ACF211 - Complete Lecture Notes PDF

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ACF211: Accounting Information Systems and AuditingLecture 1Toffler (1980), 3 waves of change: Agriculture and handwork – technology is primitive Industrial Revolution – late 18th century, lasted 150 years Information age – information becomes the currency Information I now as important as land, lab...

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ACF211: Accounting Information Systems and Auditing Lecture 1 Toffler (1980), 3 waves of change: 1. Agriculture and handwork – technology is primitive 2. Industrial Revolution – late 18th century, lasted 150 years 3. Information age – information becomes the currency Information I now as important as land, labour and capital resources Digitization: Conversion of analogue information to digital form so the information can be processed, stored and transmitted through digital media. Lower cost Instant and interactive delivery IT megatrends: o Social media - websites and applications that enable users to create and share content or to participate in social networking. Organisations use social media to encourage employee collaboration or to connect with their customers. o Cloud computing - the practice of using a network of remote servers hosted on the Internet to store, manage, and process data, rather than a local server or a personal computer. A way to allocate resources, resources are used “on demand” and customers only pay for what they consume. Resources can be rapidly allocated and reallocated. Consumption becomes an operating expense and utilisation and efficiency increase dramatically. o Mobile computing - a generic term describing ability to use the technology to wirelessly connect to and use centrally located information and/or application software through the application of small, portable, and wireless computing and communication devices. Mobile device often leapfrog traditional PCs. Implications- increased collaboration, the ability to manage business in real time and new ways to reach customers. o Big data – extremely large data sets that may be analysed computationally to reveal patterns, trends, and associations, especially relating to human behaviour and interactions. Everything we do is increasingly leaving a digital trace wheich we can use and analyse. Big data refers to our ability to make use of the ever increasing volumes of data (conversations, photos, videos and sensors. The emergence of new business models: Disruption to the existing business and reshuffling of organisational boundaries. Business model : describes how a company produces, delivers and sells products or service to create wealth. E.g. uber and Airbnb Legal issues: Sarbanes-Oxley Act of 2002 (SOX) To comply with SOX, management must document and evaluate significant internal controls. Auditors must as part of an integrated audit of financial statements, report on the

effectiveness of the organization’s system of internal control. IT in business is: o Affecting the way in which organisations operate o Changing the nature and economies of accounting activity o Changing the competitive environment in which accountants operate o Accountants must anticipate the changing needs of business. They must supplement its technical expertise with a broad understanding of the application of existing and emerging technologies and the new skills that they demand. o Accountants and finance professionals must be open to the changes created by big data, cloud, mobile and social platforms. They must be able to face up to the demands of cybercrime, digital service delivery and artificial intelligence. What is a system? o System: A system is any group of interacting, interrelated, or interdependent parts that form a complex and unified whole that has a specific purpose. o A set of things working together as parts of a mechanism or an interconnecting network; a complex whole. o A set of principles or procedures according to which something is done; an organized scheme or method. o An information system is a man-made system that generally consists of interrelated set of computer-based and manual components to collect, store and manage data to provide information for business users. o An information system is software that helps you organize and analyze data. This makes it possible to answer questions and solve problems relevant to the mission of an organization. Definition of AIS: An accounting information system (AIS) is a specialized subsystem of IS that: o Collects and stores financial and accounting data about the organisations activities and transactions efficiently and effectively. o Provide information useful for decision making – reports to management, financial statements. o Provide adequate controls to ensure that data are recorded and processed accurately. o An accounting information system (AIS) is a structure that a business uses to collect, store, manage, process, retrieve and report its financial data so that it can be used by accountants, consultants, business analysts, managers, chief financial officers (CFOs), auditors and regulatory and tax agencies. Who are the users? Management, senior management, directors, other personnel, internal auditors, trading partners (suppliers and customers) and other stakeholders (investors and government agencies).

