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CORE CONCEPTS OF Accounting Information Systems Twelfth Edition Mark G. Simkin, Ph.D. Professor Department of Accounting and Information Systems University of Nevada Jacob M. Rose, Ph.D. Professor Department of Accounting and Finance University of New Hampshire Carolyn Strand Norman, Ph.D., CPA Professor Department of Accounting Virginia Commonwealth University JOHN WILEY & SONS, INC. VICE PRESIDENT & PUBLISHER SENIOR ACQUISITIONS EDITOR PROJECT EDITOR ASSOCIATE EDITOR SENIOR EDITORIAL ASSISTANT PRODUCTION MANAGER PRODUCTION EDITOR MARKETING MANAGER CREATIVE DIRECTOR SENIOR DESIGNER PRODUCTION MANAGEMENT SERVICES SENIOR ILLUSTRATION EDITOR PHOTO EDITOR MEDIA EDITOR COVER PHOTO George Hoffman Michael McDonald Brian Kamins Sarah Vernon Jacqueline Kepping Dorothy Sinclair Erin Bascom Karolina Zarychta Harry Nolan Wendy Lai Laserwords Maine Anna Melhorn Elle Wagner Greg Chaput Maciej Frolow/Brand X/Getty Images, Inc. 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These copies are licensed and may not be sold or transferred to a third party. Upon completion of the review period, please return the evaluation copy to Wiley. Return instructions and a free of charge return shipping label are available at www.wiley.com/go/returnlabel. If you have chosen to adopt this textbook for use in your course, please accept this book as your complimentary desk copy. Outside of the United States, please contact your local representative. Library of Congress Cataloging-in-Publication Data Simkin, Mark G. Core concepts of accounting information systems/Mark G. Simkin, Carolyn Strand Norman, Jake Rose.—12th ed. p. cm. Rev. ed. of: Core concepts of accounting information systems/Nancy A. Bagranoff, Mark G. Simkin, Carolyn Strand Norman. 11th ed. c2010. Includes index. ISBN 978-1-118-02230-6 (pbk.) 1. Accounting–Data processing. 2. Information storage and retrieval systems–Accounting. I. Norman, Carolyn Strand. II. Rose, Jake. III. Bagranoff, Nancy A. Core concepts of accounting information systems. IV. Title. HF5679.M62 2012 657.0285– dc23 2011029036 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 In memory of my father, Edward R. Simkin (Mark G. Simkin) Chase your big dreams! (Jacob M. Rose) Thank you to my students—you’re the best! (Carolyn S. Norman) ABOUT THE AUTHORS Mark G. Simkin received his A.B. degree from Brandeis University and his MBA and Ph.D. degrees from the Graduate School of Business at the University of California, Berkeley. Before assuming his present position of professor in the Department of Accounting and Information Systems, University of Nevada, Professor Simkin taught in the Department of Decision Sciences at the University of Hawaii. He has also taught at California State University, Hayward, and the Japan America Institute of Decision Sciences, Honolulu; worked as a research analyst at the Institute of Business and Economic Research at the University of California, Berkeley; programmed computers at IBM’s Industrial Development—Finance Headquarters in White Plains, New York; and acted as a computer consultant to business companies in California, Hawaii, and Nevada. Dr. Simkin is the author of more than 100 articles that have been published in such journals as Decision Sciences, JASA, The Journal of Accountancy, Communications of the ACM, Interfaces, The Review of Business and Economic Research, Decision Sciences Journal of Innovative Education, Information Systems Control Journal, and the Journal of Bank Research. Jacob M. Rose received his B.B.A degree, M.S. degree in accounting and Ph.D. in accounting from Texas A&M University and he passed the CPA exam in the state of Texas. Dr. Rose holds the position of professor at the University of New Hampshire, where he is the director of the Master of Science in Accounting Program. He previously taught at Southern Illinois University, Montana State University, the University of Tennessee, Bryant University, and the University of Oklahoma, and he was an auditor with Deloitte and Touche, LLP. Professor Rose has been recognized as the top instructor in accounting at multiple universities, and he has developed several accounting systems courses at the graduate and undergraduate levels. He is also a prolific researcher, publishing in journals such as The Accounting Review; Accounting, Organizations and Society; Behavioral Research in Accounting; Journal of Information Systems; International Journal of Accounting Information Systems; Journal of Management Studies; and Accounting Horizons. Professor Rose has been recognized as the top business researcher at three universities, and he received the Notable Contribution to the Information Systems Literature Award, which is the highest research award given by the Information Systems Section of the American Accounting Association. Carolyn Strand Norman received her B.S. and M.S.I.A. degrees from Purdue University and her Ph.D. from Texas A&M University. Dr. Norman is a Certified Public Accountant (licensed in Virginia) and also a retired Lieutenant Colonel from the United