Accounting Information Systems: An

Chapter 1
Accounting
Information
Systems: An
Overview
Learning Objectives
Distinguish between data and information.
Discuss the characteristics of useful information.
Explain how to determine the value of information.
Explain the decisions an organization makes
and the information needed to make them.
Identify the information that passes
between internal and external parties and
an AIS.
Explain what an accounting information
system (AIS) is and describe its basic
functions.
Discuss how an AIS can add value to an
organization.
 Explain how an AIS and corporate strategy
affect each other.
What Is a System?
 System
◦ A set of two or more
interrelated
components interacting
to achieve a goal
 Goal Conflict
◦ Occurs when
components act in their
own interest without
regard for overall goal
 Goal Congruence
◦ Occurs when
components acting in
their own interest
contribute toward
overall goal
Data vs. Information
 Data are facts that are
recorded and stored.
◦ Insufficient for decision
making.
 Information is processed
data used in decision
making.
◦ Too much information
however, will make it
more, not less, difficult to
make decisions. This is
known as Information
Overload.
Benefits Costs
 Reduce  Time & Resources

Uncertainty
 Improve Decisions ◦ Produce Information
 Improve Planning ◦ Distribute
Information
 Improve
Benefit $’s > Cost $’s
Scheduling
Value of Information
What Makes Information
Useful?
Necessary characteristics:
◦ Relevant
 “The capacity of information to make a
difference in a decision by helping users to form
predictions about the outcomes of past, present,
and future events or to confirm or correct prior
expectations.”
◦ Reliable
 “The quality of information that assures that
information is reasonably free from error and
bias and faithfully represents what it purports to
represent.”
◦ Complete
 “The inclusion in reported information of
everything material that is necessary for faithful
representation of the relevant phenomena.”
What Makes Information
Useful?
◦ Timely
 “Having information available to a decision maker
before it loses its capacity to influence decisions.”
◦ Understandable
 “The quality of information that enables users to
perceive its significance.”
◦ Verifiable
 “The ability through consensus among measurers
to ensure that information represents what it
purports to represent or that the chosen method
of measurement has been used without error or
bias.”
◦ Accessible
 Available when needed (see Timely) and in a
useful format (see Understandable).
Business Process
Systems working
toward
organizational
goals
Business Process Cycles
Revenue
Expenditure
Production
Human Resources
Financing
Business Transactions
Give–Getexchanges
Between two entities
Measured in economic terms
Accounting Information
Systems
Collect,process, store, and report
data and information
If Accounting = language of
business
AIS = information providing
vehicle
Accounting = AIS
Components of an AIS
Peopleusing the system
Procedures and Instructions
◦ For collecting, processing, and storing data
Data
Software
Information Technology (IT)
Infrastructure
◦ Computers, peripherals, networks, and so
on
Internal Control and Security
◦ Safeguard the system and its data
AIS and Business
Functions
Collectand store data about
organizational:
◦ Activities, resources, and personnel
Transform data into information
enabling
◦ Management to:
 Plan, execute, control, and evaluate
 Activities, resources, and personnel
Provide adequate control to safeguard
◦ Assets and data
AIS Value Add
Improve Quality and Reduce
Costs
Improve Efficiency
Improve Sharing Knowledge
Improve Supply Chain
Improve Internal Control
Improve Decision Making
Improve Decision Making
Identify situations that require
action.
Provide alternative choices.
Reduce uncertainty.
Provide feedback on previous
decisions.
Provide accurate and timely
information.
Value Chain
The set of activities a product or
service moves along before as
output it is sold to a customer
◦ At each activity the product or
service gains value
Value Chain—Primary
Activities
Value Chain—Support Activities
Value Chain
AIS AND CORPORATE STRATEGY
Organizations have
limited resources, thus
investments to AIS should
have greatest impact on
ROI.
Organizations need to
understand:
IT developments
Business strategy
Organizational culture
Will effect and be
effected by new AIS
CHAPTER 2
Overview of Business Processes

INFORMATION NEEDS AND
BUSINESS ACTIVITIES
 Businesses engage in a variety of activities,
including:
◦ Acquiring capital
◦ Buying buildings and equipment Each decision
◦ Hiring and training employees requires
◦ Purchasing inventory different types
◦ Doing advertising and marketing of information.
◦ Selling goods or services
◦ Collecting payment from customers
◦ Paying employees
◦ Paying taxes
◦ Paying vendors
INFORMATION NEEDS AND
BUSINESS ACTIVITIES
Types of information needed for
decisions:
◦ Some is financial
◦ Some is non-financial
◦ Some comes from internal sources
◦ Some comes from external sources
An effective AIS needs to be able
to integrate information of different
types and from different sources.
INTERACTION WITH EXTERNAL AND
INTERNAL PARTIES
External
AIS Parties
The AIS interacts with external parties,

such as customers, vendors, creditors,
and governmental agencies.
INTERNAL PARTIES
Internal External
Parties AIS Parties
The AIS also interacts with

internal parties such as
employees and management.
INTERNAL PARTIES
Internal External
Parties AIS Parties
The interaction is typically two-way, in

that the AIS sends information to and
receives information from these parties.
BUSINESS CYCLES
A transaction is:
◦ An agreement between two entities to
exchange goods or services; OR
◦ Any other event that can be measured in
economic terms by an organization.
EXAMPLES:
◦ Sell goods to customers
◦ Depreciate equipment
BUSINESS CYCLES
The transaction cycle is a
process:
◦ Begins with capturing data about a
transaction
◦ Ends with an information output,
such as financial statements
BUSINESS CYCLES
Many business activities are
paired in give-get exchanges
The basic exchanges can be
grouped into five major
transaction cycles.
◦ Revenue cycle
◦ Expenditure cycle
◦ Production cycle
◦ Human resources/payroll cycle
◦ Financing cycle
BUSINESS CYCLES
Many business activities are paired in

give-get exchanges
The basic exchanges can be grouped
into five major transaction cycles.
◦ Revenue cycle
◦ Financing cycle
REVENUE CYCLE
The revenue cycle involves interactions

with your customers.
You sell goods or services and get cash.
Give Get
Goods Cash
BUSINESS CYCLES
Many business activities are paired

in give-get exchanges
grouped into five major transaction
cycles.
◦ Revenue cycle
◦ Financing cycle
EXPENDITURE CYCLE
The expenditure cycle involves
interactions with your suppliers.
You buy goods or services and pay cash.
Give Get
Cash Goods
BUSINESS CYCLES
transaction cycles.
◦ Revenue cycle
◦ Financing cycle
PRODUCTION CYCLE
In the production cycle, raw materials and
labor are transformed into finished goods.
Give Raw Get

Materials & Finished
Labor Goods
BUSINESS CYCLES
transaction cycles.
◦ Revenue cycle
◦ Financing cycle
HUMAN RESOURCES/
PAYROLL CYCLE
The human resources cycle involves
interactions with your employees.
Employees are hired, trained, paid,
evaluated, promoted, and terminated.
Give Get
Cash Labor
BUSINESS CYCLES
transaction cycles.
◦ Revenue cycle
◦ Financing cycle
FINANCING CYCLE
 The financing cycle involves interactions
with investors and creditors.
 You raise capital (through stock or debt),
repay the capital, and pay a return on it
(interest or dividends).
Give Get
Cash cash
BUSINESS CYCLES
Thousands of transactions can
occur within any of these cycles.
But there are relatively few
types of transactions in a cycle.
BUSINESS CYCLES
EXAMPLE: In the revenue cycle,
the basic give-get transaction is:
◦ Give goods
◦ Get cash
BUSINESS CYCLES
 Other transactions in the revenue cycle include:
 Handle customer inquiries  Update sales and Accts

 Take customer orders Rec. for sales
 Approve credit sales  Receive customer
payments
 Check inventory availability
 Update Accts Rec. for
 Initiate back orders
collections
 Pick and pack orders
 Handle sales returns,
 Ship goods discounts, & bad debts
 Bill customers  Prepare management
reports
Note that the last activity in any  Send info to other cycles
cycle is to send information to other
cycles.
BUSINESS CYCLES
Click on the buttons below if you
wish to see the transactions that
occur in the other cycles:
Expenditure
Expenditure HumanRes./
Human Res./
Cycle
Cycle PayrollCycle
Payroll Cycle
Production
Production Financing
Financing
Cycle
Cycle Cycle
Cycle
BUSINESS CYCLES
Every transaction cycle:
◦ Relates to other cycles
◦ Interfaces with the general ledger
and reporting system, which
generates information for
management and external parties.
Finished Goods
Revenue Expenditure Production

Cycle Cycle Cycle
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General Ledger
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◦ Provides funds to
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Human Res./ cycle
Financing
Payroll Cycle ◦ Provides data to
Cycle the General
Ledger and
Reporting System
Raw
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Cycle Cycle Cycle
Data
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General Ledger
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◦ Gets funds from
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◦ Provides raw
Human Res./ Financing materials to the
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◦ Provides data to
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◦ Gets raw materials

