Introduction

James started a small retailing business five years ago. He named his business James
Enterprises. James buys goods from various suppliers and sells the goods to consumers
at a profit. James has seen his business expand rapidly over the years. More customers
buy goods from him, which means he has to buy more goods from suppliers. James also
relaised that his workers are spending a lot of time performing routines tasks manually.
He was also getting frustrated because he was not getting information on a timely basis.
James discussed his business situation with his friends in the business community and
they suggested two important things. They suggested James need to reconsider how he
performs certain processes, and importantly, he must have a system in place to record
and manage these processes. His friends suggested that overall system would be
an Accounting Information System. James is excited, but needs to understand the
operations of such systems to obtain its full benefits.

Managing Organisations with Information Systems

This course will teach us about the management and operation of accounting
information systems. This learning will include understanding on the
environment that businesses need to establish to use accounting information
systems, the different types of business processes managed by the accounting
information systems, and the technology resources that we need to enable these
processes.

Business Processes

Organisations are made of business processes. A good organisation is one that

has its business processes linked to each other. This linkage will allow sharing
information within the business processes. A business process is a sequence of
steps performed to produce a desired result for the organisation. Organisations
perform numerous activities and each activity is performed in a systematic way.
This means that each activity is undertaken as a process. In relation to
Accounting Information Systems, organisations have revenue processes,
expenditure process, conversion processes, and administrative
processes. These broader processes contain sub-processes. For example, the
revenue processes contain sales processes, sales return processes and cash
collection processes. We will consider all these processes in this cours

Self-Check 1: Solutions

1.What are some of the procedures at a takeout store like

McDonald’s that are intended to ensure the accuracy of your order?

Often, at either the drive-through or the inside cash register, the customer can
see a screen that displays the items ordered. In addition, a fast food restaurant
uses pre-designed slots to hold certain types of menu items.  When a customer
orders a particular sandwich, the person filling the order knows exactly which
slot to pull the sandwich from.  Each customer receives a printed receipt with the
items listed and the customer can verify the accuracy.
2.What would be the key specific business processes within the broader
revenue, expenditure and administrative processes?

Your responses are likely to vary greatly, as they may refer to any of the sub-
processes within each category.  For example, the revenue processes include
sales, sales returns, and cash collections; the expenditure processes include
purchasing, purchase returns, cash disbursements, payroll and fixed asset
processes; the conversion processes include planning, resource management,
and logistics, and; administrative processes include capital processes,
investments, and general ledger processes.  Accordingly, any type of business
process can be cited to answer this question, but the student must match the
example with the appropriate process.

Overview of an Accounting Information System

An Accounting Information Systems (AIS) combines the study and practice of accounting
with the design, implementation, and monitoring of information systems. Such systems
use modern information technology resources together with traditional accounting
controls and methods to provide users the financial information necessary to manage
their organizations. AIS like any other information system have three key stages
– Inputs, Processing and Outputs.

Input processes capture accounting data using various input methods. These methods
may include manual or automated data input. A process within the AIS will also have
internal controls to safeguard the assets and ensure accuracy and completeness of the
data. The Process component of AIS processes the data based on a set of rules.
The Output section of the AIS generates reports for use within the organization and by
outside stakeholders. The internal stakeholders include the management and employees.
External stakeholders include the shareholders, government, tax authority, and lenders.

The reports can also be used as feedback to monitor and control the processes.
Incorrect, incomplete, or inconsistent reports will indicate internal control problems
within the processes.

Self-Check 2: Solutions

1. What are the key components of an Accounting Information

System?

These are: a) Work steps within a business process that capture accounting data as the
business process occurs. b) Manual or computer-based records that record the
accounting data from the business processes. c) Internal controls within the business
process that safeguard assets and ensure accuracy and completeness of the data. d)
Work steps that process, classify, summarize, and consolidate the raw accounting data.
e) Work steps that generate both internal and external reports.
2. How would we capture, record, classify, summarize, and report data in a
manual AIS? How does a computerized AIS impact this manual process. What is
the impact of computerized AIS on the output function? Do you think the
demand for various types of outputs affect the design of an AIS?

In a manual accounting information system, data would be captured on source

documents and recorded by hand in sub-ledgers or special journals. Account
classifications would be determined by the accountants responsible for recording the
transaction. The accountants would perform mathematical computations to summarize
the records and post them to a general ledger. The general ledger would be manually
summarized at the end of the period so that financial statements could be prepared. The
financial reports would be manually compiled based on the ending general ledger
balances. Since a great deal of paper and human processing are required for a manual
system, a manual system is prone to error.

More sophisticated, computer-based systems tend to produce more output that is more
accurate because they are programmed to process data consistently. They also use
programming to perform mathematical computations, which promotes accuracy and time
savings. Therefore, IT usage to support business processes results in increased
accuracy, increased efficiency, and reduced costs. The requirements for accounting
outputs impact the design of the AIS. Work steps within a business process can be
designed to capture data in a manner that is consistent with the desired content and
format of the related output. This promotes efficiency and effectiveness of the overall
process. When business process re-engineering is used to design business processes, IT
systems can be introduced to take advantage of the speed and efficiency of computers
to enhance the AIS.