States Air Force. At the Pentagon, she developed compensation and entitlements legislation, working frequently with House and Senate staffers. Prior to assuming her current position, Dr. Norman taught at Seattle Pacific University where she co-authored the book, XBRL Essentials with Charles Hoffman, and was selected as Scholar of the Year for the School of Business and Economics. Dr. Norman has published more than 50 articles in journals such as The Accounting Review; Accounting, Organizations and Society; Behavioral Research in Accounting; Journal of Accounting and Public Policy; Journal of Information Systems; Advances in Accounting Behavioral Research; Issues in Accounting Education; and Journal of Accounting Education. She is currently the Interim Chair of the Accounting Department at Virginia Commonwealth University. iv PREFACE Information technologies affect every aspect of accounting, and as technologies advance, so does our accounting profession! For example, accountants no longer spend much of their day footing ledgers and making hand calculations. Today, accountants use the many helpful functions in spreadsheet software and update or change calculations instantly. And increasingly, the Internet continues to change the way accountants work. Because most accounting systems are computerized, accountants must understand software and information systems to turn data into financial information and develop and evaluate internal controls. Business and auditing failures continue to force the profession to emphasize internal controls and to rethink the state of assurance services. As a result, the subject of accounting information systems (AIS) continues to be a vital component of the accounting profession. The purpose of this book is to help students understand basic AIS concepts. Exactly what comprises these AIS concepts is subject to some interpretation, and is certainly changing over time, but most accounting professionals believe that it is the knowledge that accountants need for understanding and using information technologies and for knowing how an accounting information system gathers and transforms data into useful decisionmaking information. In this edition of our textbook, we include the core concepts of Accounting Information Systems indicated by chapter in the table below. The book is flexible enough that instructors may choose to cover the chapters in any order. ACCOUNTING INFORMATION SYSTEMS COURSE CONTENT AREA COVERAGE AIS Applications Auditing Database Concepts Internal Control Management of Information Systems Management Use of Information Systems Development Work Technology of Information Systems Use of Systems Technology 7, 8, 15 12 3, 4, 5 9, 10, 11 1, 2, 13 1, 6, 7, 8, 14, 15 13 All chapters All chapters About This Book The content of AIS courses continues to vary widely from school to school. Some schools use their AIS courses to teach accounting students how to use computers. In other colleges and universities, the course focuses on business processes and data modeling. Yet other courses emphasize transaction processing and accounting as a communication system and have little to do with the technical aspects of how underlying accounting data are processed or stored. Given the variety of objectives for an AIS course and the different ways that instructors teach it, we developed a textbook that attempts to cover the core concepts of AIS. In writing the text, we assumed that students have completed basic courses in financial and managerial accounting and have a basic knowledge of computer hardware and software concepts. The text is designed for a one-semester course in AIS and may be used at the community college, baccalaureate, or graduate level. v vi Preface Our hope is that individual instructors will use this book as a foundation for an AIS course, building around it to meet their individual course objectives. Thus, we expect that many instructors will supplement this textbook with other books, cases, software, or readings. The arrangement of the chapters permits flexibility in the instructor’s subject matter coverage. Certain chapters may be omitted if students have covered specific topics in prior courses. Part One introduces students to the subject of AIS. In the first chapter, we lay the basic foundation for the remainder of the text and set the stage for students to think about the pervasiveness of technology that is common to organizations and the impact technology has on the accounting profession. This chapter also includes a section on careers in AIS that is designed to introduce students to the career paths that combine accounting with the study of information systems. Students taking the AIS course may or may not have had an earlier course in information technology. Chapter 2 allows those who did not have such a course to learn about the latest technologies and emphasizes their use in accounting. For students who have had earlier courses in computers and/or information systems, this chapter serves as a review but might also contain new technologies that students have not studied