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◦ Gets labor from the
HR/payroll cycle
Human Res./ Financing ◦ Provides finished
Payroll Cycle Cycle goods to the
revenue cycle
◦ Provides data to the
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◦ Provides labor to
Human Res./ Funds Financing the production
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Fu
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General Ledger
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 The Financing
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System cycle:
◦ Gets funds from
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Data
◦ Provides funds to
the expenditure
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Human Res./ Funds Financing cycles
Payroll Cycle Cycle ◦ Provides data to
the General
Ledger and
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Cycle Cycle Cycle
Data
ta
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General Ledger
Internal & External Users
and Reporting
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
and Reporting
System:
Human Res./ Financing ◦ Gets data from all of
Payroll Cycle Cycle the cycles
◦ Provides
information for
internal and
external users
BUSINESS CYCLES
Many accounting software packages
implement the different transaction
cycles as separate modules.
◦ Not every module is needed in every
organization, e.g., retail companies don’t
have a production cycle.
◦ Some companies may need extra
modules.
◦ The implementation of each transaction
cycle can differ significantly across
companies.
BUSINESS CYCLES
However the cycles are

implemented, it is critical that
the AIS be able to:
◦ Accommodate the information
needs of managers
◦ Integrate financial and non-
financial data.
TRANSACTION PROCESSING:
THE DATA PROCESSING
CYCLE
 Accountants play an important role in data
processing. They answer questions such
as:
◦ What data should be entered and stored?
◦ Who should be able to access the data?
◦ How should the data be organized, updated,
stored, accessed, and retrieved?
◦ How can scheduled and unanticipated
information needs be met.
 Toanswer these questions, they must
understand data processing concepts.
THE DATA PROCESSING
CYCLE
An important function of the AIS is
to efficiently and effectively process
the data about a company’s
transactions.
◦ In manual systems, data is entered into
paper journals and ledgers.
◦ In computer-based systems, the series
of operations performed on data is
referred to as the data processing cycle.
THE DATA PROCESSING
CYCLE
The data processing cycle
consists of four steps:
◦ Data input
◦ Data storage
◦ Data processing
◦ Information output
THE DATA PROCESSING
CYCLE
◦ Data input
◦ Data storage
◦ Data processing
DATA INPUT
The first step in data processing
is to capture the data.
Usually triggered by a business
activity.
Data is captured about:
◦ The event that occurred
◦ The resources affected by the event
◦ The agents who participated
DATA INPUT
A number of actions can be taken
to improve the accuracy and
efficiency of data input:
◦ Turnaround documents
 EXAMPLE: The stub on your telephone bill that you tear off
and return with your check when you pay the bill.
 The customer account number is coded on the document,
usually in machine-readable form, which reduces the
probability of human error in applying the check to the
correct account.
DATA INPUT
◦ Source data automation
 Capture data with minimal human intervention.
 EXAMPLES:
 ATMs for banking
 Point-of-sale (POS) scanners in retail stores
 Automated gas pumps that accept your credit card
DATA INPUT
◦ Well-designed source documents
and data entry screens
 How do these improve the accuracy and efficiency
of data input?
DATA INPUT
◦ Well-designed source documents and
data entry screens
 What does it mean if a document number is missing
in the sequence?
◦ Using pre-numbered documents
or having the system
automatically assign sequential
numbers to transactions
DATA INPUT
◦ Well-designed source documents and
data entry screens
 What does it mean if there are duplicate document
numbers?
◦ Using pre-numbered documents
or having the system
automatically assign sequential
numbers to transactions
DATA INPUT
A number of actions can be taken to
improve the accuracy and efficiency of
data input:
◦ Well-designed source documents and data entry
screens
◦ Using pre-numbered documents or having the
system automatically assign sequential numbers
 EXAMPLE: Check for inventory availability before
to transactions
completing an online sales transaction.
◦ Verify transactions
THE DATA PROCESSING
CYCLE
◦ Data input
◦ Data storage
◦ Data processing
DATA STORAGE
Data needs to be organized for
easy and efficient access.
Let’s start with some vocabulary
terms with respect to data
storage.
DATA STORAGE
Ledger
A ledger is a file used to store cumulative

information about resources and agents. We
typically use the word ledger to describe the set
of t-accounts. The t-account is where we keep
track of the beginning balance, increases,
decreases, and ending balance for each asset,
liability, owners’ equity, revenue, expense, gain,
loss, and dividend account.
COMPUTER-BASED STORAGE
CONCEPTS
A master file is a file that stores
cumulative information about an
organization’s entities.
It is conceptually similar to a ledger
in a manual AIS in that:
◦ The file is permanent
◦ The file exists across fiscal periods
◦ Changes are made to the file to reflect
the effects of new transactions.
CONCEPTS
A transaction file is a file that
contains records of individual
transactions (events) that occur
during a fiscal period.
It is conceptually similar to a journal
in a manual AIS in that:
◦ The files are temporary
◦ The files are usually maintained for one
fiscal period
CONCEPTS
A database is a set of interrelated, centrally-
coordinated files.
 When files about students are integrated with
files about classes and files about instructors,
we have a database.
Student Class
File File
Instructor
File
THE DATA PROCESSING
CYCLE
◦ Data input
◦ Data storage
◦ Data processing
DATA PROCESSING
Once data about a business activity
has been collected and entered into
a system, it must be processed.
DATA PROCESSING
There are four different types of file
processing:
◦ Updating data to record the occurrence of
an event, the resources affected by the
event, and the agents who participated,
e.g., recording a sale to a customer.
◦ Changing data, e.g., a customer address
◦ Adding data, e.g., a new customer.
◦ Deleting data, e.g., removing an old
customer that has not purchased
anything in 5 years.
DATA PROCESSING
Updating can be done through
several approaches:
◦ Batch processing
DATA PROCESSING
Batch processing:
◦ Source documents are grouped into
batches, and control totals are calculated.
◦ Periodically, the batches are entered into
the computer system, edited, sorted, and
stored in a temporary file.
◦ The temporary transaction file is run
against the master file to update the
master file.
◦ Output is printed or displayed, along with
error reports, transaction reports, and
control totals.
DATA PROCESSING
several approaches:
◦ On-line Batch Processing
DATA PROCESSING
On-line batch processing:
◦ Transactions are entered into a computer
system as they occur and stored in a
temporary file.
◦ Periodically, the temporary transaction
file is run against the master file to
update the master file.
◦ The output is printed or displayed.
DATA PROCESSING
several approaches:
◦ On-line, Real-time Processing
DATA PROCESSING
On-line, Real-time Processing
◦ Transactions are entered into a computer
system as they occur.
◦ The master file is immediately updated
with the data from the transaction.
◦ Output is printed or displayed.
DATA PROCESSING
several approaches:
◦ On-line, Real-time Processing
Ifyou’re going through
enrollment, which of these
approaches would you prefer
that your university was using?
Why?
THE DATA PROCESSING
CYCLE
◦ Data input
◦ Data storage
◦ Data processing
INFORMATION OUTPUT
The final step in the information
process is information output.
This output can be in the form of:
◦ Documents
Documents are records of transactions or

other company data.
 EXAMPLE: Employee paychecks or
purchase orders for merchandise
 Documents generated at the end of the
transaction processing activities are
known as operational documents (as
opposed to source documents).
 They can be printed or stored as
electronic images.
INFORMATION OUTPUT
This output can be
 Reports in the
are used form of:
by employees to
control operational activities and
◦ Documentsby managers to make decisions
and design strategies.
◦ Reports  They may be produced:
 On a regular basis
 On an exception basis
 On demand
 Organizations should periodically
reassess whether each report is
needed.
INFORMATION OUTPUT
This output can be in the form of:
◦ Documents
 Queries are user requests for
◦ Reports specific pieces of information.
 They may be requested:
◦ Queries  Periodically
 One time
 They can be displayed:
 On the monitor, called soft copy
 On the screen, called hard copy
INFORMATION OUTPUT
Output can serve a variety of
purposes:
◦ Financial statements can be provided
to both external and internal parties.
◦ Some outputs are specifically for
internal use:
 For planning purposes
 Examples of outputs for planning
purposes include:
 Budgets
 Budgets are an entity’s formal
expression of goals in financial terms
 Sales forecasts
INFORMATION OUTPUT
purposes:
internal use:
 For management of day-to-day
operations
 Example: delivery schedules
INFORMATION OUTPUT
Performance reports are outputs that
are used for control purposes.
Output can
 These serve a variety of
reports compare an
purposes:
organization’s standard or expected
performance with its actual outcomes.
◦ Financial statements
 Management can beisprovided
by exception an
approach
to both externalto utilizing performance
and internal parties.
reports that focuses on investigating
◦ Someandoutputs
acting onare specifically
only for that
those variances
are significant.
internal use:
 For management of day-to-day
operations
 For control purposes
INFORMATION OUTPUT
purposes:
internal use:
 For management of day-to-day operations
 For control
These purposes
outputs might include:
 For evaluation
 Surveys purposes
of customer satisfaction
 Reports on employee error rates
Introduction to
e-Business
Chapter 3
Learning Objectives
1. Explain what e-business is and
how it affects organizations.
2. Discuss methods for increasing
the likelihood of success and for
minimizing the potential risks
associated with e-business.
3. Describe the networking and
communications technologies
that enable e-business.
Introduction: E-Business
E-business refers to all uses

