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Accounting information system Flashcards

1
Q

Definition of accounting? (1.14)

A

Accounting is a process of identifying, measuring and communicating economic information to permit informed judgement and decisions by internal and external users of the information.

Accounting is an information-providing activity

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2
Q

The accounting process diagram? (1.18)

A

Transaction goes into accounting information system. Then arrow to stakeholders and firm management from accounting information system. Auditor intervenes to the accounting information system and middle or arrow in stakeholders.

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3
Q

What is information? (1.20)

A

Information is a business resource

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4
Q

3 information purposes? (1.22)

A

Information for delegation and accountability
information for decision making
information for operating the business

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5
Q

System vs. sub-system vs. element/component? (1.26)

A
  • System consists of interdependent elements. Is set up to achieve one or more specific objectives.
  • A sub-system can exist without containing the system, but usually has no useful function by itself.
  • An element or component cannot be used alone.
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6
Q

Definition of information systems? (1.28) Same as 4 uses of a system

A

Information system is a set of interdependent components working together to collect, process, store, and provide information.

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7
Q

Define accounting information system (AIS) (1.29)

A

An accounting information system is an organised collection of software and hardware for inputing, processing, and storing data on business events, aimed at providing information to internal and external stakeholders that complies with specified quality criteria, and creating the right conditions for effective and efficient delegation and accountability, decision-making, and operating the business.

AIS: collects, process and reports information related to the financial (accounting) aspects of business events.

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8
Q

How does AIS add value to the organisation? (1.30)

A

Improving quality of information, and therefore better decision making.
- internal decisions such as budgeting, product mix, marketing activities, etc.
- external decisions such as investments, financing, etc.
Improves efficiency
- automation helps saving resources
- information more timely
Shares knowledge by communicating procedures
Improves internal control structure
- safeguarding organisations assets

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9
Q

What is the overall goal of internal control (IC)? (1.13)

A

The overall goal of internal control is to provide a shield that protects assets against undesirable events (risks) that bombard the organisation.

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10
Q

What is internal control and what are 3 its objectives? (1.14)

A

The process effected by an entity’s board of directors (BoD), management, and other personnel, designed to provide reasonable assurance regarding the achievement of the objectives related to:
- effectiveness and efficiency of operations
- reliability of internal and external reporting
- compliance with applicable laws and regulations

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11
Q

The fraud triangle? (Name and explain each)

A
  • Pressure: is a persons incentive or motivation to commit fraud. (Ex: pressure to perform, meet stakeholder expectations, personnel incentives like the need to pay the bills)
  • Rationalisation: refers to an individual’s justification for committing fraud. (Ex: fear of losing the job motivates to commit fraud)
  • Opportunity: refers to circumstances that allow fraud to occur. In the fraud triangle it is the only components that a company exercises control over.
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12
Q

Top 4 types of fraud? (2.16)

A
  1. Customer fraud
  2. Cybercrime
  3. Asset manipulation
  4. Bribery and corruption
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13
Q

Why was Sarbanes-Oxley Act (2002) created? 6 things. (2.21)

A

Prevent financial statement fraud
make reporting more transparent
protect investors
strengthen internal control
punish executives pro comit fraud
re-establish public confidence

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14
Q

What 2 main things were mentioned in the Sarbanes-Oxley Act? (2.22)

A

Arounds 60 laws:

Board of directors and management operations
- Implement and test internal controls
- Hold executives accountable for accuracy of financial statement
- Improvement of audit committees.
Auditors operate
- Specific focus on auditor independence through: auditor rotation, restricting non-audit services

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15
Q

What does COSO stand for and why is it defined as integrated framework? (2.29)

A

COSO = committee of sponsoring organisations of the Treadway Commission (original 1992, updated 2013)

Integrated because COSO:
- Includes 5 inter-related components
- Which help achieving all internal control objectives
- And cover the entire organisation

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16
Q

What two characteristics does risk have? (2.32)

A
  1. Uncertainty: an event may or may not happen.
  2. Loss: an event has unwanted consequences or losses.
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17
Q

Name 5 interrelated components of COSO framework (2.30)

A

Control environment
Control activities
Risk assessment
Information & communication
Monitoring activities

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18
Q

What are the 5 components of control environment? (2.33) And which 3 entities are involved?