in other courses. Part Two discusses data modeling and databases. Chapter 3 begins our coverage by discussing database concepts in general, describing how to design database tables and relationships, and discussing how databases promote efficient storage of the data needed to support business decisions. This chapter also responds to increasing instructor interest in teaching the REA approach to data modeling. Chapter 4 describes how to use the latest version of Microsoft Access to create databases and extract data from databases. Chapter 5 continues the discussion of how to use Microsoft Access to develop database forms and reports. Chapters 4 and 5 are more ‘‘how to’’ than the other chapters in the book, and they allow the instructor to guide students with hands-on experience in using software to implement the database concepts they have learned. Part Three begins with Chapter 6 and a discussion of systems documentation, a matter of critical importance to the success of an AIS and also to an understanding of an information system. This chapter describes the various tools that accountants can use to document an AIS for their own and others’ understanding of information flows. Business processes and software solutions for improving those processes are gaining in importance in today’s businesses. Chapters 7 and 8 discuss several core business processes and highlight a number of Business Process Management (BPM) solutions that are currently available in the marketplace. Instructors who focus on transaction cycles in their AIS courses may choose to use supplemental pedagogical tools, such as software and practice sets, to cover this material in more depth. Part Four is an overview of internal controls and the potential consequences of missing, weak, or poorly developed controls. Although the subject of internal control appears repeatedly throughout the book, we examine this subject in depth in Chapters 9 and 10. These two chapters introduce students to internal controls that are necessary at each level of the organization. Chapter 11 focuses on computer crime, ethics, and privacy to help students understand the need for internal controls. The last section of the book examines special topics in AIS. Chapter 12 introduces the topic of auditing in an IT environment. Information technology auditing is an increasingly important field and represents a great career opportunity for students who understand both accounting and IT. Recognizing that some students in AIS courses may have completed courses in management information systems (MIS) and thus are already familiar with systems development topics, the emphasis in Chapter 13 is on the accountant’s role in Preface vii designing, developing, implementing, and maintaining a system. Although we integrated Internet technology throughout this book, its influence on accounting information systems is so great that we devoted a special chapter to it. Chapter 14 provides a basic overview of Internet concepts, discusses financial reporting on the Internet including an expanded section on XBRL, explores the accounting components of e-business, and covers the issues of privacy and security. Finally, in Chapter 15, we discuss accounting and enterprise software, and the chapter provides advice related to AIS selection. Special Features This edition of our book uses a large number of special features to enhance the coverage of chapter material as well as to help students understand chapter concepts. Thus, each chapter begins with an outline and a list of learning objectives that emphasize the important subject matter of the chapter. This edition of the book also includes many new real-world Cases-in-Point, which are woven into the text material and illustrate a particular concept or procedure. Each chapter also includes a more detailed real-world case as an end-of-chapter AlS-at-Work feature. Each chapter ends with a summary and a list of key terms. To help students understand the material in each chapter, this edition also includes multiple-choice questions for selfreview with answers and three types of end-of-chapter exercises: discussion questions, problems, and cases. This wide variety of review material enables students to examine many different aspects of each chapter’s subject matter and also enables instructors to vary the exercises they use each semester. The end-of-chapter materials also include references and other resources that allow interested students to explore the chapter material in greater depth. In addition, instructors may wish to assign one or a number of articles listed in each chapter reference section to supplement chapter discussions. These articles are also an important resource for instructors to encourage students to begin reading professional journals. We include articles from Strategic Finance, The Journal of Accountancy, and The Internal Auditor, which represent the journals of three important accounting professional organizations. There are two major supplements to this textbook. One is an instructor’s manual containing suggested answers to the end-of-chapter