Accounting Information Systems: A Practitioner …€¦ · reviews the essential elements and basic...

Accounting Information Systems:

A Practitioner Emphasis 8e

Cynthia D. Heagy University of Houston-Clear Lake

Constance M. Lehmann University of Houston-Clear Lake

Hui Du University of Houston-Clear Lake

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Cynthia D. Heagy

Constance M. Lehmann

Hui Du

ISBN: 1-930789-82-3

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Preface and Front Matter

Cynthia D. Heagy University of Houston-Clear Lake

Constance M. Lehmann University of Houston-Clear Lake

Hui Du University of Houston-Clear Lake

Accounting Information Systems: A Practitioner Emphasis 8e

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This textbook is intended to meet the needs of a first course in accounting information systems at ei-ther the undergraduate or graduate level. It may also be used as a review text in second or subse-quent courses in this area.

A primary objective in writing the eighth edition of the textbook was to present accounting information systems material that would make students more marketable in today's accounting envi-ronment. Recognizing that over 90 percent of accounting systems are licensed rather than internally custom developed and that the current market demand is for accounting graduates who can install, operate, and audit such systems, we present this textbook that reflects a new paradigm to our stu-dents and our colleagues. In contrast to traditional accounting systems textbooks that assume an or-ganization will develop its own accounting system and, therefore, emphasize systems development, this textbook gives students the theoretical foundation and skills they will need to conduct a require-ments analysis, search for a commercially available solution, successfully implement the software package selected, and enjoy the experience using the accounting system for their daily business and decision making. In addition to learning essential accounting systems concepts, the students and the instructors will see much discussion and many examples of commercial accounting systems software as it is designed and as it should be designed.

Another objective in writing this edition was to make the material student friendly. Therefore, we took great care in directing our words to the students. Recognizing this is their first introduction to accounting systems, we included clear definitions of terms (and included a glossary) and incorporated numerous examples and illustrations to explain the material.

The book consists of fifteen chapters. Each chapter begins with an Introductory Scenario to help students understand the relevance of the material they are about to study to the real world. In-terspersed throughout several of the chapters are vignettes to again bring in real-world relevance of particular topics. The first fourteen chapters provide the theoretical and practical foundation for the final chapter on selecting and implementing accounting systems software. The learning experience will be optimized if all fifteen chapters are covered.

Ralph Waldo Emerson said, “The man [or woman] who can make hard things easy is the educa-tor.” In writing this book, we tried our best to be educators.

Accounting systems in this textbook are events-driven, encompassing the capture and processing of all events (financial and non-financial) required to construct the financial reports that are necessary for managing an organization and for meeting its external reporting requirements. The chapters empha-size the use of accounting systems to conduct business operations. Special emphasis is given to the reporting requirements of accounting systems, as well as control activities typically found in the gener-ic business processes we have discussed. Each chapter contains a set of learning objectives to facilitate the assessment of learning outcomes.

Because students learn best by doing, we have included several hands-on learning activities at the end of many chapters. These activities require students to apply the theoretical knowledge from the chapter to solve practical problems. We realize the importance of using cases in the course. The introductory scenarios and vignettes can be assigned as cases. We have included “thought questions”

A MESSAGE TO STUDENTS AND INSTRUCTORS

A MESSAGE TO INSTRUCTORS


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at the end of the scenarios and vignettes for the benefit of instructors wishing to make use of cases in their classes. (Suggested answers to the questions are included in the instructor materials.)

A common difficulty in teaching the AIS course is that students are unfamiliar with the docu-ments, reports, and activities associated with an accounting system. Although students have, at least to some extent, been exposed to documents, reports, and activities in other accounting courses, these were not the main focus and may have been only partially retained. Therefore, we thought is was im-portant to do something early in the course that would (a) provide students with a familiar context in which to understand the issues of computerized accounting systems and (b) bring all students up to the same level before adding on more layers of knowledge. We wrote Chapter 3 for these purposes. It reviews the essential elements and basic activities of paper-based accounting systems, introduces the essential elements and basic activities of computerized accounting systems, and compares the two. When testing this chapter in our classes, accounting students have expressed gratitude for reviewing accounting systems issues that they had not previously considered as “systems” related, and non-accounting students have expressed appreciation for reviewing accounting issues that they must know to fully understand accounting information systems.

