AIS 2 Chapter 1 The Information
System_ An Accountant's
Perspective
chapter
The Information System:
An Accountant’s
Perspective
nlike many other accounting subjects, such as
U intermediate accounting, accounting information
systems (AIS) lacks a well-defined body of knowl-
edge. Much controversy exists among college faculty as to
■
what should and should not be covered in the AIS course.
To some extent, however, the controversy is being resolved ■ Learning Objectives
through recent legislation. The Sarbanes-Oxley Act (SOX) After studying this chapter, you should:
of 2002 established new corporate governance regulations
■ Understand the primary infor-
and standards for public companies registered with the
mation flows within the business
Securities and Exchange Commission (SEC). This wide-
environment.
sweeping legislation impacts public companies, their man-
agement, and their auditors. Of particular importance to AIS ■ Understand the difference between
students is the impact of SOX on internal control standards accounting information systems and
and related auditing procedures. Whereas SOX does not management information systems.
define the entire content of the AIS course, it does identify ■ Understand the difference between a
critical areas of study that need to be included for account- financial transaction and a non-
ants. These topics and more are covered in several chapters financial transaction.
of this text. ■ Know the principal features of the
The purpose of this chapter is to place the subject of AIS general model for information
in perspective for accountants. Toward this end, the chapter systems.
is divided into four major sections, each dealing with a ■ Be familiar with the functional areas
different aspect of information systems. The first section of a business and their principal
explores the information environment of the firm. It intro- activities.
duces basic systems concepts, identifies the types of infor- ■ Understand the stages in the evolu-
mation used in business, and describes the flows of tion of information systems.
information through an organization. This section also
■ Understand the relationship between
presents a framework for viewing AIS in relation to other
external auditing, internal auditing,
information systems components. The second section of the and information technology
chapter deals with the impact of organizational structure on auditing.
AIS. Here we examine the business organization as a system
of functional areas. The accounting function plays an impor-
tant role as the purveyor of financial information for the rest
of the organization. The third section reviews the evolution
of information systems. Over the years, AIS has been repre-
sented by a number of different approaches or models.
,4 PART I Overview of Accounting Information Systems
Five AIS models are examined. The final section discusses the role of accountants as users, designers,
and auditors of AIS.
The Information Environment
We begin the study of AIS with the recognition that information is a business resource. Like the other
business resources of raw materials, capital, and labor, information is vital to the survival of the contem-
porary business organization. Every business day, vast quantities of information flow to decision makers
and other users to meet a variety of internal needs. In addition, information flows out from the organiza-
tion to external users, such as customers, suppliers, and stakeholders who have an interest in the firm.
Figure 1-1 presents an overview of these internal and external information flows.
The pyramid in Figure 1-1 shows the business organization divided horizontally into several levels of
activity. Business operations form the base of the pyramid. These activities consist of the product-ori-
ented work of the organization, such as manufacturing, sales, and distribution. Above the base level, the
organization is divided into three management tiers: operations management, middle management, and
top management. Operations management is directly responsible for controlling day-to-day operations.
Middle management is accountable for the short-term planning and coordination of activities necessary to
accomplish organizational objectives. Top management is responsible for longer-term planning and set-
ting organizational objectives. Every individual in the organization, from business operations to top man-
agement, needs information to accomplish his or her tasks.
Notice in Figure 1-1 how information flows in two directions within the organization: horizontally and
vertically. The horizontal flow supports operations-level tasks with highly detailed information about the
many business transactions affecting the firm. This includes information about events such as the sale and
shipment of goods, the use of labor and materials in the production process, and internal transfers of resour-
ces from one department to another. The vertical flow distributes information downward from senior manag-
ers to junior managers and operations personnel in the form of instructions, quotas, and budgets. In addition,
summarized information pertaining to operations and other activities flows upward to managers at all levels.
Management uses this information to support its various planning and control functions.
F I G U R E
1-1 INTERNAL AND EXTERNAL FLOWS OF INFORMATION
Top
Stakeholders
Management
Middle
Management
Operations
Management Suppliers
Customers
Operations Personnel
Day-to-Day Operations Information
, CHAPTER 1 The Information System: An Accountant’s Perspective 5
A third flow of information depicted in Figure 1-1 represents exchanges between the organization and
users in the external environment. External users fall into two groups: trading partners and stakeholders.
Exchanges with trading partners include customer sales and billing information, purchase information
for suppliers, and inventory receipts information. Stakeholders are entities outside (or inside) the organi-
zation with a direct or indirect interest in the firm. Stockholders, financial institutions, and government
agencies are examples of external stakeholders. Information exchanges with these groups include finan-
cial statements, tax returns, and stock transaction information. Inside stakeholders include accountants
and internal auditors.