A
  • Commitment to integrity and ethical values
  • BoD independent from management, oversees internal control
  • Management establishes structures, reporting lines and authorities and responsibilities
  • Commitment to competence
  • Accountability and responsibilities

Human resources / Management / Internal Audit

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19
Q

4 components of risk assessment? (2.35)

A

Identification of objectives to enable risk identification and assessment
Risk identification and analysis as a basis for risk management
Fraud taken into consideration
Identification and assessment of changes with impact in internal control system

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20
Q

3 components of control activities? (2. 37)

A

Controls to mitigate risk to acceptable level
General control over technology
Policies and procedures to help ensure that management’s risk responses are carried out

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21
Q

3 components of information & communication? (2.38)

A

Use of relevant, quality information to support internal control
Internal communication to support internal control
Communication with external parties regarding internal control

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22
Q

2 components of monitoring activities? (2.39)

A
  • Selection, development, and performance of ongoing and separate evaluations of (other) internal control components.
  • Timely evaluation and communication of internal control deficiencies to parties responsible for taking corrective action.
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23
Q

What can be 4 possible risk responses? (2.42)

A

Activity elimination
Automation
Centralisation
Risk sharing

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24
Q

4 levels of managing risks? Which are preventive controls are which are detective/corrective controls? (2.43)

A

Potential risks - Risks that are not avoided - Risks for which no preventive controls are put in place - Residual risks

Detective/corrective is the last one. Otherwise: preventive.

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25
Q

Understand: because of inherent limitations in any system of internal control, error or irregularities may occur and not be detected (2.44)

Understand: one of the causes of Enron’s failure probably was the lack of segregation of duties within the company. Explain such concept: segregation of duties. (2.44)

A
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26
Q

Value cycle + - where??? Look into the graph (2.45)
As well as network of reconciliations +-???

A
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27
Q

5 duties to be segregated? (3.6)

A
  1. Authorization
  2. Recording
  3. Custody
  4. Checking
  5. Execution
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28
Q

What are 3 information security goals? (3.27)

A
  • Confidentiality (C)
  • Integrity (I)
  • Availability (A)
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29
Q

What are 5 primary activities and how they create value? (4.4)

A
  • Inbound logistics: receiving, storing, and distributing inputs internally)
    Focus: supplier management
  • Operations: change inputs into outputs that are sold to customers
    Focus: operațional systems
  • Outbounds logistics: deliver product or service to customer
    Focus: distribution systems
  • Marketing and sales: convince clients to purchase
    Focus: communicating with customers
  • Service: maintaining the value of product or service to customers after purchase
    Focus: customer management
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30
Q

What are 4 support activities and how they create value? (4.5)

A
  • Procurement (purchasing): get the resources it needs to operate
    Focus: supplier negotiations
  • Human resource management: how well a company recruits, hires, trains, motivates, rewards, and retains employees.
    Focus: people management
  • Technological development: managing and processing information
    Focus: reduce IT costs/ IT systems
  • Infrastructure: maintain daily operations
    Focus: finance, accounting, legal. admin, and general management
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31
Q

From an accounting perspective, we typically talk about ____ (4.6) And why?

A

(COSTS): costs reflect the value that is attached to a resource, which is in turn needed to create value for the customer

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32
Q

Documentation in a business environment is necessary for what 2 reasons? (4.9)

A
  • Read and prepare: documentation to determine how a system works
  • Evaluate: documentation to identify strengths and weaknesses and recommend improvements (think about auditors who need to test the system of their clients or a company’s employees who work on improvement of current system)
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33
Q

What are Data flow diagrams (DFD)? (4.10)

A
  • Graphically describes the flow of data (data sources, data flow, data storage)
  • Simple diagrams (only a few different kinds of symbols) which highlight a particular aspect of the system
34
Q

What are flowcharts? (4.10)

A
  • Graphical description of a system
  • Record how business processes are performed and how documents flow through the organisation.
35
Q

4 basic DFD symbols? (4.11)

What does the circle mean? Rectangle? Arrow? Equal sign?