Distinction between data and information: Data are facts that are collected, recorded, stored and processed by an IS. Data: Facts and statistics collected together for reference or analysis. The quantities, characters, or symbols on which operations are performed by a computer, which may be stored and transmitted in the form of electrical signals and recorded on magnetic, optical, or mechanical recording media. Organisations collect data about: events are occur, resources that are affects by those event and agents who participate in the events. Information is data that has been organized and processed to provide meaning to a user. Importance of computerized systems: o Data processing capacity o Real-time processing o Faster service and product delivery o Ability to deal with complexity o Superior quality of output o Potential for tailored reports Problems of computerized systems: o Information overload o Processing of input errors that humans would easily spot- failure to identify fraudulent input o Potential for bigger frauds o Data organized, integration and storage can be problematic AIS-related legislation in the US: Federal statutes requiring Suspicious Activity Reporting (SAR), including the anti-money laundering act 1992 and the patriot act 2001. SOX – especially section 404 AIS-related legislation in the UK: Money laundering legislation – Terrorism act 2000, anti-terrorism crime and seciruty act 2001, proceeds of crime act 2002, serious rime ad police act 2005. Requirements for SAR (as in the US) Data Protection Act 1998.

IT megatrends Impact on AIS:

Lecture 2 Steps in the accounting cycle: o Record transaction in a journal o Post the journal entry to the ledgers (general, debtors, creditors) o Extract an unadjusted trail balance o Record and post adjusting journal entries (depreciation, prepayments, accruals) o Extract an adjusted trial balance o Prepare the financial statements from the adjusted trial balance Coding systems: AIS’s depend on coding to record, store, classify and retrieve financial date. Computer systems often use numerical or alphanumeric codes for processing accounting transactions. Purposes of coding: 1. Uniquely identify transactions and accounts 2. Compress data 3. Aid in classification process 4. Convey special meanings Coding structure: The structure chosen by the business is fundamental to the effectiveness of the AIS because: o Normally the coding structure cannot be amended without significant upheaval o It establishes the relationships between accounting elements o It defines the boundaries on the level of detail needed o It determines authority within the organization Business process: A business process is a collection of activities and work-flows in an organization that creates value. Business processes can be particular to the organization but there are some common processes which are core to most; sales, purchases, production and financing. The sales process: Process – begins with customer order, ends with collection of cash. Primary objectives of sales process – process sales in a timely and efficient manner, collect cash in a timely and effective manner. Sales order entry  Shipping  Billing  Cash collections Objective of the sales process: o Tracking sales of goods and/or services to customers o Filling customers’ orders o Maintaining customer records o Billing customers for goods and services o Collecting payment for goods and services o Forecasting sales and cash receipts Source documents in the sales process:

o o o o o

Sales order Sales invoice Remittance advice Shipping notice Debit/credit memo

Inputs to the sales process: o Sales order – created at time of sale. Used to prepare the sales invoice. o Sales invoice – reflects information of the sale. Products purchased, price, terms of payment. o Remittance advice – may accompany payment. o Shipping notices – prepared when warehouse releases goods. Copy possibly included with goods. Additional copy sent to accounts receivable. o Debit/credit memoranda- denotes return of damaged goods. Identifies discrepancies about amount owed. Outputs of the sales process: o Financial statements o Customer billing statement – summarises outstanding sales invoices. Total amount currently owed. o Aging report- accounts receivable balances. Categorised based on time outstanding. o Bad o Bad debt report- information on collection follow-up procedures. Helps manage overdue accounts. o Cash receipts forecast- source documents used as inputs. Prior payment experience and aging analysis aid in preparation. o Approved customer listing report- identifies customers approved for sales. Included customer information such as billing address, credit limits, and billing terms. o Sales analysis reports- detailed information captured by AIS. Aid in decision making process for production planning and marketing efforts.

Sales process summary: Objectives- tracking sales of goods and/or services to customers, filling customers orders., maintaining customer records, billing for goods and services, collecting payment for goods and services, and forecasting sales and cash receipts. Inputs (source documents)- sales order, sales invoice, remittance advice, shipping notice and debit/credit memoranda.