of advances in information
technology (IT), particularly
networking and
communications technology,
to improve the ways in which
an organization performs all
of its business processes.
Introduction: E-Business
E-business encompasses
an organization’s external
interactions with its:
◦ Suppliers
◦ Customers
◦ Investors
◦ Creditors
◦ The government
◦ Media
E-business includes the use of IT to
redesign its internal processes.
For organizations in many
industries, engaging in e-business
is a necessity.
Engaging in e-business in and of
itself does not provide a
competitive advantage.
However, e-business can be used
to more effectively implement its
basic strategy and enhance the
effectiveness and efficiency of its
value-chain activities.
E-Business Models
Business to Consumers (B2C):
Interactions between individuals
and organizations.
Business to Business (B2B):
Interorganizational e-business.
Categories of E-Business
Type of E- Characteristics
Business
B2C Organization-individual
Smaller dollar value
One-time or infrequent transactions
Relatively simple
B2B Interorganizational
B2G Larger dollar value
B2E Established, on-going relationships
Extension of credit by seller to
customer
More complex
E-Business Effects on
Business Processes
Electronic Data Interchange (EDI):
Standard protocol, available since
the 1970s, for electronically
transferring information between
organizations and across business
processes.
EDI:
◦ Improves accuracy
◦ Cuts costs
Recent EDI Facilitators
Traditional EDI was
expensive.
New developments that have
removed this cost barrier are:
◦ The Internet: Eliminates the
need for special proprietary
third-party networks.
◦ XML: Extensible Markup
Language – Set of standards for
defining the content of data on
Web pages.
Integrated Electronic Data
Interchange (EDI)
Reaping the full benefits of EDI
requires that it be fully integrated
with the company’s AIS.
EDI
Suppliers Company
Purchase orders AIS
EDI
Customers Customer orders
E-Business Effects on Value Chain Activities
Value Chain – E-Business Opportunity
Primary Activities
 Inbound logistics  Acquisition of digitizable products
 Reduced inventory “buffers”
 Operations  Faster, more accurate production
 Outbound logistics  Distribution of digitizable products

 Continuous status tracking
 Sales and Marketing  Improved customer support
 Reduced advertising costs
 More effective advertising
 Post-sale Support and Service  Reduced costs

 24/7 Service availability
 Purchasing  Source identification and reverse
 Human Resources auctions

 Employee self-service
 Infrastructure
 EFT, FEDI, other electronic payments
Information Flows in
Electronic Commerce
1. Inquiries
Buyer Seller
2. Responses
3. Orders
4. Acknowledgment
5. Billing
6. Remittance data
Explanations:
EDI = Steps 1-6 7. Payments
EFT = Step 7
FEDI = Steps 1-7
Financial Electronic Data
Interchange (FEDI)
The use of EDI to exchange information
is only part of the buyer-seller
relationship in business-to-business
electronic commerce.
Electronic funds transfer (EFT) refers to
making cash payments electronically,
rather than by check.
EFT is usually accomplished through the
banking system’s Automated Clearing
House (ACH) network.
◦ An ACH credit is an instruction to your bank to
transfer funds from your account to another account.
◦ An ACH debit is an instruction to your bank to
transfer funds from another account into yours.
Financial Electronic Data
Interchange (FEDI)
Company A Company B
Remittance data
and payment
instruction
Company A’s Company B’s
bank bank
Remittance data and funds
E-Business Success
Factors
The degree to which e-business
activities fit and support the
organization’s overall business
strategy.
The ability to guarantee that e-
business processes satisfy the
three key characteristics of any
business transaction
◦ Validity
◦ Integrity
◦ Privacy
Digital Signatures and
Digests
Digitalsignature: An electronic
message that uniquely identifies
the sender of that message.
Digest: The message that is used to
create a digital signature or digital
summary.
◦ If any individual character in the
original document changes, the value
of the digest also changes. This
ensures that the contents of a
business document have not been
altered or garbled during transmission
Digital Certificates & Certificate
Authorities
Digital Certificate: Used to verify the identity of
the public key’s owner.
◦ A digital certificate identifies the owner of a
particular private key and the corresponding
public key, and the time period during which
the certificate is valid.
Digital certificates are issued by a reliable third
party, called a Certificate Authority, such as:
◦ Verisign
◦ Entrust
◦ Digital Signature Trust
The certificate authority’s digital signature is
also included on the digital certificate so that
the validity of the certificate can also be
verified.
Types of Networks
The global networks used by many
companies to conduct electronic
commerce and to manage internal
operations consist of two components:
1 Private portion owned or leased by the
company
2 The Internet
 The private portion can be further divided into two
subsets:
1 Local area network (LAN) — a system of computers
and other devices, such as printers, that are located
in close proximity to each other.
2 Wide area network (WAN) — covers a wide
geographic area.
Types of Networks
Companies typically own all the
equipment that makes up their local
area network (LAN).
They usually do not own the long-
distance data communications
connections of their wide area
network (WAN).
They either contract to use a value-
added network (VAN) or use the
Internet.
Types of Networks
The Internet is an international
network of computers (and smaller
networks) all linked together.
What is the Internet’s backbone?
– the connections that link those computers
together
Portionsof the backbone are owned by
the major Internet service providers
(ISPs).
Types of Networks
What is an Intranet?
The term Intranet refers to
internal networks that connect to
the main Internet.
They can be navigated with the
same browser software, but are
closed off from the general
public.
What are Extranets?
Types of Networks
Extranets link the intranets of
two or more companies.
Either the Internet or a VAN can
be used to connect the
companies forming the extranet.
Value-added networks (VAN) are
more reliable and secure than the
Internet, but they are also
expensive.
Types of Networks
Companies build a virtual private
network (VPN) to improve
reliability and security, while still
taking advantage of the Internet.
Company A
AIS VPN ISP
equipment
Internet
Data Communications
System Components
There are five basic components in any
data communication network (whether
it is the Internet, a LAN, a WAN, or a
VAN):
1 The sending device
2 The communications interface device
3 The communications channel
4 The receiving device
5 Communication software
Data Communications
System Components
The following are
components of the data
communications model:
– interface devices
– communications software
– communications channel
Interface Devices
There are six basic communication
interface devices that are used in
most networks:
1 Network interface cards
2 Modems
3 Remote access devices
4 Hubs
5 Switches
6 Routers
Interface Devices
Company A
Internet service
PC-1 PC-2 PC-3 provider
NIC NIC NIC
Remote access
device
Hub 1 Frame relay

switch
Switch Hub 2 Other
LANs
Router
Router
Communications Software
Communications software
manages the flow of data across
a network.
It performs the following
functions:
– access control
– network management
– data and file transmission
– error detection and control
– data security
Communications Channels
A communications channel is the medium
that connects the sender and the
receiver.
– standard telephone lines
– coaxial cables
– fiber optics
– microwave systems
– communications satellites
– cellular radios and telephones
Communications Channels
Satellite
Microwave stations
Satellite Communications
Network Configuration
Options
Local area networks (LANs) can
be configured in one of three
basic ways:
1 Star configuration
2 Ring configuration
3 Bus configuration
Options
A star configuration is a LAN
configured as a star; each device
is directly connected to the
central server.
All communications between
devices are controlled by and
routed through the central server.
Typically, the server polls each
device to see if it wants to send a
message.
Options
The star configuration is the most
expensive way to set up a LAN, because
it requires the greatest amount of
wiring.
A B C
H Host computer D
or server
G F E
Network Configuration Options
In a LAN configured as a ring, each
node is directly linked to two other
nodes
B
A C
H D
G E
F
Options
In a LAN configured as a bus, each device
is connected to the main channel, or bus.
Communication control is decentralized on
bus networks.
Bus channel
A B C D
Host computer
or server
E F G H
Options
Wide area networks (WANs) can
be configured in one of three
basic ways:
1 Centralized system
2 Decentralized system
3 Distributed data processing
Options
In a centralized WAN, all
terminals and other devices are
connected to a central corporate
computer.
Options
 Ina decentralized WAN, each
departmental unit has its own computer
and LAN.
 Decentralized systems usually are better
able to meet individual department and
user needs than are centralized systems .
Network Configuration Options
A distributed data processing system WAN