All user groups have unique information requirements. The level of detail and the nature of the infor-
mation these groups receive differ considerably. For example, managers cannot use the highly detailed in-
formation needed by operations personnel. Management information is thus more summarized and
oriented toward reporting on overall performance and problems rather than routine operations. The infor-
mation must identify potential problems in time for management to take corrective action. External stake-
holders, on the other hand, require information very different from that of management and operations
users. Their financial statement information, based on generally accepted accounting principles (GAAP),
is accrual based and far too aggregated for most internal uses.
WHAT IS A SYSTEM?
For many, the term system generates mental images of computers and programming. In fact, the term has
much broader applicability. Some systems are naturally occurring, whereas others are artificial. Natural
systems range from the atom—a system of electrons, protons, and neutrons—to the universe—a system
of galaxies, stars, and planets. All life forms, plant and animal, are examples of natural systems. Artificial
systems are man-made. These systems include everything from clocks to submarines and social systems
to information systems.
Elements of a System
Regardless of their origin, all systems possess some common elements. To specify:
A system is a group of two or more interrelated components or subsystems that serve a common
purpose.
Let’s analyze the general definition to gain an understanding of how it applies to businesses and infor-
mation systems.
MULTIPLE COMPONENTS. A system must contain more than one part. For example, a yo-yo carved
from a single piece of wood and attached to a string is a system. Without the string, it is not a system.
RELATEDNESS. A common purpose relates the multiple parts of the system. Although each part func-
tions independently of the others, all parts serve a common objective. If a particular component does not
contribute to the common goal, then it is not part of the system. For instance, a pair of ice skates and a vol-
leyball net are both components; however, they lack a common purpose, and thus do not form a system.
SYSTEM VERSUS SUBSYSTEM. The distinction between the terms system and subsystem is a mat-
ter of perspective. For our purposes, these terms are interchangeable. A system is called a subsystem
when it is viewed in relation to the larger system of which it is a part. Likewise, a subsystem is called a
system when it is the focus of attention. Animals, plants, and other life forms are systems. They are also
subsystems of the ecosystem in which they exist. From a different perspective, animals are systems com-
posed of many smaller subsystems, such as the circulatory subsystem and the respiratory subsystem.
PURPOSE. A system must serve at least one purpose, but it may serve several. Whether a system pro-
vides a measure of time, electrical power, or information, serving a purpose is its fundamental justifica-
tion. When a system ceases to serve a purpose, it should be replaced.
, 6 PART I Overview of Accounting Information Systems
An Example of an Artificial System
An automobile is an example of an artificial system that is familiar to most of us and that satisfies the def-
inition of a system provided previously. To simplify matters, let’s assume that the automobile system
serves only one purpose: providing conveyance. To do so requires the harmonious interaction of hun-
dreds or even thousands of subsystems. For simplicity, Figure 1-2 depicts only a few of these.
In the figure, two points are illustrated of particular importance to the study of information systems:
system decomposition and subsystem interdependency.
SYSTEM DECOMPOSITION. Decomposition is the process of dividing the system into smaller sub-
system parts. This is a convenient way of representing, viewing, and understanding the relationships
among subsystems. By decomposing a system, we can present the overall system as a hierarchy and view
the relationships between subordinate and higher-level subsystems. Each subordinate subsystem performs
one or more specific functions to help achieve the overall objective of the higher-level system. Figure 1-2
shows an automobile decomposed into four primary subsystems: the fuel subsystem, the propulsion sub-
system, the electrical subsystem, and the braking subsystem. Each contributes in a unique way to the sys-
tem’s objective, conveyance. These second-level subsystems are decomposed further into two or more
subordinate subsystems at a third level. Each third-level subsystem performs a task in direct support of its
second-level system.
SUBSYSTEM INTERDEPENDENCY. A system’s ability to achieve its goal depends on the effective
functioning and harmonious interaction of its subsystems. If a vital subsystem fails or becomes defective
and can no longer meet its specific objective, the overall system will fail to meet its objective. For exam-
ple, if the fuel pump (a vital subsystem of the fuel system) fails, then the fuel system fails. With the fail-
ure of the fuel system (a vital subsystem of the automobile), the entire system fails. On the other hand,
when a nonvital subsystem fails, the primary objective of the overall system can still be met. For instance,
if the radio (a subsystem of the electrical system) fails, the automobile can still convey passengers.
Designers of all types of systems need to recognize the consequences of subsystem failure and provide
the appropriate level of control. For example, a systems designer may provide control by designing a
F I G U R E
1-2 PRIMARY SUBSYSTEM OF AN AUTOMOBILE
Automobile
Fuel Propulsion Electrical Brake
System System System System
Brake
Fuel Tank Engine Lights
Pedal
Trans- Master
Fuel Pump Ignition
mission Cylinder
Rear Brake
Fuel Injector Radio
Axle Lines
Wheels Battery Disk