discussion questions, problems, and cases. There is also a test bank of true-false, multiple-choice, and matching-type questions. The test bank includes short-answer problems and fill-in-the-blank questions so that instructors have a wide variety of choices. What’s New in the Twelfth Edition This edition of our book includes a number of changes from prior editions. These include • A new coauthor with an international reputation in the AIS community! • More Test Yourself multiple-choice questions at the end of each chapter to help students assess their understanding of the chapter material. • New color—both inside and on the cover! This edition uses green to highlight information and to make the book more interesting to read. • All new database chapters. Material related to the design of databases and database theory is all presented in the first database chapter, rather than spread throughout three viii Preface chapters. The following two chapters describe how to apply the theoretical concepts using Access 2010. The new approach allows instructors to easily select a desired emphasis: theory, application, or both. New database diagramming methods simplify the design process for students. • Expanded coverage of topics that are increasingly important to accounting systems, including cloud computing, data mining, sustainability accounting, forensic accounting COBIT version 5, COSO’s 2010 Report on Enterprise Risk Management, enterprise controls, and internal auditing of IT. • The discussion of internal controls in Chapter 10 and auditing of IT in Chapter 12 are reorganized to reflect new PCAOB standards. • An expanded section in Chapter 1 on career paths for accountants interested in forensic accounting. • Many new Case-in-Points that identify examples of the discussion in the textbook. These examples illustrate the topic to give students a better grasp of the material. • Chapter reorganization, with database chapters moved closer to the front, as requested by our adopters. Instructors still have the flexibility to integrate the database concepts and database development anywhere in their course. • An updated glossary of AIS terms at the end of the book. • New AIS at Work features at the end of many chapters to help students better understand the impact of systems in a wide variety of contexts. • A number of new problems and cases at the end of chapters so that instructors have more choices of comprehensive assignments for students. • A new section that includes links to videos related to the concepts presented in each chapter. ACKNOWLEDGMENTS We wish to thank the many people who helped us during the writing, editing, and production of our textbook. Our families and friends are first on our list of acknowledgments. We are grateful to them for their patience and understanding as we were writing this book. Next, we thank those instructors who read earlier drafts of this edition of our textbook and provided suggestions to improve the final version. In addition, we are indebted to the many adopters of our book who frequently provide us with feedback. We sincerely appreciate Paula Funkhouser who helped us with our supplementary materials on this and several previous editions. Finally, we thank all of our many students who have given us feedback when we’ve used the book. We do listen! Mark G. Simkin Jacob M. Rose Carolyn S. Norman ix CONTENTS PART ONE AN INTRODUCTION TO ACCOUNTING INFORMATION SYSTEMS/ 1 Accounting Information Systems and the Accountant/ CHAPTER 1 Introduction/ 4 What Are Accounting Information Systems?/ 4 What’s New in Accounting Information Systems?/ Accounting and IT/ 14 Careers in Accounting Information Systems/ 21 9 Information Technology and AISs/ CHAPTER 2 33 Introduction/ 34 The Importance of Information Technology to Accountants/ Input, Processing, and Output Devices/ 36 Secondary Storage Devices/ 46 Data Communications and Networks/ 50 Computer Software/ 57 PART TWO DATABASES/ CHAPTER 3 3 34 73 Data Modeling/ 75 Introduction/ 76 An Overview of Databases/ 76 Steps in Developing a Database Using the Resources, Events, and Agents Model/ Normalization/ 91 CHAPTER 4 Organizing and Manipulating the Data in Databases/ Introduction/ 104 Creating Database Tables in Microsoft Access/ 104 Entering Data in Database Tables/ 111 Extracting Data from Databases: Data Manipulation Languages/ Recent Database Advances and Data Warehouses/ 123 CHAPTER 5 Database Forms and Reports/ 83 103 116 139 Introduction/ 140 Forms/ 140 Reports/ 147 PART THREE DOCUMENTING BUSINESS PROCESSES/ CHAPTER 6 Documenting Accounting Information Systems/ Introduction/ 168 Why Documentation Is Important/ 168 Primary Documentation Methods/ 171 Other Documentation Tools/ 186 End-User Computing and Documentation/ CHAPTER 7 167 191 Accounting Information Systems and Business Processes: Part I/ Introduction/ 208 Business Process Fundamentals/ x 165 208 207 Contents Collecting and Reporting Accounting Information/ The Sales Process/ 215 The Purchasing Process/ 220 Current Trends in Business Processes/ 227 CHAPTER 8 xi 210 Accounting Information