is essentially a hybrid of the centralized
and decentralized approaches
Options
Many WANs, and most LANs, are set up as
client/server systems.
Each desktop computer is referred to as a
client.
The client sends requests for data to the
servers.
The servers perform preprocessing on the
database and send only the relevant subset
of data to the client for local processing.
What about Africa?
Chapter 4
Relational
Databases
Types of Files
Two basic types of files are used
to store data.
1 The master file, which is
conceptually similar to a ledger in
a manual system.
2 The transaction file, which is
conceptually similar to a journal
in a manual system.
File Approach
For many years, companies created
new files and programs each time an
information need arose.
This proliferation of master files
created problems:
1 Often the same data was stored in two
or more separate files.
2 The specific data values stored in the
different files were not always
consistent.
File-Oriented Approach
File 1
Fact A Sales
Fact B Program
Fact C
File 2
Fact B Shipping
Fact D Program
Fact E
File 3
Fact A Billing
Fact G Program
Fact E
Databases
The database approach views data as an
organizational resource that should be
used by, and managed for, the entire
organization, not just the originating
department or function.
Its focus is data integration and data
sharing.
Integration is achieved by combining
master files into larger pools of data that
can be accessed by many application
programs.
Databases
Database management system
(DBMS) is the program that
manages and controls access to the
database.
Database system is the combination
of the database, the DBMS, and the
application program that uses the
database.
Database administrator (DBA) is the
person responsible for the
database.
Database Approach
Database Sales Program
Fact A
Database
Fact B Shipping
management
Program
Fact C system
Fact D
Fact E Billing
Program
Relational Databases
Databases differ in the type of data
model they are designed with
A data model is an abstract
representation of the contents of a
database.
The relational data model represents
everything in the database as being
stored in the form of tables.
Technically, these tables are called
relations.
Relational Databases
Each row in a relation, called a
tuple, contains data about a
specific occurrence of the type of
entity represented by that table.
Logical and Physical
Views of Data
A major advantage of database
systems over file-oriented
systems is that the database
systems separate the logical and
physical view of data.
What is the logical view?
◦ It is how the user or programmer
conceptually organizes and
understands the data.
Views of Data
What is the physical view?
◦ It refers to how and where the data
are physically arranged and stored on
disk, tape, CD-ROM, or other media.
The DBMS controls the database
so that users can access, query,
or update it without reference to
how or where the data are
physically stored.
Views of Data
Logical View User A Logical View User B

Past Due Accounts October Sales by Region
Name Balance Days
Jackson 2145 48
Houston 1595 65
Database
Operating
DBMS system
Views of Data
Program-data independence
is the separation of the logical
and physical views of data.
Schemas
A schema describes the logical
structure of a database.
There are three levels of
schemas:
1Conceptual-level schema
2External-level schema
3Internal-level schema
Schemas
The conceptual-level schema is
an organization-wide view of the
entire database.
The external-level schema
consists of a set of individual user
views of portions of the database,
also referred to as a subschema.
The internal-level schema
provides a low-level view of the
database.
Schemas
Subschema A Subschema B Subschema C

r r
Jackson 210 xxxxxxx
Houston 100 xxxxxxx
Mapping external level views to conceptual level schema
Inventory Sales Customer
Cash receipt
Schemas
Inventory Sales Customer
Cash receipt
Mapping conceptual level facts to internal level descriptions
Inventory Record
Item number – integer (5), non-null, index =
itemx Description – character (15)
The Data Dictionary
The data dictionary contains
information about the structure of
the database.
For each data element stored in
the database, such as the
customer number, there is a
corresponding record in the data
dictionary describing it.
The Data Dictionary
The data dictionary is often one
of the first applications of a newly
implemented database system.
What are some inputs to the data
dictionary?
– records of any new or deleted data
elements
– changes in names, descriptions, or
uses of existing data elements
The Data Dictionary
What are some outputs of the
data dictionary?
– reports useful to programmers,
database designers, and users of
the information system
What are some sample reports?
– lists of programs in which a data
item is used
– lists of all synonyms for the data
elements in a particular file
DBMS Languages
Every DBMS must provide a means of
performing the three basic functions:
1Creating the database
2Changing the database
3Querying the database
The sets of commands used to perform
these functions are referred to as the
data definition, data manipulation, and
data query languages.
DDL Language
The data definition language
(DDL) is used to...
– build the data dictionary.
– initialize or create the database.
– describe the logical views for each
individual user or programmer.
– specify any limitations or constraints
on security imposed on database
record or fields.
DML Language
The data manipulation language
(DML) is used for data
maintenance.
What does it include?
– updating portions of the database
– inserting portions of the database
– deleting portions of the database
DQL Language
The data query language (DQL) is
used to interrogate the database.
The DQL retrieves, sorts, orders,
and presents subsets of the
database in response to user
queries.
Basic Requirements of the
Relational Data Model
1. Each column in a row must be single
valued.
2. Primary keys cannot be null.
3. Foreign keys, if not null, must have
values that correspond to the value
of a primary key in an other relation.
4. All non-key attributes in a table
should describe a characteristic
about the object identified by the
primary key.
Approaches to Database
Design
Normalization
◦ Starts with the assumption that all data is
initially stored in a large non-normalized
table.
◦ This table is then decomposed using a set
of normalization rules to create a set of
tables in the Third Normal Form.
Semantic Data Modeling
◦ The database designer uses his/her
knowledge about the business structure to
create a set of relational tables.
Database Systems and the
Future of Accounting
Database systems have the
potential to significantly alter the
nature of external reporting.
Perhaps the most significant
effect of database systems will be
in the way that accounting
information is used in decision
making.
Designing and Implementing
a Database System
 Six basic steps in designing and
implementing a database system:
1. Initial planning to determine the
need for and feasibility of
developing a new system (planning
stage).
2. Identifying user needs (requirements
analysis stage).
3. Developing the contextual-,
external-and internal- level schemas
(design stage).
Designing and Implementing
a Database System
4. Translating the internal-level
schema into the actual database
structures that will be
implemented in the new system
(coding stage).
5. Transferring all data from the
existing system to the new
database (implementation stage).
6. Using and maintaining the new
system (operation and
maintenance stage).
The REA Data Model
Data Modeling in the database Design Process
Operation and
Planning
maintenance
Data Requirements
Implementation
modelin analysis
g occurs
here
Design Coding
The REA Data Model
Data modeling is the process of

defining a database so that it faithfully
represents all aspects of the
organization, including its interactions
with the external environment.
The REA (Resources, Data, Events)
data model is a conceptual modeling
tool that focuses on the business
semantics underlying an organization’s
value chain activities.
The REA Data Model
The REA data model provides

structure in two ways:
1 By identifying what entities
should be included in the AIS
database
2 By prescribing how to structure
relationships among the
entities in the AIS database
Types of Entities
An entity is any class of objects about

which data is collected.
The REA data model classifies entities
into three distinct categories:
1Resources acquired and used by an
organization
2Events engaged in by the organization
3Agents participating in these events
Types of Entities
Resources are defined as those
things that have economic value
to the organization.
What are some examples?
– cash
– inventory
– equipment
Types of Entities
Events are the various business
activities about which
management wants to collect
information for planning or
control purposes.
– sales events
– taking customer orders
Types of Entities
Agents are the third type of
entity in the REA model.
Agents are the people and
organizations that participate in
events and about whom
information is desired.
– employees
– customers
Developing an REA
Diagram
Developing an REA diagram for a
specific transaction cycle consists of
four steps:
1 Identify the pair of events that
represent the basic give-to-get
economic duality relationship in that
cycle.
2 Identify the resources affected by
each event and the agents who
participate in those events.
Developing an REA
Diagram
 Four steps (continued):
3. Analyze each economic exchange event
to determine whether it should be
decomposed into a combination of one
or more commitment events and an
economic exchange event. If necessary,
replace the original economic exchange
event with the resulting set of
commitment and economic exchange
events.
4. Determine the cardinalities of each
relationship.
Basic REA template
Resource A GET
Inflow Participant Internal Agent
Resource A
Participant External Agent
Economic
Duality
Participant External Agent
GIVE
Resource B Outflow Participant Internal Agent
Resource B
Sample REA diagram
Inventory Stock-flow Sales Participant Salesperson
Participant
Economic
Customer
Duality
Participant
Cash
Cash Stock-flow Participant Cashier
Receipts
REA Diagram, Step 1:
Identify Economic Exchange Events
In drawing an REA diagram for an
individual cycle, it is useful to divide
the paper into three columns, one for
each type of entity.
◦ Left column should be used for resources.
◦ Middle column should be used for events.
◦ Right column should be used for agents.
Identify Economic Exchange Events
The basic economic exchange in the
revenue cycle involves the sale of
goods or services and the subsequent
receipt of cash in payment for those
sales.
The REA diagram for S&S’s revenue
cycle shows the drawing of sales and
cash receipts events entities as
rectangles and the relationship
between them as a diamond.
Identify Resources and Agents
Once the events of interest have
been specified, the resources that
are affected by those events
need to be identified.
The sales event involves the
disposal of inventory.
The cash receipts event involves
the acquisition of cash.
Identify Resources and Agents
After specifying the resources
affected by each event, the next
step is to identify the agents who
participate in those events.
There will always be at least one
internal agent (employee) and, in
most cases, an external agent
(customer).
Include Commitment Events
The third step in drawing an REA
diagram is analyzing each economic
exchange event to determine whether
it can be decomposed into a
combination of one or more
commitment exchange events.
Example: The sales event may be
decomposed into the “take order”
commitment event and the “deliver
order” economic exchange event
Decomposing Sales into
Orders and Sales
Customer
Inventory- (1,N) (1,1) Participant (0,N) Customer
Orders
Orders
(0,N) (1,1)
(0,1) Participant
(0,N)
Inventory- Leads to
Inventory (0,N) Salesperson
Sales (0,N)
(0,1)
(1,N)
Participant
(1,1)
Sales
(1,1) Participant (0,N) Customer