The first chapter captures the interest of the students by stressing the importance of this course to a successful career in accounting regardless of the accounting specialty students may choose. In this chapter, we introduce students to commercial off-the-shelf software (COTS). This eighth edition has been updated to reflect the changes in the software industry that have occurred since the writing of the seventh edition. Chapter 2 gives students the knowledge they need to enable them to read and prepare systems documentation. Chapter 3, as previously discussed, gives students a context in which to anchor what they will be learning in the course. It gives instructors comfort that we have covered some basics so that we will then be dealing with a fairly homogenous group of students. After giving students an understanding of the data flows, functions, and structure of an accounting system in Chap-ter 4, the general reporting principles and coding methods that form a foundation for effective re-porting and audit trails are covered in Chapter 5. The section on eXtensible business reporting lan-guage (XBRL) introduces this new financial reporting mandate required by the Securities and Exchange Commission (SEC).

A comprehensive coverage of internal control is included in Chapters 6 and 7. These chapters are built around the concepts reflected by COSO’s Internal Control – Integrated Framework, COSO’s Enterprise Risk Management – Integrated Framework, the Institute of Internal Auditors Research Foun-dation’s Systems Auditability and Control Report, the Information Systems Audit and Control Founda-tion’s Control Objectives for Information and Related Technology (COBIT), and several standards issued by the American Institute of Certified Public Accountants. These include Statement on Standards for Attestation Engagements (SSAE) 16: Reporting on Controls at a Service Organization, Service Organiza-tion Control Reports (SOC-1, SOC-2, SOC-3), SAS 94, SAS 99, and SAS 109. These chapters stress compli-ance with the Sarbanes-Oxley Act. IT auditing, IT governance, and computer forensics are integral parts of these chapters.

The financial, revenue, purchasing, and inventory processes are covered in Chapters 8 – 11. These chapters introduce students to the activities, data flows, functions, coding systems, reporting, special accounting requirements, and internal controls peculiar to each process. Because most ac-counting systems are based on database management systems, Chapters 12 and 13 discuss how ac-counting data are stored and retrieved using database technology.

Chapter 14 explains how to conduct electronic business with electronic data interchange (EDI), an Extranet, and the Internet. The technical and legal aspects and security issues involved with elec-tronic business are discussed as well as Web-assurance services. A new section has been added in this eighth edition on cloud computing. Chapter 15 is the capstone chapter that applies the knowledge and


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skills gained from the first fourteen chapters in the selection and implementation of commercial off-the-shelf accounting software packages. The discussion of the software industry has been updated to reflect the recent changes.

Cynthia D. Heagy is professor of accounting at the University of Houston – Clear Lake. She earned her DBA degree from the University of Memphis and is a CPA, CMA, and CNA. Dr. Heagy entered higher education after working as a trust officer at a large national bank and later as a systems analyst. Dr. Heagy has published in several professional and academic journals, including Journal of Information Systems, Advances in Ac-

counting Education, Journal of the Academy of Business Education, Compendium of Classroom Cases and Tools for AIS Applications, The Journal of Accountancy, Issues in Accounting Education, Internation-al Journal of Accounting, Journal of Cost Management, Journal of Accounting Education, Accounting Educators' Journal, EDP Auditing, Data Security Management, The Journal of Accounting Case Re-search, The CPA Journal, Journal of Accounting and Computers, and The Accounting Systems Journal. She is coauthor of Principles of Bank Accounting and Reporting, published by the American Bankers Association.

Constance M. Lehmann, PhD, CISA, is associate professor of accounting at the University of Houston – Clear Lake. She earned her PhD from Texas A&M University and her MBA from University of Texas at San Antonio. Dr. Lehmann entered higher education after working as an internal audi-tor and branch manager for financial institutions including the Federal Reserve Bank (San Antonio branch) and various savings and loans in the

San Antonio area. Dr. Lehmann has published in several professional and academic journals, including Behavioral Research in Accounting, Journal of Information Systems, Advances in Accounting Education, Journal of Education for Business, Journal of Accounting Education, Internal Auditing Journal, Issues in Accounting Education, and Journal of Financial Education. Dr. Lehman is an active member of the Greater Houston ISACA chapter, and the faculty advisor for the University of Houston – Clear Lake ISA-CA Student Group.