A

Circle = activities or processes (transformation of data)
Rectangle = data origins or data destinations external to the system
Arrow = data flows (needs label!)
Equal sign = data store

36
Q

What is the most common DFD mistake in terms of diagram? (4.12)

A

Not having a circle in the middle which means process or activity.

37
Q

What is a context diagram? (highest level DFD)

A
  • Defines and clarify boundaries of the system
  • Identifies the flows of information between the internal entities within the system and external entities
  • Entity = person, place, department, or thing like computer
38
Q

What is a physical DFD? (4.14)

A
  • Is a graphical representation of a system showing the system’s internal and external entities, and the flows of data into and out of these entities.
  • A physical DFD specifies: WHERE, HOW, and BY WHOM a system’s processes are accomplished
  • A physical DFD does not tell us WHAT is being accomplished
39
Q

What is a logical DFD? (4.16)

A
  • Is a graphical representation of a system focusing on the system’s processes, and the flows of data into and out of the processes and data stores.
  • We use logical DFD to document WHAT tasks the system is doing - without having to specify how, where, or by whom the tasks are accomplished.
  • The advantage of a logical DFD (versus a physical DFD) is that we can concentrate on the functions that a system performs
  • A logical DFD portrays a system’s activities, whereas a physical DFD depicts a system’s infrastructure.
  • We need both pictures to understand a system completely
40
Q

Data flow diagrams describe the flow of ____?
Flowcharts graphically describe the ____?

(4.19)

A
  1. data
  2. system
41
Q

Why do people not comply with practices, rules, or policies? (4.27) 4 things

A

Efficiency
Effectiveness
Desire to help a colleague, customer, or the organisation
Self-serving motives

42
Q

What are the objectives of the expenditure cycle? (5.3)

A

Minimise the total cost of acquiring and maintaining inventories, supplies, and the various services the organisation needs to function.

43
Q

Expenditure cycle transactions have what 2 components? (5.5) example of each

A

physical: receiving goods
financial: paying goods

44
Q

What are 4 basic expenditure cycle activities? (5.5)

A

Ordering goods
Receiving goods
Approving invoices
Cash disbursement

It’s a circle, not in this order!

45
Q

What are 2 primary objectives of ordering goods? (5.6)

A
  • The accurate and efficient processing of purchase orders
  • Assurance over validity and correctness of purchases
46
Q

What are 3 primary objectives of receiving goods? (5.7)

A
  • To receive goods in desired condition (quantity, quality)
  • To safeguard inventory
  • Accurately record receipt
47
Q

What are 3 primary objectives of approving invoices? (5.8)

A
  • Received invoices are correct
  • Suppliers are paid
  • Supplier accounts are accurately maintained
48
Q

What are 2 primary objectives of cash disbursement? (5.9)

A
  • Review cash outflow (check due dates)
  • Safeguard cash and A/P master data
49
Q

What are 4 main risks when ordering goods? (5.11)
- And each of them controls?

A
  1. Inaccurate inventory records
    - Controls: perpetual inventory method, reduce manual data entry
  2. Ordering too many or too few items
    - Controls: authorisation of purchases not by purchasing departments (SoD)
  3. Ordering low quality supplies
    - Controls: purchase from previously screened suppliers, periodic price and quality assessment of suppliers
  4. Influencing purchasing clerks (kickbacks)
    - Controls: code of conduct prohibiting acceptance of gifts from suppliers, use of tender procedure
50
Q

What are 3 main risks when receiving goods? (5.13)
- And their controls?

A
  • Accepting non-valid orders
    Controls: compare purchase order number on the packing slip with purchase order
  • Acceptance of damaged/inaccurate amount of goods
    Controls: inspecting and counting of goods at time of arrival and compare against packing slip and purchase order, prepare a receiving report, guidelines on how to resolve any delivery issues
  • Inaccurate documentation of receipt
    Controls: use technology to avoid human error such as scanners and automated forwarding of receiving goods
51
Q

What are 2 main risks when approving invoices? (5.15)
And their controls

A

Risk 1: unauthorised invoice approval
- Control: segregation of duties (Sod), authorisation matrix
Risk 2: error in supplier invoice
- Control: manual calculation, compare invoice prices to prices in system/purchase order

52
Q

What are 3 main risks when paying invoices (cash disbursement)? (5.17) And their controls?