Determine Cardinalities
Cardinalities indicate how many
instances of one entity can be
linked to one specific instance of
another entity.
Cardinalities are often expressed
as a pair of numbers.
The first number is the minimum,
and the second number is the
maximum.
The minimum cardinality of a relationship
indicates whether each row in that entity
MUST be linked to a row in the entity on the
other side of the relationship.
Minimum cardinalities can be either 0 or 1.
A minimum cardinality of zero means that a
new row can be added to that table without
being linked to any rows in the other table.
A minimum cardinality of 1 means that
each row in that table MUST be linked to at
least one row in the other table
The minimum cardinality of zero
in the (0, N) cardinality pair to
the left of the customer entity in
the customer-sales relationship
indicates that a new customer
may be added to the database
without being linked to any sales
events. (0, N)
Sales Made to Customer
The minimum cardinality of 1 in
the
(1, 1) cardinality pair to the right
of the sales entity in the
customer-sales relationship
indicates that a new sales
transaction CAN ONLY be added if
it is linked to a customer.
(1,1) (0, N)
The maximum cardinality of a relationship
indicates whether each row in that entity
CAN be linked to more than one row in the
entity on the other side of the relationship.
Maximum cardinalities can be either 1 or
N.
A minimum cardinality of 1 means that
each row in that table can be linked to at
most only 1 row in the other table.
A maximum cardinality of N means that
each row in that table MAY be linked to
more than one row in the other table.
The maximum cardinality of N in
the (0, N) cardinality pair to the
left of the customer entity in the
indicates that a given customer
MAY be linked to many sales
events.
(0, N)
The maximum cardinality of 1 in
the
(1, 1) cardinality pair to the right
of the sales entity in the
indicates that a given sales
transaction can only be linked to
one customer.
(1,1) (0, N)
Cardinalities are not arbitrarily
chosen by the database designer.
They reflect facts about the
organization being modeled and
its business practices obtained
during the requirements analysis
stage of the database design
process.
Relationships
between Entities
 Three basic types of
relationships between entities
are possible, depending on the
maximum cardinality associated
with each entity. They are:
1. A one-to-one relationship (1:1)
2. A one-to-many relationship (1:N)
3. A many-to-many relationship
(M:N)
Different types of
relationships
Panel A: One-to-One (1:1) Relationship
Cash
Sales (0,1) (1,1)
Receipts
Different types of
relationships
Panel B: One-to-Many (1:N) Relationship
Cash
Sales (0,N) (1,1)
Receipts
Different types of
relationships
Panel C: One-to-Many (1:N) Relationship
Cash
Sales (0,1) (1,N)
Receipts
Different types of
relationships
Panel D: Many-to-Many (M:N) Relationship
Cash
Sales (0,N) (1,N)
Receipts
Implementing an REA
Diagram in a Relational
Database
An REA diagram can be used
to design a well-structured
relational database.
A well-structured relational
database is one that is not
subject to update, insert, and
delete anomaly problems.
Implementing an REA Diagram in
a Relational Database
Implementing an REA diagram in
a relational database is a three-
step process:
1. Create a table for each distinct entity
and for each many-to many relationship
2. Assign attributes to appropriate tables
3. Use foreign keys to implement one-to-
one and one-to-many relationships
Create Tables
From the previously discussed REA diagram, nine
tables would be created: one for each of the seven
entities and one for each of the many-to-many
relationships.
1. Inventory 6. Cash
disbursements
2. Purchases
7. Cash
3. Employees 8. Purchases-
4. Vendors inventory
5. Cashier 9. Purchases-cash
disbursements
Assign Attributes for Each
Table
Primary keys: Usually, the
primary key of a table
representing an entity is a single
attribute.
Other Attributes: Additional
attributes are included in each
table to satisfy transaction
processing requirements.
Implement One-to-One and
One-to-Many Relationships
One-to-One Relationships: In a
relational database, one-to-one
relationships between entities
can be implemented by including
the primary key of one entity as a
foreign key in the table
representing the other entity.
No examples of 1:1 relationships
in the sample diagram
Implement One-to-One and
One-to-Many Relationships
One-to-Many Relationships: In a relational
database, one-to-many relationships can
be also implemented in relation to
databases by means of foreign keys.
The primary key of the entity with the
maximum cardinality of N becomes a
foreign key in the entity with a maximum
cardinality of 1
Examples: Employee number and vendor
number are foreign keys in the purchases
event and in the cash disbursement event
Chapter 5
The System Development

Process
5.1. Systems Development
and Documentation
Techniques
Data Flow Diagrams
A data flow diagram (DFD)
graphically describes the flow of
data within an organization.
It is used to document existing
systems and to plan and design
new ones.
There is no ideal way to develop
a DFD.
Data Flow Diagrams
A data flow diagram (DFD) is
composed of the following four
basic elements:
1Data sources and destinations
2Data flows
3Transformation processes
4Data stores
Data Flow Diagram
Symbols
Data Source and destinations
Data Flows
Transformation Processes
Data Stores
Data Flow Diagram
Symbols
A data source or data destination symbol on
the DFD represents an organization or
individual that sends or receives data that
they system uses or produces.
 A data flow represents the flow of data
between processes, data stores and data
sources and destinations.
 A transformation process represents the
transformations of data.
 A data store is a temporary or permanent
repository of data.
 A data dictionary contains description of all
the elements, stores, and flows in a system.
Data Flow Diagrams
Data Process
source Data flow (B) Data flow (D)
(A) (C)
Data flow (E)

Data
destination
(J)
Data Flow Diagrams
Data store (H)

Data flow (G)
Process Data flow (I) Data

Data flow (D) destination
(F) (K)
Data Flow Diagrams
Customer Remittance data

payment (B) (D)
Customer Process
(A) payment
(C)
Deposit (E)
Bank
(J)
Data Flow Diagrams
Accounts
receivable
(H)
(G)
Remittance Receivables
data Update information Credit
(D) receivables (I) manager
(F) (K)
Data Flow Diagrams
Data flow diagrams are subdivided into
successively lower levels in order to
provide increasing amounts of detail.
The highest-level DFD is referred to as
a context diagram.
What is the context diagram for S&S
payroll processing?
Data Flow Diagrams
Time
Departments cards
Payroll
processing
system
Human
resources Employee
data
Data Flow Diagrams
Tax reports and payments Government

agencies
Payroll Employee Employees

processing paychecks
system Payroll Bank
check
Payroll report Management

Data Flow Diagrams
The context diagram for payroll
processing shows that the payroll
processing system...
– receives time cards from different
departments.
– receives employee data from the
human resources department.
Data Flow Diagrams
When these data are processed,
the system produces...
– tax reports and payments for
governmental agencies.
– employee paychecks.
– a check to deposit in the payroll
account at the bank.
– management payroll reports.
Flowcharts
A flowchart is an analytical
technique used to describe some
aspect of an information system
in a clear, concise, and logical
manner.
Flowcharts use a standard set of
symbols to pictorially describe
transaction processing
procedures.
Flowchart Symbols
Flowcharting symbols can be
divided into the following four
categories:
1Input/output symbols
2Processing symbols
3Storage symbols
4Flow and miscellaneous symbols
Flowcharting Symbols:
Some Input Output Symbols
Symbol Name
Document
Online keying
Display
Input/output;
Journal/ledger
Flowchart Symbols:
Some Processing Symbols
Symbol Name
Manual operations
Computer processing
Auxiliary operation
Flowchart Symbols:
Some Storage Symbols
Symbol Name
Magnetic disk
Magnetic tape
Flowchart Symbols: Some Flow
and Miscellaneous Symbols
Symbol Name
Document or processing flow
On-page connector
Off-page connector
Terminal
Decision
What are Document
Flowcharts?
A document flowchart illustrates the
flow of documents and information
between areas of responsibility within
an organization.
A document flowchart is particularly
useful in analyzing the adequacy of
control procedures.
Flowcharts that describe and evaluate
internal controls are often referred to
as internal control flowcharts.
What are System
Flowcharts?
System flowcharts depict the
relationship among the input,
processing, and output of an AIS.
A system flowchart begins by
identifying both the inputs that
enter the system and their origins.
The input is followed by the
processing portion of the
flowchart.
What are Computer System Flowcharts?
The resulting new information is the
output component.
System flowcharts are an important tool
of system analysis, design, and
evaluation.
Input
Storage Process
Output
What are Program
Flowcharts?
A program flowchart describes the
specific logic to perform a process
shown on a systems flowchart.
A flow line connects the symbols
and indicates the sequence of
operations.
The processing symbol represents
a data movement or arithmetic
calculation.
What are Program
Flowcharts?
Input data
No
If a condition is met
Yes
Perform calculation
Update record
What are Program
Flowcharts?
The input/output symbol represents
either reading of input or writing of
output.
The decision symbol represents a
comparison of one or more variables
and the transfer of flow to alternative
logic paths.
All points where the flow begins or
ends are represented by the terminal
symbol.
Flowchart for Processing
Credit Orders
Enter
Start sales
order
Approved No Reject
for credit? order
Yes
Inventory No Back-
available? order
Yes
Fill order Stop