Systems and Business Processes: Part II/ 239 Introduction/ 240 The Resource Management Process/ 240 The Production Process/ 246 The Financing Process/ 252 Business Processes in Special Industries/ 256 Business Process Reengineering/ 260 PART FOUR INTERNAL CONTROL SYSTEMS AND COMPUTER CRIME, ETHICS, AND PRIVACY/ CHAPTER 9 Introduction to Internal Control Systems/ 271 273 Introduction/ 274 1992 COSO Report/ 276 Updates on Risk Assessment/ 278 Examples of Control Activities/ 281 Update on Monitoring/ 289 2011 COBIT, Version 5/ 290 Types of Controls/ 292 Evaluating Controls/ 293 CHAPTER 10 Computer Controls for Organizations and Accounting Information Systems/ 307 Introduction/ 308 Enterprise Level Controls/ 308 General Controls for Information Technology/ 312 Application Controls for Transaction Processing/ 324 CHAPTER 11 Computer Crime, Fraud, Ethics, and Privacy/ 341 Introduction/ 342 Computer Crime, Abuse, and Fraud/ 342 Three Examples of Computer Crimes/ 348 Preventing Computer Crime and Fraud/ 354 Ethical Issues, Privacy, and Identity Theft/ 361 PART FIVE SPECIAL TOPICS IN ACCOUNTING INFORMATION SYSTEMS/ 377 CHAPTER 12 Information Technology Auditing/ Introduction/ 380 The Audit Function/ 380 The Information Technology Auditor’s Toolkit/ 386 Auditing Computerized Accounting Information Systems/ Information Technology Auditing Today/ 396 CHAPTER 13 379 389 Developing and Implementing Effective Accounting Information Systems/ Introduction/ 410 The Systems Development Life Cycle/ 410 409 xii Contents Systems Planning/ 412 Systems Analysis/ 414 Detailed Systems Design/ 419 Implementation, Follow-Up, and Maintenance/ CHAPTER 14 Accounting on the Internet/ Introduction/ 448 The Internet and World Wide Web/ 448 XBRL—Financial Reporting on the Internet/ Electronic Business/ 455 Privacy and Security on the Internet/ 461 CHAPTER 15 Index/ 509 521 447 451 Accounting and Enterprise Software/ Introduction/ 482 Integrated Accounting Software/ 482 Enterprise-Wide Information Systems/ 486 Selecting a Software Package/ 496 Glossary/ 428 481 PART ONE AN INTRODUCTION TO ACCOUNTING INFORMATION SYSTEMS CHAPTER 1 Accounting Information Systems and the Accountant CHAPTER 2 Information Technology and AISs Part One of this book introduces the subject of accounting information systems. It defines accounting’s principal goal, which is to communicate relevant information to individuals and organizations, and describes the strong influence of information technology on this communication process. Chapter 1 defines accounting information system and then discusses some current events that impact accountants and the profession. This chapter also examines the impact of information technology on financial accounting, managerial accounting, auditing, and taxation. Finally, Chapter 1 describes a number of career opportunities for accounting majors who also are proficient in AISs. Chapter 2 provides an overview of information technology that is relevant to accounting professionals. It begins by identifying six reasons that make information technology very important to accountants, and then discusses the current American Institute of Certified Public Accountants survey of the top 10 information systems technologies. Of course, the focus of this chapter is on modern technology and its impact on AISs. Therefore, it discusses computer input devices, central processing units, secondary storage devices, and output devices in detail. Because communication links are so important to AISs, this chapter also examines various communication and network arrangements, including client/server computer and wireless technology. The chapter concludes with descriptions of various types of computer software. 1 Chapter 1 Accounting Information Systems and the Accountant INTRODUCTION DISCUSSION QUESTIONS WHAT ARE ACCOUNTING INFORMATION SYSTEMS? PROBLEMS Accounting Information Systems—A Definition Accounting Information Systems and Their Role in Organizations CASE ANALYSES The Annual Report Performance Management Company The CPA Firm WHAT’S NEW IN ACCOUNTING INFORMATION SYSTEMS? READINGS AND OTHER RESOURCES Cloud Computing—Impact for Accountants ANSWERS TO TEST YOURSELF Sustainability Reporting Suspicious Activity Reporting Forensic Accounting, Governmental Accountants, and Terrorism Corporate Scandals and Accounting ACCOUNTING AND IT Financial Accounting Managerial Accounting Auditing Taxation CAREERS IN ACCOUNTING INFORMATION SYSTEMS Traditional Accounting Career Opportunities Systems Consulting Certified Fraud Examiner Information Technology Auditing and Security AIS AT WORK—CONSULTING WORK FOR CPAS SUMMARY After reading this chapter, you will: 1. Be able to distinguish between such terms as ‘‘systems,’’ ‘‘information systems,’’ ‘‘information technology,’’ and ‘‘accounting information systems.’’ 2. Learn how information technology (IT) influences accounting systems. 3. Be familiar with suspicious activity reporting. 4. Understand how financial reporting is changing with advances in IT, such as XBRL. 5. Appreciate how IT allows management accountants to use business intelligence to create dashboards and scorecards. 