Hui Du is an associate professor of accounting at the University of Houston – Clear Lake. She earned her PhD and MBA from Rutgers – The State Uni-versity of New Jersey. She entered higher education after working as a research assistant at Bell Labs of Lucent Technologies (now Alcatel-Lucent). Dr. Du has published in various professional and academic jour-nals, including Journal of Information Systems, Journal of Accounting and

Public Policy, Advances in Accounting, Journal of Emerging Technologies in Accounting, International Journal of Auditing, Research in Accounting Regulation, Journal of Accountancy, The CPA Journal, and Information Systems Control Journal.

C.D.H.

C.M.L.

H.D.

ABOUT THE AUTHORS


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Chapter 1 Significance of Accounting Information Systems and the Accountant’s Role 1

Chapter 2 Accounting Systems Documentation 22

Chapter 3 Essential Elements and Basic Activities of Accounting Systems 51

Chapter 4 Data Flows, Activities, and Structure of Accounting Systems 97

Chapter 5 Reporting Process, Coding Methods, and Audit Trails 144

Chapter 6 Internal Control and Risk Assessment 173

Chapter 7 Control Activities and Monitoring 209

Chapter 8 The Financial Process 249

Chapter 9 The Revenue Process 283

Chapter 10 The Purchasing Process 325

Chapter 11 The Inventory Process 352

Chapter 12 Database Structure of Accounting Systems 378

Chapter 13 Developing a Relational Database for an Accounting Information System 415

Chapter 14 Electronic Business 443

Chapter 15 AIS Selection and Implementation 468

Glossary 492

Index 510

CONTENTS IN BRIEF


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CONTENTS

Chapter 1 Significance of Accounting Information Systems and the Accountant’s Role 1 Learning Objectives 1

Accounting Information 3

What Are Accounting Data? 3

Who Needs Accounting Information? 4

Accounting Information Systems 6

What Is an Accounting Information System? 6

Accounting Systems Technology 10

Importance of Accounting Systems 10

Why Study Accounting Information Systems? 14

Accountants as Users of Accounting Systems 14

Accountants as Auditors of Accounting Systems 15

Accountants as Consultants for Accounting Systems 16

Professional Certifications and AIS Knowledge 18

Summary 19

Key Terms 19

Discussion Questions, Problems, and Activities 20

Notes 21

Chapter 2 Accounting Systems Documentation 22 Learning Objectives 22

Documentation of Accounting Systems 24

Documentation Standards 26

Types of System Documentation 27

System Narrative Description 28

System Graphical Representation 29

Computer-assisted System Documentation Tools 43

Summary 44

Key Terms 45


Notes 50

Chapter 3 Essential Elements and Basic Activities of Accounting Systems 51 Learning Objectives 51

Why Review Paper-based Accounting Systems? 53

Similarities Between Paper-based and Computerized Accounting Systems 53

Paper-based Accounting Systems 53

Computerized Accounting Systems 72

Batch versus Real-time Posting 88

Batch Posting 88

Real-time Posting 88

Best Uses of Batch and Real-time Posting 90

Summary 90

Key Terms 91


Notes 96


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Chapter 4 Data Flows, Activities, and Structure of Accounting Systems 97 Learning Objectives 97

Data Flows in an Accounting System 99

Life Cycle of Transactions and Other Events 99

Illustration of Data Flows 100

Data Flows in a Complex Accounting System 122

Activities of an Accounting Information System 122

Input (Capture) Data 123

Process Data 123

Store Data 124

Output (Communicate) Data 125

Structure of an Accounting Information System 126

Business Processes and Subsystems 126

Integration of the Subsystems 132

Summary 135

Key Terms 135

Interpretation of Purchasing Process in Exhibit 4.28 Appendix—Chapter 4 136


Notes 142

Chapter 5 Reporting Process, Coding Methods, and Audit Trails 144 Learning Objectives 144

Reporting Principles 145

Necessity for Concise Reports 146

Emphasis on Both Physical and Monetary Measures 147

Frequency of Reporting 148

Responsibility Reporting 150

Reporting by Function 152

Comparative Reporting 154

Exception Reporting 154

XBRL 157

Benefits of XBRL 157

XBRL Background 158

Explanation of XBRL 158

Coding Methods 161

Coding Objectives 161

Types of Codes 161

Application of Coding to Accounting Systems 162

Audit Trails 163

Concept of an Audit Trail 164

Coding for Audit Trails 165

Summary 165

Key Terms 166


Notes 172

Chapter 6 Internal Control and Risk Assessment 173 Learning Objectives 173

Where Was Internal Control? 175


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What Is Internal Control? 175