A

Risk 1: missing out on discounts
- Control: file invoices by due date, automated procedure which makes the invoices payable when due
Risk 2: duplicate payments
- Controls: pay only original invoices, cancel supporting document when payment is made (example: stamping)
Risk 3: payment for not received goods
- Control: match supplier invoice to supporting documents (purchase order, receiving report)

53
Q

What are 4 objectives of the revenue cycle? (6.3)

A

Provide the right product (service) in the right place at the right time for the right price.

Right product (service), right place, right time, right price

54
Q

4 basic revenue cycle activities? (6.4)

A

Sales order entry
Shipping
Billing
Cash collection

It goes in a circle, there is no right start or finish.
Revenue cycle transaction have a physical component like shipping goods and a financial component like receiving payments.

55
Q

What are 3 primary objectives of the sales order entry process? (6.6)

A
  • Objective: to accurately and efficiently process customer orders
  • Objective: to ensure that company gets paid for all credit sales
  • Objective: to ensure that all sales are valid
56
Q

What are 3 main risks of the sales order entry process? (6.7)
And internal controls for those risks?

A

Risk 1: incomplete or inaccurate customer oder
Control 1: training, data entry edit checks, pre-formatted screens, populate input screen with master data
Risk 2: credit sales to customers with poor credit
Control 2: sell only to customers in customer file, credit approved by credit (not sales) manager, accurate record of customer account balances
Risk 3: validity of orders
Control 3: weed out ‘inactive’ customers, signature on paper doc or digital signature

57
Q

What are 3 primary objectives of the picking and shipping process? (6.9)

A
  • To accurately and efficiently pick and ship the required goods
  • To safeguard inventory
  • Accurately record shipment
58
Q

What are 6 main risks of the picking and shipping process? (6.10) And internal control for them?

A
  • Inaccurate picking (wrong goods/quantity)
    = automated picking, travel paths, training, compare picking ticket to picked goods
  • Theft of goods
    = restrict access to inventory, documentation of all internal transfers of inventory, no picking without SO/authorisation
  • Failure to pick goods
    = training, personnel
  • Shipping errors (wrong goods/address)
    = reconciliation (coordination) of SO with picking ticket
  • Damage goods in shipment
    = training
  • Loose shipment
    = compare goods with packing slip after shipping
59
Q

4 primary objectives of the billing process? (6.13)

A

Customers are billed for all sales
Invoices are accurate
Customer accounts are accurately maintained
Records are accurately maintained

60
Q

What are 4 main risks of the billing process? (6.14)
And internal controls for them?

A

Risk 1: failure to bill customer
Control 1: separation of shipping and billing, renumber all shipping docs & periodically compare to invoices, coordination of picking tickets and bill of lading with SO
Risk 2: billing errors
Control 2: data entry edit controls, populate screen with master data, reasonableness check
Risk 3: bill for goods not shipped
Control 3: billing is authorised by shipping order
Risk 4: error in maintaining customer accounts
Control: confirm customer accounts regularly

61
Q

2 primary objectives of the cash collection process? (6.16)

A

Monitor cash collection
Safeguard cash, customer payment and A/R master data

62
Q

2 risks of the cash collection process? (6.17) And internal controls.

A

Risk 1: theft of cash
Control 1: segregation of duties, periodic comparison of bank statement with records, lockbox
Risk 2: customer does not pay
Control 2: focus on old A/R, following up on open A/R, analyse payments that are overdue, always communicate actions with customer service.