Outputs (reports)- Financial statement information, customer billing statements, aging report, bad debt report, cash receipt forecast, customer listing and sales analysis reports. The purchasing process: Process- Bings with request for goods/services, ends with payment of cash. Primary objectives of purchasing process- purchase high quality goods at best price. Pay vendors at the optimal time. Ordering goods, supplies and services  receiving and storing goods, supplies and services  paying for goods, supplies and services. Objectives of the purchasing process: o Tracking purchases of goods and/or services from vendors. o Tracking amounts owed. o Maintaining vendor records (approved vendors, update for experiences of poor quality) o Controlling inventory (avoid too little/too much) o Making timely and accurate vendor payments (taking advantage of discounts) o Forecasting purchases and cash outflows Inputs to the purchasing process: o Purchase requisition – identifies item requested. May indicate name of vendor. o Purchase order- based on purchase requisition. Includes vendor information and payment terms. o Vendor invoice- includes prices, shipping terms and discounts. o Receiving report- count and condition of goods received. o Bill of lading- accompanies the goods sent (freight carrier). Carrier assumes the responsibility for the goods. o Packing slip- specific goods and quantities included in shipment. Included in merchandise package. Source documents in the purchasing process: o Purchase requisition o Purchase order o Vendor invoice o Receiving report o Bill of lading o Packing slip o Debit/credit memoranda Outputs of the purchasing process: Financial statement information Vendor check- supported by a voucher. Signed by a person designated by management.

Check register- list of all check issues for a particular period. Discrepancy reports- notes differences in quantities or amounts. Based on reconciliation of purchase order, receiving report, and the purchase invoice. Cash requirements forecast- predicts future payments and payment dates (important for working capital decision making). Utilises multiple source documents. Purchasing process summary: Objectives- tracking purchases of goods and/or services from vendors, tracking amounts owed, maintaining vendor records, controlling inventory, making timely and accurate vendor payments, and forecasting purchases and cash outflows. Inputs (source documents)- purchase requisition, purchase order, vendor listing, receiving report, bill of lading, packing slip, and debit/credit memoranda Outputs (reports)- financial statement information, vendor checks, check register, discrepancy reports, cash requirements forecast, and sales analysis reports. The production process summary: Objectives- track purchases and sales of inventories, monitor and control manufacturing costs, control inventory, control and coordinate the production process, and provide input for budgets. Inputs (source documents)- materials requisition form, bill of materials, master production schedule, production order, and job time cards. Outputs (reports)- financial statement information, material price lists, periodic usage reports, inventory status reports, production cost reports, and manufacturing status reports. The financing process: Implicit in all other processes Long-term financing (issue of shares, rights issues and debenture loans) Short-term financing and working capital management Forecasts and budgets of cash flow Management of long-term investments in non-current tangible, in tangible and financial assets. The financing process summary: Objectives- effective cash management, cost of capital optimization, earn maximum return on investments, and project cash flows. Inputs (source documents): remittance advices, deposit slips, checks, bank statements, stock market data, interest data, and financial institution profiles. Outputs (reports)- financial statement information, cash budget, investment report, debt and interest reports, financial ratios, and financial planning model reports. Service industries: o No inventory o Stock-in-trade is time o Accounting for time requires time recording and coding system o Accurate billing requires accurate time recording and coding Special issues – outsourcing:

Alternative to developing, installing a running a business’s own AIS. Pro– business can focus on core competencies, business does not need to keep up with changing technologies and cost saving. Con- inflexibility (contracts typically run for 5 to 10 year), difficult to break contractual agreements if arrangement is unsatisfactory, difficult and expensive to bring these functions back in house and a loss of control. Special issues – offshoring: Transfer of business processes to a distant location. Pros- cost saving and businesses do not need to keep up with changes in technologies. Cons- inflexibility of arrangement, potential communication problems, cultural issues, potential problems with quality control and cost savings may diminish over time. Business process re-engineering: The redesign of business processes that are no longer efficient or effectiveo Information systems difficult to use because of interface, slowness and lack of reliability. o Data/information output is incorrect, irrelevant and incomprehensible. o People experience problems using the systems. o System too complex. Why might BPR not work? o Resistance by people because of e.g. threats to employment, lack of consultation. o Overstatement of potential positive outcomes by those involved. o Lack of understanding/genuine support by senior managers. o Loss of interest- replaced by other concerns.