6. Know why auditors provide a variety of assurance services. 7. Be more aware of what is new in the area of accounting information systems. 8. Be familiar with career opportunities that combine accounting and IT knowledge and skills. KEY TERMS YOU SHOULD KNOW TEST YOURSELF 3 4 PART ONE / An Introduction to Accounting Information Systems Cloud computing . . . . It’s about reallocating the IT budget from maintenance—such as keeping servers running, performing upgrades, and making backups—to actually improving business processes and delivering innovation to the finance organization. Gill, R. 2011. Why cloud computing matters to finance. Strategic Finance 92(7): 43–47. INTRODUCTION The study of accounting information systems (AISs) is, in large part, the study of the application of information technology (IT) to accounting systems. This chapter describes the ways that IT affects financial accounting, managerial accounting, auditing, and taxation. We begin by answering the question ‘‘what are accounting information systems’’ and then look at some new developments in the field. Following this, we will examine some traditional roles of AISs in organizations. Why should you study AISs? There are many reasons, which we will review briefly in this chapter, but one of the most important is the special career opportunities that will enable you to combine your study of accounting subjects with your interest in computer systems. In today’s job market, accounting employers expect new hires to be computer literate. In addition, a large number of specialized and highly compensated employment opportunities are only available to those students who possess an integrated understanding of accounting and IT and can bring that understanding to bear on complicated business decisions. The last part of this chapter describes a number of special career opportunities for those with an interest in AISs. WHAT ARE ACCOUNTING INFORMATION SYSTEMS? What do the following have in common: (1) a shoebox filled with a lawyer’s expense receipts, (2) the monthly payroll spreadsheet in the computer of an auto-repair shop, (3) the Peachtree accounting system for a small chain of dry cleaning stores, and (4) the enterprise resource planning (ERP) system of a large manufacturer? The answer is that they are all examples of AISs. How can such a wide range of accounting applications each qualify as an AIS? The answer is that this is the essence of what AISs are—collections of raw and stored data (that together typically serve as inputs), processing methods (usually called ‘‘procedures’’), and information (outputs) that serve useful accounting purposes. Do such systems have to be computerized? The first example—the shoebox—suggests that they do not. Can they be complicated? The last example—an ERP system—illustrates one that is. Accounting Information Systems—A Definition Accounting information systems (AISs) stand at the crossroads of two disciplines: accounting and information systems. Thus, the study of AISs is often viewed as the study of computerized accounting systems. But because we cannot define an AIS by its size, it is better to define it by what it does. This latter approach leads us to the following definition that we will use as a model in this book: CHAPTER 1 / Accounting Information Systems and the Accountant 5 Definition: An accounting information system is a collection of data and processing procedures that creates needed information for its users. Let us examine in greater detail what this definition really means. For our discussion, we’ll examine each of the words in the term ‘‘accounting information systems’’ separately. Accounting. You probably have a pretty good understanding of accounting subjects because you have already taken one or more courses in the area. Thus, you know that the accounting field includes financial accounting, managerial accounting, and taxation. AISs are used in all these areas—for example, to perform tasks in such areas as payroll, accounts receivable, accounts payable, inventory, and budgeting. In addition, AISs help accountants to maintain general ledger information, create spreadsheets for strategic planning, and distribute financial reports. Indeed, it is difficult to think of an accounting task that is not integrated, in some way, with an AIS. The challenge for accountants is to determine how best to provide the information required to support business and government processes. For example, in making a decision to buy office equipment, an office manager may require information about the sources of such equipment, the costs of alternate choices, and the purchasing terms for each choice. Where can the manager obtain this information? That’s the job of the AIS. AISs don’t just support accounting and finance business processes. They often create information that is useful to nonaccountants—for example, individuals working in marketing, production, or human relations. Figure 1-1 provides some examples. For this information to be effective, the individuals working in these