Differences Between
DFDs and Flowcharts
DFDs emphasize the flow of data
and what is happening in a
system, whereas a flowchart
emphasizes the flow of documents
or records containing data.
A DFD represents the logical flow
of data, whereas a flowchart
represents the physical flow of
data.
Differences Between DFDs and
Flowcharts
Flowcharts are used primarily to
document existing systems.
 DFDs, in contrast, are primarily used
in the design of new systems and do
not concern themselves with the
physical devices used to process, store,
and transform data.
DFDs make use of only four symbols.
Flowcharts use many symbols and thus
can show more detail.
5.2. Phases of System Development
The Systems Development
Life Cycle
 What are the five steps in the
systems development life cycle
(SDLC)?
1. Systems analysis
2. Conceptual design
3. Physical design
4. Implementation and conversion
5. Operations and maintenance
The Players
Who are the people involved in
developing and implementing
AIS?
 Management
 Accountants
 Information systems steering
committee
 Project development team
 Systems analysts and programmers
 External players
The Players
What are top management’s
roles?
– providing support and
encouragement
– establishing system goals and
objectives
– determine information requirements
The Players
What are accountants’ roles?
– determine their information needs
– may be members of the project
development team
– play an active role in designing
system controls
The Players
Whatare the steering
committee’s roles?
– set policies that govern the AIS
– ensures top-management
participation
– guidance and control
– facilitates coordination and
integration of IS activities
The Players
What are the project

development team’s roles?
– plan each project
– monitor project
– make sure proper
consideration is given to the
human element
The Players
What are the system analyst’s
and programmer’s roles?
– study existing systems
– design new systems and prepare
specifications
– write computer programs
Planning Systems
Development
Why is planning an important
step in systems development?
– consistency
– efficiency
– cutting edge
– lower costs
– adaptability
Planning Systems
Development
What types of systems
development plans are needed?
– project development plan
– master plan
Planning Techniques
 Two techniques for scheduling and
monitoring systems development
activities are:
1 PERT (program evaluation and review
technique)
 PERT requires that all activities and the
precedent and subsequent relationships
among them be identified.
2 Gantt chart
 A bar chart with project activities listed on the
left-hand side and units of time across the top
Planning Techniques:
Gantt Chart
Project Planning Chart

(Sample Gantt Chart)
______________________________________________
Activity Week Starting
______________________________________________
1
______________________________________________
2
______________________________________________
3
______________________________________________
4
______________________________________________
5
______________________________________________
6
______________________________________________
7
______________________________________________
8
______________________________________________
Feasibility Analysis
 Systems analysis is the first step in the
systems development life cycle (SDLC).
 A feasibility study (also called a business
case) is prepared during systems analysis
and updated as necessary during the
remaining steps in the SDLC.
 The steering committee uses the study to
decide whether to terminate a project,
proceed unconditionally, or proceed
conditionally.
 What five important aspects
need to be considered during a
feasibility study?
1. Technical feasibility
2. Operational feasibility
3. Legal feasibility
4. Scheduling feasibility
5. Economic feasibility
Economic feasibility is the most
frequently analyzed of the five
aspects.
What is the basic framework for
feasibility analysis?
– capital budgeting model
What are some capital budgeting
techniques?
– payback period
– net present value (NPV)
– internal rate of return (IRR)
Behavioral Aspects of
Change
Individualsinvolved in systems
development are agents of
change who are continually
confronted by people’s reaction
and resistance to change.
The best system will fail without
the support of the people it
serves.
Change
Why do behavioral problems
occur?
– personal characteristics and
background
– manner in which change is introduced
– experience with prior changes
– communication
– disruptive nature of the change
process
– fear
Change
How do
people resist
AIS changes?
– aggression
– projection
– avoidance
Behavioral Aspects
of Change
 How can behavioral problems be
overcome?
– meet needs of the users
– keep communication lines open
– maintain a safe and open atmosphere
– obtain management support
– allay fears
– solicit user participation
– make sure users understand the system
Change
– How can behavioral problems be
overcome? (continued)
– provide honest feedback
– humanize the system
– describe new challenges and opportunities
– reexamine performance evaluation
– test the system’s integrity
– avoid emotionalism
– present the system in the proper context
– control the users’ expectations
– keep the system simple
Systems Analysis
When a new or improved system is
needed, a written request for
systems development is prepared.
The request describes the current
system’s problems, why the
change is needed, and the
proposed system’s goals and
objectives.
It also describes the anticipated
benefits and costs.
Systems Analysis
 There are five steps in the
analysis phase:
1. Initial investigation
2. Systems survey
3. Feasibility study
4. Information needs and systems
requirements
5. Systems analysis report
Conceptual Systems
Design
 In the conceptual systems design
phase, a general framework is
developed for implementing user
requirements and solving problems
identified in the analysis phase.
 What are the three steps in
conceptual design?
1. Evaluate design alternatives.
2. Prepare design specifications.
3. Prepare conceptual systems design report.
Conceptual Systems
Design
Systems
analysis
Prepare
Evaluate Prepare
conceptual
design design
systems
alternatives specifications
design report
Conceptual Systems
Design
 Evaluate design alternatives:
 The design team should identify
and evaluate design alternatives
using the following criteria:
1. How well it meets organizational and
system objectives
2. How well it meets users’ needs
3. Whether it is economically feasible
4. Its advantages and disadvantages
Conceptual Systems
Design
 Prepare design specifications:
 Once a design alternative has been
selected, the team develops the
conceptual design specifications for
the following elements:
1. Output
2. Data storage
3. Input
4. Processing procedures and operations
Conceptual Systems
Design
 Prepare conceptual systems design
report:
 At the end of the conceptual design a
conceptual systems design report is
developed and submitted.
1. To guide physical systems design activities
2. To communicate how management and
user information needs will be met
3. To help assess systems’ feasibility
Physical Systems Design
Physical design translates the
broad, user-oriented AIS
requirements of conceptual
design into detailed specifications
that are used to code and test
the computer program.
Conceptual Physical
systems design systems design
Physical Systems Design
Output Program
design design
File and data Procedures

base design design
Input Controls
design design
Physical Systems Design:
Output Design
 The objective of output design is
to determine the characteristics
of reports, documents, and
screen displays.
 Output fits into one of four
categories:
1. Scheduled reports
2. Special-purpose analysis
3. Triggered exception reports
4. Demand reports
Physical Systems Design: File
and Database Design
What are some file and database
design considerations?
– medium of storage
– organization and access
– processing mode
– maintenance
– size and activity level
Input Design
 When evaluating input design,
the design team must identify
the different types of data input
and optimal input method.
 What are the two principal
types of data input?
1. Forms
2. Computer screens
Program Design
Program design is one of the most
time-consuming activities in the entire
SDLC.
Programs should be subdivided into
small, well-defined modules to reduce
complexity.
What is this referred to as?
– structured programming
Modules should interact with a control
module rather than with each other.
Physical Systems Design: Procedures
Design
Procedures design should answer the
who, what, where, and how questions
related to all AIS activities.
What should procedures cover?
 input preparation
 transaction processing
 error detection and corrections
 controls
reconciliation of balances
database access
output preparation and distribution
computer operator instructions
Physical Systems Design: Control
Design
What are some control design considerations?
Validity Authorization
Accuracy Security
Numerical Control Availability
Maintainability Integrity
Audit Control
Physical Systems Design Report
At the end of the physical design

phase the team prepares a
physical systems design report.
This report becomes the basis for
management’s decision whether
to proceed to the implementation
phase.
Systems Implementation
Systems implementation is the
process of installing hardware
and software and getting the AIS
up and running.
Implementation planning
Develop and Prepare site; Select