Lecture 3 What is fraud? “an intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving the use of deception to obtain an unjust or illegal advantage” Any means a person uses to gain an unfair advantage over another person, includeso False representation – false statement or disclosure o Material fact- a fact must be substantial in inducing someone to act o Intent to deceive- must exist o The misrepresentation must have resulted in justifiable reliance upon information, which caused someone to act o The misrepresentation must have caused injury or loss Two categories of fraud: Two main types of accounting-related fraud; fraudulent financial reporting and misappropriation of assets. Fraudulent financial reporting (management fraud “cooking the books”)o Falsify accounting records to mislead creditors/analysts/investors o Corporate scandals are examples Misappropriation of assets (employee fraud/occupational fraud)o Stealing assets from a company, usually committed by employees or multiple in collusion. o Assets can be physical (cash, inventory) and digital (intellectual property, customer data). Major motivations for committing fraud: o Envy of wealth and success o Corrupt corporate cultures o Competitive ethic of capitalism o Belief that financial crime is victimless o Ability to rationalize abnormal situations (e.g. ‘just borrowing the money, will return it later’) o Moral justification (e.g. ‘employer owed me the money really’) Perpetrator characteristics: o Men in 40-50 age group, working alone, commit the most frauds o Large amounts stolen by university-educated older men with no criminal records o Frauds are more likely to be committed by individuals who have worked for long time in an organization o Women commit frauds, but for lesser amounts than men (fraud’s ‘glass ceiling’. Note however the rise in pink collar crime) o Most fraudsters lead lives of stability and conformity Why do they do it? Three conditions are necessary for fraud to occur- a pressure or motive, an opportunity and a rationalization.

What to look for? o Incentives/pressures – threats from e.g. market conditions, rapid technological change, pressure to meet requirements and expectations of third parties, and threats to personal financial situation of managers. o Opportunities – an opportunity is the conditions or situation that allows a person to commit and conceal a dishonest act, opportunities often stem from a lack of internal controls, and the most prevalent opportunity for fraud results from a company’s failure to enforce its system of internal controls. o Attitudes/rationalizations – inappropriate values and ethical standards in the organization, excessive interest by management in maintaining or increasing stock price or earnings trend, known history of violation of securities laws, low morale, and poor relationship with auditors. Ethical issues in computer use: o Computer abuse – use of internet in worktime for surfing, email, illegal activities and profit making activities. Copying software for home/business use. o How to prevent this? Determine what is acceptable, educate/inform employees, code of ethics for computer use, monitoring computer activity, and review email traffic (?). Cybercrime: o Cybercrime – a general term that refers to any criminal activity that involves direct attacks on computers or networks using viruses or denial of service attacks. o Computer systems are particularly vulnerable to computer crimes for several reasons;  Company databases can be huge and access privileges can be difficult to create and enforce. Consequently, individuals can steal, destroy, or alter massive amounts of data in very little time.  Organizations often want employees, customers, suppliers, and others to have access to their system from inside the organization and without. This access also creates vulnerability.  Computer programs only need to be altered once, and they will operate that way until – the system is no longer in use; or someone notices. o Examples of cyber crime –  Compromising valuable information (data diddling); data diddling refers to changing data before, during, or after they are entered into a computer system. Data diddling is a problem because these data are often proprietary, they may give a firm a competitive advantage and sometimes an organization most valuable asset. Hacking is such a wid...