subsystems must help the developers of an AIS identify what information they need for their planning, decision making, and control functions. These examples illustrate why an AIS course is useful not only for accounting majors but also for many nonaccounting majors. Information (versus Data). Although the terms data and information are often used interchangeably, it is useful to distinguish between them. Data (the plural of datum) are raw facts about events that have little organization or meaning—for example, a set of raw scores on a class examination. To be useful or meaningful, most data must be processed into useful information—for example, by sorting, manipulating, aggregating, or classifying them. An example might be computing of the class average from the raw scores of a class examination. Application Examples of AIS Information Supply chain management Demand trends, inventory levels and warehouse management, supplier relationship management. Finance Cash and asset management, multicompany and multicurrency management, credit card transaction summaries. Marketing Sales management, sales forecasts and summaries, customer relationship management. Human resources Workforce planning tools and employee management, benefits management, payroll summaries and management. Production Inventory summaries, product cost analysis, materials requirement planning. FIGURE 1-1 Examples of useful information an AIS can generate for various business functions. 6 PART ONE / An Introduction to Accounting Information Systems Do raw data have to be processed in order to be meaningful? The answer is ‘‘not at all.’’ Imagine, for example, that you take a test in a class. Which is more important to you—the average score for the class as a whole (a processed value) or your score (a raw data value)? Similarly, suppose you own shares of stock in a particular company. Which of these values would be least important to you: (1) the average price of a stock that was traded during a given day (a processed value), (2) the price you paid for the shares of stock (an unprocessed value), or (3) the last price trade of the day (another unprocessed value)? Raw data are also important because they mark the starting point of an audit trail— that is, the path that data follow as they flow through an AIS. In a payroll system, for example, an input clerk enters the data for a new employee and the AIS keeps track of the wages due that person each pay period. An auditor can verify the existence of employees and whether each employee received the correct amount of money. Case-in-Point 1.1 A former payroll manager at the Brooklyn Museum pleaded guilty to embezzling $620,000 by writing paychecks to ‘‘ghost employees.’’ Dwight Newton, 40, admitted committing wire fraud by adding workers to the payroll who did not exist and then wiring their wages directly into a joint bank account that he shared with his wife. Under a plea agreement, Newton must repay the museum the stolen funds. He was ordered to forfeit $77,000 immediately, sell his Barbados timeshare, and liquidate his pension with the museum.1 Despite the potential usefulness of some unprocessed data, most end users need financial totals, summary statistics, or exception values—that is, processed data—for decision-making purposes. Figure 1-2 illustrates a model for this—a three stage process in which (1) raw and/or stored data serve as the primary inputs, (2) processing tasks process the data, and (3) meaningful information is the primary output. Modern AISs, of course, harness IT to perform the necessary tasks in each step of the process. For example, a catalog retailer might use some Web pages on the Internet to gather customer purchase data, then use central file servers and disk storage to process and store the purchase transactions, and finally employ other Web pages and printed outputs to confirm and distribute information about the order to the appropriate parties. Although computers are wonderfully efficient and useful tools, they also create problems. One is their ability to output vast amounts of information quickly. Too much information, and especially too much trivial information, can overwhelm its users, possibly causing relevant information to be lost or overlooked. This situation is known as information overload. It is up to the accounting profession to determine the nature and timing of the outputs created and distributed by an AIS to its end users. Another problem with computerized data processing is that computers do not automatically catch the simple input errors that humans do. For example, if you were performing payroll processing, you would probably know that a value of ‘‘−40’’ hours Inputs Processes Outputs Data/Information from Internal/External Sources Sort, Organize, Calculate Information for Internal/External Decision Makers FIGURE 1-2 An information system’s components. Data or information is input, processed, and output as information for planning, decision-making, and control purposes. 1 http://www.payroll-fraud.com/rc009.html
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