Chapter 1: Information Systems in Accountants’ Perspective Notes
Information Environment
Information is recognized as a vital business resource, essential for the survival of
contemporary organizations.
Vast quantities of information flow daily to decision-makers for various internal needs
and external users, such as customers and stakeholders.
Flow of Information
The organization operates at multiple levels—business operations at the base and three
management tiers above: operations management, middle management, and top
management.
Each level of management has distinct responsibilities—operations management oversees
daily activities, middle management focuses on short-term planning, and top
management handles long-term objectives.
Horizontal and Vertical Information Flow: Information flows horizontally (detailed
transactions for operations) and vertically (instructions and summarized reports from
top to lower management).
External users include trading partners (customers and suppliers) and stakeholders
(entities with interests in the firm, like stockholders and government).
Each user group has specific information needs; managers require summarized data for
performance reporting, while external stakeholders seek detailed financial statements
based on GAAP.
The detailed operational information necessary for daily tasks may not be suitable for
managers, who need summarized insights for decision-making.
Financial statement information for external stakeholders is accrual-based and typically
aggregates data, making it unsuitable for most internal uses.
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Definition of System
The term "system" encompasses both natural and artifice
al systems, ranging from atomic structures to complex organizations.
A system consists of two or more interrelated components or subsystems that serve a
common purpose.
True system must contain more than one part; for example, a yo-yo with a string
functions only as a system when both parts are present.
All parts of a system relate to a common purpose. If a component does not contribute to
the common goal, it is not part of that system.
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System vs. Subsystem:
The distinction is based on perspective; a subsystem can be viewed as a system within a
larger system.
Each system must serve at least one purpose. If it ceases to fulfill its purpose, it should be
replaced.
Example of an Artificial System
Automobile as a System:
An automobile serves the purpose of transportation, relying on numerous subsystems
(e.g., fuel, propulsion, electrical, and braking) that work together.
System Decomposition
Decomposition divides a system into smaller subsystems to clarify their relationships and
functions within a hierarchy.
Each subordinate subsystem performs specific tasks to support the overall objectives of
higher-level systems.
Subsystem Interdependency
The overall system's success depends on the effective operation and interaction of its
subsystems.
If a vital subsystem fails (e.g., a fuel pump), the entire system may fail, while nonvital
subsystem failures (e.g., radio) may not affect overall performance.
Designers should anticipate subsystem failures and incorporate cost-effective controls,
such as backup systems, to mitigate related risks.
An information system consists of formal procedures for collecting, processing, and
distributing data.
The framework of an information system can be decomposed into elemental subsystems,
primarily AIS and MIS, aiding in defining their respective domains.
Concept of Transaction:
The distinction between AIS and MIS revolves around the concept of a transaction,
which is an event processed by the information system as a unit of work.
Types of Transactions:
Transactions are categorized into financial transactions, affecting an organization's
assets and equities, and nonfinancial transactions, which do not meet the criteria for
financial transactions.
Financial Transactions: These are economic events measured in monetary terms,
including sales, purchases, and cash disbursements, and must be processed correctly due
to legal obligations.
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Nonfinancial Transactions: Events not classified as financial transactions, such as
adding a new supplier.
Integration of Transactions: Financial and nonfinancial transactions are often processed
within the same physical system, demonstrating their close relationship.
AIS & MIS
The AIS is composed of three major subsystems: (1) the transaction processing
system (TPS), which supports daily business operations with numerous reports,
documents, and messages for users throughout the organization; (2) the general
ledger/financial reporting system (GL/FRS), which produces the traditional
financial statements, such as the income statement, balance sheet, statement of
cash flows, tax returns, and other reports required by law; and (3) the
management reporting system (MRS), which provides internal management
with special-purpose financial reports and information needed for decision
making such as budgets, variance reports, and responsibility reports.
MIS: Management often requires information that goes beyond the capability of
AIS. As organizations grow in size and complexity, specialized functional areas
emerge, requiring additional information for production planning and control,
sales forecasting, inventory warehouse planning, market research, and so on. The
management information system (MIS) processes nonfinancial transactions that
are not normally processed by traditional AIS.
Difference Between MIS and AIS
The Sarbanes-Oxley Act (SOX) legislation requires that management design and implement
internal controls over the entire financial reporting process.
This includes the financial reporting system, the general ledger system, and the transaction
processing systems that supply the data for financial reporting.
SOX further requires that management certify these controls and that the external auditors
express an opinion on control effectiveness.
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Because of the highly integrative nature of modern information systems, management and
auditors need a conceptual view of the information system that distinguishes key processes and
areas of risk and legal responsibility from the other (nonlegally binding) aspects of the system.
Without such a model, critical management and audit responsibilities under SOX may not be met
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