Outside Interest in Internal Control 176

Stakeholders’ Interest in Internal Control 176

Legislators’ Interest in Internal Control 176

External Auditors’ Interest in Internal Control 178

Professional Organizations’ Interest in Internal Control 179

Integrated Control Framework 182

Organizational Objectives 183

Components of Internal Control 185

Summary 200

Key Terms 201

Discussion Questions and Problems 201

Notes 208

Chapter 7 Control Activities and Monitoring 209 Learning Objectives 209

Nature of Control Activities 211

Definition of Control Activities 212

Identification of Control Activities 212

Underlying Concepts of Control Activities 214

Placement of Control Activities 214

Limitations of Control Activities 215

Categories of Control Activities 215

Performance Reviews 215

Physical Controls 217

Segregation of Duties 217

Information Processing 218

Information Processing—General Controls 219

Access Security 219

Network and Data Service Center Operation Controls 226

System Software Acquisition, Implementation, and Maintenance Controls 229

Application Software Selection, Implementation, and Maintenance Controls 229

Information Processing—Application Controls 230

Input Controls 231

Processing Controls 233

Output Controls 236

Master File Maintenance Controls 237

Monitoring 237

Computer Forensics 239

Summary 239

Key Terms 240


Student Activity—Play Ball! 248

Notes and Acknowledgements 248

Chapter 8 The Financial Process 249 Learning Objectives 249

An Overview of the Financial Process 250

Context of the Financial Process 251

Functions of the Financial Process 252


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Financial Reporting Requirements 252

Conventional Financial Statements 253

Responsibility Reporting 257

Accounting Records—Journals and Ledgers 257

Account Coding for the Financial Process 258

Coding Schemes 258

XBRL Coding for SEC Reporting 259

Types of Accounts 259

Coding for the Cash Flow Statement 260

Coding for Ad Hoc Reporting 262

Transaction Entry 263

Imported Data 264

Transactions Recorded in the GL Module 264

Adjusting and Reversing Entries 265

Budgeting 265

Comprehensive Model 265

Piecemeal Budgeting 266

Efficiency Features in Data Entry 267

Recurring Entries 267

Automatic Distribution Entries 268

Dollar versus Cents Entry 268

Auto-enter 268

Reporting Periods and Time-sensitive Entries 269

Posting in the GL Module 269

Detail or Summary Transfers 270

Batch Posting versus Real-time Posting 270

Provisional Posting 270

Status of Accounts 271

Controls in the Financial Process 271

Transaction Risks 271





Conceptual File Structures 273

Master File Design 273

Transaction File Design 275

End-of-Period Processing 275

The Effects of the Implementation of International Financial Reporting Standards (IFRS) 276

Summary 277

Key Terms 277


Notes 282

Chapter 9 The Revenue Process 283 Learning Objectives 283

Overview of the Revenue Process 285

Sales-Supported Organizations 285

Tax- and Contribution-Supported Organizations 287

Data Flows in the Revenue Process 288


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Cash-and-Carry Sales 288

Credit Card Sales 289

Sales Order Processing 290

Trade Credit Sales 291

Shipping Goods to Customers 292

Customer Invoicing 293

Accounting Methods for Customer Accounts 294

Balance Forward and Open Item Accounting Methods 294

Sales Taxes 295

Sales Returns and Allowances 296

Cash Receipts 297

Sales Analysis 298

AIS Structure for the Revenue Process 299

Sales Order Functions 299

Accounts Receivable Functions 300

Reporting for the Revenue Process 301

Reporting for Advertising and Order Solicitation 301

Reporting for Sales Orders 301

Reports for Shipping 303

Billing and Reporting 304

Collection Reports 304

Sales Analysis Reporting 307

Coding for Customer Accounts 308

Audit Trails for the Revenue Process 309

Controls in the Revenue Process 309

Sales and Billing 309

Cash Handling 309





Data Entry in the Revenue Process 311

Sales Order Entry 311

Invoice Entry 312

Recording Receipts 312

Posting 315

Cycle Billing 315

Monthly Closings and Statements of Account 316

Inter-module Data Transfers 316

Summary 316

Key Terms 317


Notes 324

Chapter 10 The Purchasing Process 325 Learning Objectives 325

Overview of the Purchasing Process 327

Procuring Goods and Vendor Services 327

Paying for Procured Goods and Vendor Services 328

Data Flows in the Purchasing Process 328


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Ordering Goods and Vendor Services 328