63
Q

3 objectives of management? (7.2)

A

Objective setting -> strategy formulation -> management control

64
Q

Without objectives, it is impossible to: (2 things) (7.3)

A
  1. assess whether employee’s actions are purposeful
  2. make claims about an organisation’s success
65
Q

Objectives can be…? (7.3)

A

Financial versus non-financial
Quantified, explicit versus implicit
Economic, social, environmental, societal

66
Q

Strategies define….(7.4)

A

how organisations should use their resources to meet their objectives

(Strategies put constraints on employees to focus activities on what the organisation does best or areas where it has an advantage over competitors)

67
Q

Management control is the process by which management…? (7.5)

A
  • Ensures that people in the organisation follow organisational objectives and strategies
  • !!! encourages, enables, or sometimes ‘forces’ employees to act in the organisation’s best interest

Management control includes all the devices/mechanisms managers use to ensure that the behaviour of employees is consistent with the organisation’s objectives and strategies

68
Q

2 functions/purpose and benefit of management control? (7.6)

A
  • Get done what management wants done
  • Influence behaviour in desirable ways

Benefit: increased probability that the organisation’s objectives will be achieved

69
Q

Facts:

Management control is about encouraging people to take desirable actions
- It guards against the possibilities that employees will do something the organisation does not want them to do, or, fail to do something they should do.

!!! Management control has a behavioral orientation.
If all personnel could always be relied on to do what is best for the organisation, there would be no need for a management control system.

A
70
Q

3 basic control issues of management? (7.9)

A
  1. Lack of direction
    - Do they understand what we expect of them
    Employees do not know what the organisation wants from them. When this lack of direction occurs, the likelihood of the desirable behaviours occurring is small
  2. Lack of motivation
    - Will they work consistently hard and try to do what is expected of them
    When employees ‘choose’ not to perform as their organisation would have them perform.
  3. Personal limitations
    - Are they capable of doing what is expected of them?
    Some examples: lack of required knowledge, training, experience, employees are promoted above their level of competence
71
Q

What does lack of congruence (compatibility) mean? (7.11)

A

Individual goals do not coincide (match) with organisational goals.

72
Q

3 management control systems? (7.13) !!!!!!!!!!

A

People controls (input/cultural)
Action controls (process)
Result controls (output)

73
Q

4 control-problem avoidance? (7.14)

A
  • Activity elimination
  • Risk sharing (buying insurance)
  • Automation (eliminate human inaccuracies, inconsistency, lack of motivation)
  • Centralisation (superiors make the most critical decisions)
74
Q

3 personnel controls (people controls)? (7.16)

A
  • Selection and placement: right people must be selected for the job.
  • Training: organization use formal as well as informal training to improve personnel performance.
  • Job design and provision of necessary resources.: task definition and providing a car for customer visits.
75
Q

5 cultural controls (people controls)? (7.17)

A
  • Codes of conduct: ethical codes, mission statements, vision statements.
  • Group-based rewards: same reward for all group for successfully completed task
  • Intra-organisational transfers: regular transfer from one department, job assignment, business unit, geographical location to another.
  • Physical and social arrangements: luxurious buildings, cards, furniture.
  • Tone at the top: management believes continuing education is important and for that reason managers participate in courses themselves.
76
Q

4 action controls? (7.18)

A

Behavioral constraints (physical constraintsL locks on desks, user Ids and passwords, limiting decision making authority, segregation of duties)
Pre-action reviews (analysing an audit plan before it gets executed)
Action accountability
Redundancy (surplus)

77
Q

4 result controls? (7.19)

A
  • Defining performance measurements (profitability, product quality, customer satisfaction)
  • Setting targets for these performance measures
  • Measuring performance
  • Providing rewards or punishments (salary increases, bonuses, promotions, demotions, loss of job)
78
Q

What does tight result control mean? (7.27)

A

Achievement of right results control depends on:
- Congruence
- Specificity (performance targets must be specific)
- Communication (desired results must be effectively communicated)
- Completeness (the measures must be complete)

79
Q

When is action control system tight?
3 tight action controls? (7.28)

A
  • Action control systems are tight if it is highly likely that employees engage consistently in all of the actions critical to firm success.
  1. behavioral constraints
    - it can be assumed that higher-level personnel can be expected to make more reliable decisions
    - if can be guaranteed that those who do not have authority for certain actions cannot violate the constraints that have been established
  2. pre-action reviews
    - frequent, detailed
  3. action, accountability
    - is tight when
80
Q

Tight personnel/cultural controls? (7.29)

A

Personnel control usually provide a significant amount of control (MCSs dominated by personnel. Charitable and voluntary organisations)

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