test software install and and train
programs test hardware personnel
Complete Test system

documentation
Conversion
Systems Implementation:
Implementation Planning
An implementation plan consists of
implementation tasks, expected
completion dates, cost estimates,
and the person or persons
responsible for each task.
Planning should include
adjustments to the company’s
organizational structure.
Systems Implementation: Develop
and test software programs
Seven steps are followed when
developing and testing software
programs.
1. Determine user needs.
2. Develop a plan.
3. Write program instructions (code).
4. Test the program.
5. Document the program.
6. Train program users.
7. Install and use the system.
Site Preparation
 A PC requires little site
preparation.
 A large system may require
extensive changes, such as
additional electrical outlets.
 Site preparation should begin
well in advance of the
installation date.
Select and train personnel
Employees can be hired from
outside the company or
transferred internally.
Effective AIS training should
include employees’ orientation to
new policies and operations.
Training should occur before
systems testing and
conversion.
Complete Documentation
 Three types of documentation
must be prepared for new
systems.
1. Development documentation
2. Operations documentation
3. User documentation
Test the System
 There are three common forms
of testing.
1. Walk-through
2. Processing of test transactions
3. Acceptance tests
Conversion
 There are four conversion
approaches.
1. Direct conversion
2. Parallel conversion
3. Phase-in conversion
4. Pilot conversion
Direct Conversion Method
Old system
New system
Parallel Conversion Method
Old system New system

Phase-in Conversion Method
Old system
New system
Pilot Conversion Method
1 2 3 1 2 3
Old Old Old Old Old New
1 2 3 1 2 3
Old New New New New New

Data Conversion
 Data files may need to be
modified in three ways:
1. Files may be moved to a different
storage
2. Data content may be changed
3. File format may be changed
Operation and
Maintenance
The final step in the SDLC is to
operate and maintain the new
system.
A postimplementation review
should be conducted on a newly
installed system.
Implementation Operation and
and conversion maintenance
Operation and
Maintenance
What are some factors to consider during the
postimplementation review?
Goals and objectives Controls and security
Satisfaction Errors
Benefits Training
Costs Communications
Reliability Organizational changes
Documentation Accuracy
Timeliness Compatibility
5.3 Approaches to System
Development
Purchase Software
Canned software is written by

software development companies
and is sold on the open market to a
broad range of users with similar
requirements.
Turnkey systems are a combination
of software and hardware sold as a
package. The vendor installs the
entire system and user needs only to
“turn the key”.
Purchase Software, continued
The Internet has given companies
a new way to acquire software:
Application service providers
(ASPs) host Web-based software
on their computers and deliver
the software to their clients over
the Internet.
Purchasing Software and The
SDLC
 Companies that buy rather than
develop AIS software still go
through the systems
development life cycle (SDLC).
1. Systems analysis
2. Conceptual design
3. Physical design
4. Implementation and conversion
5. Operation and maintenance
The Systems Acquisition Process
Investigate
software
packages
Will package No Can package No Develop

meet needs? be modified? software
internally
Yes
Send RFP for Yes

Yes
software and
hardware Send RFP for
hardware,
if necessary
Evaluate
proposal Select best
combination
Development by In-House IS
Department
Most often, organizations develop
their own custom software,
because canned software that fit
their specific needs is not
available.
Developing custom software is
difficult and error-prone.
It also consumes a great deal of
time and resources.
Custom Software Development
by an Outside Company
When contracting with an outside
organization, a company should
maintain control over the
development process. Some
guidelines:
•Carefully select a developer
•Sign a contract
•Plan and monitor each step
•Maintain effective communication
•Control all costs
End-User-Developed
Software
End-user computing (EUC) is the
hands-on development, use, and
control of computer-based information
systems by users.
With the advent of inexpensive PCs
and powerful, inexpensive software,
users began developing their own
systems to create and store data,
access and download company data,
and share data and computer
resources in networks.
End-User-Developed
Software
Examples of end user development
uses:
• Retrieving information from company
databases to produce simple reports or to
answer one-time queries
• Performing “what if” sensitivity or statistical
analyses
• Developing applications using prewritten
software (spreadsheet or database system)
• Preparing schedules and lists, such as
depreciation schedules, accounts receivable
aging, and loan amortizations
Benefits of End-User-
Developed Software
Benefits of End-User Computing

User creation, control, and implementation
Systems that meet user needs
Timeliness
Freeing up IS resources
Versatility and ease of use
Risks of End-User-Developed
Software
Risks of End-User Computing

Logic and development errors
Inadequately tested applications
Inefficient systems
Poorly controlled and documented systems
Systems incompatibility
Duplication of systems
Increased costs
Managing and Controlling
End-User Computing
Organizations use several
different approaches to mange
and control end-user computing.
For example, a help desk can
encourage, support, coordinate
and control end-user activities.
Functions of a Help Desk
What are some duties of the help desk?
– Providing hot-line assistance to help resolve
problems
– Serving as a clearinghouse for information,
coordination, and assistance training end
users, and providing corresponding technical
maintenance and support
– Evaluating new end-user hardware and
software products
– Assisting with application development
– Developing and implementing standards
– Controlling corporate data
Outsource the System
What is outsourcing?
◦ It is hiring an outside company to
handle all or part of an organization’s
data processing activities.
In a mainframe outsourcing
agreement, the outsourcers buy
their client’s computers and hire
all or most of the client’s
employees.
In a client/server or PC
outsourcing agreement, an
organization outsources a
particular service, a segment of
its business, a particular function,
or PC support.
Benefits of Outsourcing
A business and information solution
Asset utilization
Access to greater expertise and
more advanced technology
Lower costs
Improved development time
Elimination of peaks and valleys usage
Facilitation of downsizing
Risks of Outsourcing
Inflexibility
Loss of control of system and/or data
Reduced competitive advantage
Locked-in system
Unfulfilled goals
Possibility of poor service
Business Processes
Reengineering
What is business process reengineering
(BPR)?
It is the thorough analysis and complete
redesign of business process and
information systems to achieve
performance improvements.
It is a process that challenges traditional
organizational values and cultures
associated with underperformance.
Business Processes
Reengineering
BPR reduces a company to its
essential business processes and
focuses on why they are done
rather than on the details of how
they are done.
It completely reshapes
organizational work practices and
information flows to take
advantage of technological
advancements.
Challenges Faced by Reengineering
Efforts
What are some of the obstacles to
reengineering efforts?
Tradition Resistance
Time requirements Risk
Lack of management support Skepticism
Retraining Controls
Prototyping
What is prototyping?
– an approach to systems design in
which a simplified working model of
a system is developed.
A prototype, or “first draft,” is
quickly and inexpensively built
and provided to users for testing.
Prototyping
 What four steps are involved in
developing a prototype?
1. Identify basic systems requirements.
2. Develop an initial prototype that meets the
agreed-on requirements.
3. Users identify changes, developers make
changes, and the system is turned over to
the user.
4. Use the system approved by the users.
Benefits of Prototyping
Advantages of Prototyping
Better definition of user needs
Higher user involvement and satisfaction
Faster development time
Fewer errors
More opportunity for changes
Less costly
Disadvantages of
Prototyping
Disadvantages of Prototyping
Significant user time
Less efficient use of system resources
Incomplete systems development
Inadequately tested and
documented systems
Negative behavioral reactions
Unending development
Computer-Aided Software
Engineering (CASE)
CASE is an integrated package of
computer-based tools that automate
important aspects of the software
development process.
CASE tools are used to plan, analyze,
design, program, and maintain an
information system.
They are also used to enhance the
efforts of managers, users, and
programmers in understanding
information needs.
Computer-Aided Software
Engineering (CASE)
CASE tools do not replace skilled
designers; instead they provide a host
of self-integrated tools that give
developers effective support for all
SDLC phases.
CASE software typically has tools for
strategic planning, project and system
management, database design, screen
and report layout, and automatic code
generation.
Computer-Aided Software Engineering
(CASE)
Advantages of CASE Technology

