Unit 2: Overview of Accounting Information Systems

Question 1

What are three fundamental information objectives common to all organizations?

Answer 1

1. To support the firm’s day-to-day operations.
2. To support management decision making
3. To support the stewardship function of management. (Stewardship refers to managers’ responsibility to properly manage the resources of the firm and to report on their activities)

Question 2

What is an information system?

Answer 2

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

Question 3

What are the three major subsystems of an AIS?

Answer 3

1. the transaction processing system (TPS) which supports daily business operations with numerous reports, documents, and messages for users throughout the organization; activity composed of three major subsystems - the revenue cycle, the expenditure cycle, and the conversion cycle
2. the general ledger/financial reporting system (GL/FRS) which produces the traditional financial statements, such as the income statement, balance sheet, statement of cash flows, tax returns, and other reports required by law
3. 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.

Question 4

Define nondiscretionary reporting

Answer 4

A type of reporting in which the organization has few or no choices in the information it provides. Much of this information consists of traditional financial statements, tax returns, and other legal documents.

Question 5

What attributes must information possess to have reliability?

Answer 5

Relevance
Accuracy
Completeness
Summarization
Timeliness

Question 6

Define Accounting Independence.

Answer 6

Information reliability rests heavily on the concept of accounting independence: separation of the record-keeping function of accounting from the functional areas that have custody of physical resources.

Question 7

Define the Centralized Data Processing model

Answer 7

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

In this shared data arrangement, a special independent group - database administration - headed by the database administrator is responsible for the security and integrity of the database.

Question 8

Define the Distributed Data Processing (DDP) model

Answer 8

Model under which users process their transactions locally. Unlike in the centralized approach, users in a DDP environment function independently and tend not to share data and information. Any necessary sharing, however, is accomplished through network connections between the users.

Network administration is responsible for the effective functioning of the software and hardware that constitute the organization’s network.

Question 9

Define Turnkey Systems

Answer 9

Commerical software packages that can often be implemented by the user with little or no modification

Question 10

Define Enterprise Resource Planning (ERP).

Answer 10

A system assembled of prefabricated software components. Rather than a company creating an entirely custom software and absorb all development costs, some commercial software vendors design their systems in modules that allow flexibility through numerous processing options.

The base ERP system comprises thousands of small program modules. From this vast array of options, the IT team selects those modules that support the organization’s specific information and data processing needs.

Configuring the system in this way often takes many months, but the result is a customized system with the advantages of a commercial system.

Question 11

Define Software as a Service (SaaS).

Answer 11

A software distribution model in which service providers host applications for client organizations over a private network or the internet.

Question 12

Define Infrastructure as a Service (IaaS).

Answer 12

The provision of computing power and disk space to client firms who access it from desktop PCs. The client firm can configure the infrastructure for storage, networks, and other computing needs, including running operating systems and data processing applications.

Question 13

Define Platform as a Service (PaaS).

Answer 13

It enables client firms to develop and deploy onto the cloud infrastructure consumer-generated applications using facilities provided by the PaaS vendor.

Question 14

What are the three most common audits?

Answer 14

External (attestation)
Internal (operational)
Fraud

Question 15

What did the SOX legislation change?

Answer 15

Prior to the passage of SOX, accounting firms were permitted to provide advisory services and attest services concurrently to clients. SOX legislation greatly restricts the types of nonaudit services that auditors may render audit clients.

At least one member of the audit committee must be a financial expert.

Question 16

When can external auditors rely on evidence provided by an internal auditor?

Answer 16

Some internal audit departments report directly to the controller. Under this arrangement, the internal auditor’s independence is compromised and the external auditor is prohibited by professional standards from relying on evidence provided by them.

In contrast, external auditors can rely, in part, on evidence gathered by internal audit departments that are organizationally independent and report to the board of directors’ audit committee.

Question 17

What distinguishes the accounting information system and the management information system?

Answer 17

Whether the transactions are financial or nonfinancial that directly affect the processing financial transactions.

The AIS captures financial transactions to support systems around the revenue, expenditure, and conversion cycles. The MIS captures nonfinancial transactions to support systems for marketing, inventory, manufacturing, and human resources.

Question 18

What is an appraisal function housed within an organization that performs a wide range of services for management?

Answer 18

Internal Auditing

Question 19

What are the three transaction cycles that process most of the firm’s economic activity?

Answer 19

1. Expenditure cycle - incurs expenditures in exchange for resources
2. Conversion cycle - provides value added through its products or services
3. Revenue cycle - receives revenue from outside sources

Question 20

What is an example of a Master File?

Answer 20

A master file contains account data. The general ledger and subsidiary ledgers are examples of master files. Data values in master files are updated by transactions.

Question 21

What is an example of a Transaction File?

Answer 21

A transaction file is a temporary file of transaction records used to update data in a master file. Sales orders, inventory receipts, and cash receipts are examples of transaction files.

Question 22

What is an example of a Reference File?

Answer 22

A reference file stores data that are used as standards for processing transactions. For example, the payroll program may refer to a tax table to calculate the proper amount of withholding taxes for payroll transactions. Other reference files include price lists used for preparing customer invoices, lists of authorized suppliers, employee rosters, customer credit history files for approving credit sales, and freight charges used for calculating the cost of shipments to customers.

Question 23

What is an example of an Archive File?

Answer 23

An archive file contains records of past transactions that are retained for future reference and form an important part of the audit trail. Archive files include journals, prior-period payroll information, lists of former employees, records of accounts written off, and prior-period ledgers.

Question 24

An objective of internal control is to mitigate the risk from errors and fraud.

What is the primary risk associated with revenue cycle transactions?

Answer 24

The correct answer is “Inaccurately recording sales and cash receipt transactions in journals and accounts.” Recording sales and cash receipt transactions in journals and accounts must be accurate.

Question 25

What does the letter N in an inverted triangle mean in a system flowchart?

Answer 25

“It is a temporary file using a numeric filing system.” The inverted triangle means that it is a temporary file and the N means that it uses a numeric filing system.

Question 26

Which digital computer file contains account data that are updated by transactions and includes the general ledger and subsidiary ledgers?

Answer 26

The correct answer is “Master file.” The general ledger and subsidiary ledgers are examples of master files.

Question 27

How would shipping logs be depicted in a system flowchart?

Answer 27

The parallelogram symbol is used to depict many types of hard-copy accounting records.

Question 28

What is the circular symbol labeled A in the system flowchart?

Answer 28

“This is an on-page connector used to replace flow lines that otherwise would cause excessive clutter on the page.” The connector replaces the lines that signify the movement. Lines should be used whenever possible to promote clarity. Restricted use of connectors, however, can improve the readability of a flowchart.

Question 29

What is an advantage of sequential codes?

Answer 29

“Sequential coding supports the reconciliation of a batch of transactions at the end of processing.” If the transaction processing system detects any gaps in the sequence of transaction numbers, it alerts management to the possibility of a missing or misplaced transaction.

Question 30

What does efficiency mean in the data collection process?

Answer 30

Efficiency in data collection means that data is collected only once.

Question 31

What does the letter C in an inverted triangle mean in a system flowchart?

Answer 31

The inverted triangle means that it is a temporary file and the C means that it uses a chronological filing system.

Question 32

In a system flowchart, how would a clerk’s tasks of entering sales orders be depicted?

Answer 32

The bucket-shaped symbol represents a manual process.