  • What is the role of an accountant?

    Accountants are primarily involved in three ways: as system users, designers, and auditors.    

  • What are accountants as users?

    In most organizations, the accounting function is the single largest user of IT. All systems that process financial transactions impact the accounting function in some way. As end users, accountants must provide a clear picture of their needs to the professionals who design their systems. 

  • What are accountants as system designers?

    Today, we recognize that the responsibility for systems design is divided between accountants and IT professionals as follows: the accounting function is responsible for the conceptual system, and the IT function is responsible of the physical system. The design of 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. The physical system is the medium and method for capturing and presenting the information. 

  • What is the difference between an internal and external auditor?

    The tasks external and internal auditors perform are similar. The feature that most clearly distinguishes the two groups is their respective constituencies. External auditors represent third-party outsiders, whereas internal auditors represent the interest of management. 

  • What are internal financial transactions?

    Internal financial transactions involve the exchange or movement of resources within the organization.

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What are internal financial transactions?

Internal financial transactions involve the exchange or movement of resources within the organization.

What is the generalized audit software?  

GAS is the most widely used CAATT for IS auditing. GAS allows auditors to assess electronically coded data files and perform various operations on their contents.  

What is the embedded audit module?  

The embedded audit module (EAM) techniques use one or more programmed modules embedded in a host application to select, for subsequent analysis, transactions that meet predetermined conditions.  

What are substantive testing techniques?

Substantive tests are so named because they are used to substantiate dollar amounts in account balances. Substantive tests include but are not limited to the following:

  1. Determining the correct value of inventory;

  2. Determining the accuracy of prepayments and accruals;

  3. Confirming accounts receivable with customers;

  4. Searching for unrecorded liabilities. 

What is a parallel simulation?

involves creating a program that simulates key features or processes of the application under review. The simulated application is then used to reprocess transactions that the production application previously processed. See figure 17-15 on page 761. The steps involved in parallel simulation testing:

  1. The auditor must gain a thorough understanding of the application under review. The documentation must be complete and current;

  2. The auditor must identify those processes and controls in the application that are critical to the audit. These are the processes to be simulated;

  3. The auditor creates the simulation using a fourth generation language or generalized audit software;

  4. The auditor runs the simulation program using selected production transactions and master files to produce a set of results;

  5. Finally, the auditor evaluates and reconciles the test results with the production results produced in the previous run. 

What is an integrated test facility (ITF)?

Is an automated technique that enables the auditor to test an application’s logic and controls during its normal operations. 


What is tracing?  

Is another form of the test data technique an performs an electronic walk-through of the applications internal logic. It involves three steps:

  1. The application under review must undergo a special compilation to activate the trace option;

  2. Specific transactions or types of transactions are created as test data;

  3. The test data transactions are traces through all processing stages of the program, and a listing is produced of all programmed instructions that were

    executed during the test. 

What is a base case system evaluation (BCSE)?  

Is a variant of the test data approach. BCSE tests are conducted with a set of test transactions containing all possible transaction types. These are processed through repeated iterations during systems development testing until consistent and valid results are obtained. These results are the base case. When subsequent changes to the application occur during maintenance, their effect are evaluated by comparing current results with base case results. 

What is the test data method?  

used to establish application integrity by processing specially sets of input data through production applications that are under review. The results of each test are compared to predetermined expectations to obtain an objective assessment of application logic and control effectiveness. 

What is white box testing?

The white box approach relies on an in-depth understanding of the internal logic of the application being tested. The most common types of tests of controls include:

  • -  Authenticity tests;

  • -  Accuracy tests;

  • -  Completeness tests;

  • -  Redundancy tests:

  • -  Access tests;

  • -  Audit trial tests;

  • -  Rounding error tests