Ordering Custom Goods and Vendor Services 330

Receiving 331

Vendor Invoicing 332

Disbursing Cash 333

AIS Structure for the Purchasing Process 335

Purchase Order Module Functions 335

Vendor (Accounts Payable) Module Functions 336

Reporting for the Purchasing Process 338

Reporting for Vendor Performance 338

Reporting for Outstanding Purchase Orders 339

Reporting for Vendor Invoices 340

Coding for Vendor Accounts 340

Audit Trails for the Purchasing Process 341

Controls in the Purchasing Process 341

Procurement of Goods and Vendor/Employee Services 342

Disbursement of Cash 342





Data Entry in the Purchasing Process 344

Purchase Order Entry 344

Accounts Payable Data Entry 345

Posting 346

Retainages 346

Summary 347

Key Terms 347


Notes 351

Chapter 11 The Inventory Process 352 Learning Objectives 352

Overview of the Inventory Process 354

The Inventory Process in Mercantile Organizations 354

Periodic and Perpetual Inventory Systems 355

Inventory Management Problems 355

Supply Chain Management Systems 357

Outsourcing 359

AIS Structure for the Inventory Process 359

Inventory Data Flows 359

Inventory Control Functions 361

Controls in the Inventory Process 370





An Inventory Design Problem 373

Summary 373

Key Terms 374


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Notes 377

Chapter 12 Database Structure of Accounting Systems 378 Learning Objectives 378

General Structure of Accounting Systems 380

General Structure of an Accounting System 380

Using Conventional Files 380

General Structure of an Accounting System Using a Database 382

How a Database Management System Works 387

Database Architecture 389

Logical and Physical Data Structures 389

External Level 389

Conceptual Level 390

Internal Level 390

Data Relationships 391

One-to-One Relationship 391

One-to-Many Relationship 392

Many-to-Many Relationship 392

Schemas and Subschemas 393

Data Dictionary 394

Database Administrator 395

Logical Data Models 396

Relational Model 396

Object-Oriented Model 397

Combined Object and Relational Models 397

Components of a Relational Database 398

Tables 398

Primary Keys 398

Index Keys 399

Foreign Keys 399

Relational Operations 400

Selection 401

Projection 401

Selection and Projection 401

Join 402

Union 402

Intersection 403

Difference 403

Queries and Outputs 403

Association Between Tables and Files 406

Summary 408

Key Terms 408


Notes 414

Chapter 13 Developing a Relational Database for an Accounting Information System 415 Learning Objectives 415

Why Accountants Need to Know about Database Development and Implementation 416

System Output Approach 417


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Step 1 Identify and document the system outputs and the contents of the outputs that are required by users 418

Step 2 Identify and document what data elements need to be stored to produce the output 418

Step 3 Determine what tables to create and what data elements to put in which tables by using a pro-cess called data normalization 419

Step 4 Evaluate the tables to determine if additional tables need to be created 426

Step 5 Document the tables with a data access diagram 428

REA Framework Approach 429

REA Terminology 429

Entity-Relationship Diagram 430

Developing the Database 431

Comparison of REA Framework and System Output 435

Implementing a Database 436

Summary 437

Key Terms 437


Student Activity 442

Notes 442

Chapter 14 Electronic Business 443 Learning Objectives 443

Overview of Electronic Business 444

B2B and Electronic Data Interchange 445

What is EDI? 445

EDI Standards and Protocols 446

EDI Architectures 448

EDI and Electronic Funds Transfer 451

EDI and Supply Chain Management 451

Legal Aspects of EDI 451

B2B and Extranets 452

BWO and Intranets 453

BWO and Bar Coding 453

Characteristics of Bar Codes 454

Bar Code Symbologies 455

Accounting Applications of Bar Codes 458

B2C (E-Commerce) 459

Cloud Computing 460

E-Business Security 460

Confidentiality 461

Web Assurance Services 461

Authentication 462

Prevention of Access 463

Summary 464

Key Terms 465


Notes 467

Chapter 15 AIS Selection and Implementation 468 Learning Objectives 468


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Overview of the Accounting Software Industry 470

Accounting Software Vendors and Packages 471

System Search, Selection, and Implementation 473

Issues in System Implementation 474

Project Tasks 478

Final Caveats 487

Summary 488

Key Terms 489

Discussion Questions and Problems 489

Notes 491

Glossary 492

Index 510

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