Improved productivity
Improved program quality
Cost savings
Improved control procedures
Simplified documentation
Disadvantages of CASE Technology
Incompatibility
Cost
Unmet expectations
Computer-Based Information
Systems Controls
Chapter 7
Introduction
This chapter discusses the five interrelated
components of the Committee of Sponsoring
Organizations (COSO’s) internal control
model.
What is the traditional definition of internal
control?
Internal control is the plan of organization
and the methods a business uses to
safeguard assets, provide accurate and
reliable information, promote and improve
operational efficiency, and encourage
adherence to prescribed managerial policies.
Overview of Control
Concepts
What is management control?
Management control encompasses the
following three features:
1 It is an integral part of management
responsibilities.
2 It is designed to reduce errors,
irregularities, and achieve
organizational goals.
3 It is personnel-oriented and seeks to
help employees attain company goals.
Internal Control
Classifications
The specific control procedures
used in the internal control and
management control systems may
be classified using the following four
internal control classifications:
1Preventive, detective, and corrective controls
2General and application controls
3Administrative and accounting controls
4Input, processing, and output controls
Committee of Sponsoring
Organizations
The Committee of Sponsoring
Organizations (COSO) is a private
sector group consisting of five
organizations:
1American Accounting Association
2American Institute of Certified Public
Accountants
3Institute of Internal Auditors
4Institute of Management Accountants
5Financial Executives Institute
Committee of Sponsoring
Organizations
The COSO study defines internal
control as the process implemented
by the board of directors,
management, and those under
their direction to provide
reasonable assurance that control
objectives are achieved with regard
to:
– effectiveness and efficiency of operations
– reliability of financial reporting
– compliance with applicable laws and
regulations
COSO’sinternal control
model has five crucial
components:
1Control environment
2Control activities
3Risk assessment
4Information and
communication
5Monitoring
Information Systems Audit and Control
Foundation
 The Information Systems Audit and Control Foundation
(ISACF) recently developed the Control Objectives for
Information and related Technology (COBIT).
 COBIT consolidates standards from 36 different sources
into a single framework.
 The framework addresses the issue of control from three
vantage points, or dimensions:
1 Information: needs to conform to certain criteria that
COBIT refers to as business requirements for
information
2 IT resources: people, application systems, technology,
facilities, and data
3 IT processes: planning and organization, acquisition and
implementation, delivery and support, and monitoring
The Control Environment
The first component of COSO’s internal control
model is the control environment.
The control environment consists of many
factors, including the following:
1Commitment to integrity and ethical values
2Management’s philosophy and operating style
3Organizational structure
4The audit committee of the board of directors
5Methods of assigning authority and
responsibility
6Human resources policies and practices
7External influences
Control Activities
The second component of COSO’s internal
control model is control activities.
Generally, control procedures fall into one
of five categories:
1Proper authorization of transactions and
activities
2Segregation of duties
3Design and use of adequate documents
and records
4Adequate safeguards of assets and
records
5Independent checks on performance
Proper Authorization of
Transactions and Activities
Authorization is the empowerment
management gives employees to
perform activities and make
decisions.
Digital signature or fingerprint is a
means of signing a document with a
piece of data that cannot be forged.
Specific authorization is the granting
of authorization by management for
certain activities or transactions.
Segregation of Duties
Good internal control demands
that no single employee be given
too much responsibility.
An employee should not be in a
position to perpetrate and
conceal fraud or unintentional
errors.
Custodial Functions
Handling cash
Handling assets
Writing checks
Receiving checks in mail Authorization Functions
Authorization of
Recording Functions transactions
Preparing source documents
Maintaining journals
Preparing reconciliations
Preparing performance reports
Iftwo of these three functions are the
responsibility of a single person,
problems can arise.
Segregation of duties prevents
employees from falsifying records in
order to conceal theft of assets
entrusted to them.
Prevent authorization of a fictitious or
inaccurate transaction as a means of
concealing asset thefts.
Segregation of duties prevents an
employee from falsifying records
to cover up an inaccurate or false
transaction that was
inappropriately authorized.
Design and Use of Adequate
Documents and Records
The proper design and use of
documents and records helps
ensure the accurate and
complete recording of all relevant
transaction data.
Documents that initiate a
transaction should contain a
space for authorization.
Design and Use of Adequate
Documents and Records
The following procedures safeguard
assets from theft, unauthorized use,
and vandalism:
– effectively supervising and segregating
duties
– maintaining accurate records of assets,
including information
– restricting physical access to cash and paper
assets
– having restricted storage areas
Adequate Safeguards of
Assets and Records
What can be used to safeguard
assets?
– cash registers
– safes, lockboxes
– safety deposit boxes
– restricted and fireproof storage areas
– controlling the environment
– restricted access to computer rooms,
computer files, and information
Independent Checks on
Performance
Independent checks ensure that
transactions are processed accurately
are another important control element.
What are various types of
independent checks?
– reconciliation of two independently maintained
sets of records
– comparison of actual quantities with recorded
amounts
– double-entry accounting
– batch totals
Independent Checks on Performance
Fivebatch totals are used in
computer systems:
1 A financial total is the sum of a dollar field.
2 A hash total is the sum of a field that would
usually not be added.
3 A record count is the number of documents
processed.
4 A line count is the number of lines of data
entered.
5 A cross-footing balance test compares the
grand total of all the rows with the grand total
of all the columns to check that they are equal.
Risk Assessment
Thethird component of COSO’s internal control
model is risk assessment.
Companies must identify the threats they face:
– strategic — doing the wrong thing
– financial — having financial resources lost, wasted, or stolen
– information — faulty or irrelevant information, or unreliable
systems
 Companies that implement electronic data interchange
(EDI) must identify the threats the system will face, such
as:
1Choosing an inappropriate technology
2Unauthorized system access
3Tapping into data transmissions
4Loss of data integrity
Risk Assessment
5 Incomplete transactions
6 System failures
7 Incompatible systems
Risk Assessment
Some threats pose a greater risk
because the probability of their
occurrence is more likely. For example:
A company is more likely to be the
victim of a computer fraud rather than
a terrorist attack.
Risk and exposure must be considered
together.
Estimate Cost and
Benefits
No internal control system can
provide foolproof protection
against all internal control
threats.
The cost of a foolproof system
would be prohibitively high.
One way to calculate benefits
involves calculating expected
loss.
Estimate Cost and
Benefits
The benefit of a control
procedure is the difference
between the expected loss with
the control procedure(s) and the
expected loss without it.
Expected loss = risk × exposure
Information and Communication
The fourth component of COSO’s
internal control model is information
and communication.
Accountants must understand the
following:
1 How transactions are initiated
2 How data are captured in machine-readable
form or converted from source documents
3 How computer files are accessed and updated
4 How data are processed to prepare information
5 How information is reported
6 How transactions are initiated
Information and
Communication
Allof these items make it possible for
the system to have an audit trail.
An audit trail exists when individual
company transactions can be traced
through the system.
Monitoring Performance
The fifth component of COSO’s
internal control model is
monitoring.
What are the key methods of
monitoring performance?
– effective supervision
– responsibility accounting
– internal auditing
The Four Principles of a
Reliable System
1. Availability of the system when needed.
2. Security of the system against
unauthorized physical and logical
access.
3. Maintainability of the system as
required without affecting its
availability, security, and integrity.
4. Integrity of the system to ensure that
processing is complete, accurate,
timely, and authorized.
The Criteria Used To Evaluate
Reliability Principles
 For each of the four principles of reliability,
three criteria are used to evaluate whether or
not the principle has been achieved.
1. The entity has defined, documented, and
communicated performance objectives, policies,
and standards that achieve each of the four
principles.
2. The entity uses procedures, people, software, data,
and infrastructure to achieve each principle in
accordance with established policies and standards.
3. The entity monitors the system and takes action to
achieve compliance with the objectives, policies,
and standards for each principle.

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Chapter 1

 Reduce  Time & Resources

Overview of Business Processes

The AIS interacts with external parties,

The AIS also interacts with

The interaction is typically two-way, in

Many business activities are paired in

The revenue cycle involves interactions

Many business activities are paired

Give Raw Get

 Handle customer inquiries  Update sales and Accts

Revenue Expenditure Production

and Reporting  The revenue cycle

◦ Gets raw materials

◦ Gets funds from

However the cycles are

A ledger is a file used to store cumulative

E-business refers to all uses

One-time or infrequent transactions

B2E Established, on-going relationships

Extension of credit by seller to

 Outbound logistics  Distribution of digitizable products

 Post-sale Support and Service  Reduced costs

 Purchasing  Source identification and reverse

 Human Resources auctions

Hub 1 Frame relay

A distributed data processing system WAN

Logical View User A Logical View User B

Subschema A Subschema B Subschema C

Mapping external level views to conceptual level schema

Inventory Sales Customer

Inventory Sales Customer

Data modeling is the process of

The REA data model provides

An entity is any class of objects about

Participant External Agent

Participant External Agent

Inventory Stock-flow Sales Participant Salesperson

(1,1) Participant (0,N) Customer

Panel A: One-to-One (1:1) Relationship

Panel B: One-to-Many (1:N) Relationship

Panel C: One-to-Many (1:N) Relationship

Panel D: Many-to-Many (M:N) Relationship

The System Development

Data flow (E)

Data store (H)

Process Data flow (I) Data

Customer Remittance data

Tax reports and payments Government

Payroll Employee Employees

Payroll report Management

Fill order Stop

What are the project

Project Planning Chart

File and data Procedures

At the end of the physical design

Develop and Prepare site; Select

Complete Test system

Parallel Conversion Method

Old system New system

Phase-in Conversion Method

Old Old Old Old Old New

Old New New New New New