T Enablement of Business Processes

Recall that a business process is a sequence of steps performed to produce a desired
result for the organisation. Businesses can perform processes without any use of
information technology (IT). However, remember as with James business, the processes
without any use of IT can become unmanageable and inefficient.

ITs are computers, ancillary equipment, software, services, and related resources
applied to support business processes. Businesses use IT to refine their business
processes. Small improvements in business processes represent business process
refinement. Radical changes in business processes represent Business Process Re-
engineering (BPR).

BPR is a technique that helps organizations fundamentally rethink how they do their
work in order to dramatically improve customer service, cut operational costs, and
become more competitive. A key stimulus for re-engineering has been the continuing
development and deployment of sophisticated information systems and networks.
Organizations are becoming bolder in using this technology to support innovative
business processes, rather than refining current ways of doing work.

Your University registers the students using the student registration processes. The
University’s student registration process has gone through substantial changes over the
last 5-10 years. Much of the aspects of this process are now automated or refined using
technology. This transformation is an example of a re-engineered business process.
Self-Check 3: Solutions!

1.    What are some of the improvements that you may witness from
BPR in conjunction with IT systems?
The use of IT systems usually leads to two kinds of efficiency improvements.  First, the
underlying processes are re engineered (through rethinking and redesign) so as to be
conducted more efficiently.  Second, the IT systems improve the processing efficiency of
the underlying processes. 

2. Cool’s Cues Co is a regional manufacturer and seller of pool cues for sporting
goods stores and billiard halls. Currently they focus their business in their
locality. The business is owner operated by John and Rebecca. All materials for
making cues is purchased locally and paid for in cash at the time of purchase.
John, the owner makes the cues, takes the telephone calls for query and
replacements, and personally delivers all finished products to customers.  All
orders are received electronically and sales are conducted on account
via www.coolcues.com. Rebecca prints orders and passes them to John.
Rebecca is also responsible for website design and maintenance, as well as all
accounting and customer collections.

 a) What are the business processes that apply to this business?
The business processes described include the expenditure process involved in purchasing
materials needed to manufacture pool cues and disbursing cash to suppliers for materials
purchased.  The case also describes revenues processes for sales of pool cues over the
internet, customer collections, and sales returns (replacements).  This business would
also include subprocesses for payroll expenditures to pay John and Rebecca Cool for
their time worked, and fixed asset processes to handle any capital assets acquired (such
the workshop, office space, furniture and computers, tools and equipment, delivery
vehicle, etc.). In addition, conversion processes would involve planning of the
manufacturing process, planning and managing materials and resources needed for
production, and logistics (movement of the manufactured goods through the production
process through delivery to a customer).

b) How would the business processes change if Cool’s Cues expanded to a

regional focus?
If Cool’s Cues expanded to a regional focus, it is likely that its business would grow. 
John and Rebecca Cool may have difficulty managing a regional business on their own,
so they would likely need to hire and train employees to join their business. As more
people became involved in the business processes, they would need to determine how
responsibilities would be divided and how to implement internal controls in the
processes. John Cue may no longer be able to personally handle all deliveries.  The
company’s website may also need to be enhanced to handle the additional volume
anticipated in connection with the business expansion.

c) How would the business processes change if the company began selling pool
balls and other billiard equipment in addition to the cues?
If Cool’s Cues began selling pool balls and other billiard equipment in addition to its pool
cues, its business processes would change.  If Cool’s acquired this type of merchandise,
it would have to enhance its expenditures processes to include the types of suppliers of
these billiard accessories. It would also need to consider the logistics of inventory
storage. In addition, its revenue processes would need to be enhanced to differentiate
sales of manufactured cues versus other billiard merchandise. Its website would need to
be updated to handle the additional product lines.
Basic Computer and IT Concepts

All Information Systems (IS) today include IT to manage their processes. AIS
also rely on IT to input, process, output and store data. It is important that you
have some understanding of the basic computer and IT concepts. This will help
you in understanding the key IT-enabled business processes and will help you in
transforming manual business processes into IT-enabled business processes.

Organizations manage data. Most organizations use databases to manage data.

A database is a system intended to organize, store, and retrieve large amounts
of data easily. It consists of an organized collection of data for one or more uses,
typically in digital form. The smallest element of data is a bit. Accounting data is
stored mostly in relation to transactions, customers, or other stakeholders. The
smallest element of a transaction is a field, for example, the price of an item. All
aspects of a transaction become a record. All similar records, for example all
sales, become a file. Combination of related files becomes a database.

Organizations can access data from the database sequentially (one after the

other), or randomly (direct access). The ways of accessing data also depends
upon the storage medium. For example, you can access data sequentially from a
magnetic tape, but randomly from an optical disk.   

Organizations also process data in a batch (all at a particular time),

or online. Online processing is when a transaction is processed individually,
and real-time processing is where a transaction is processed immediately, and
in real time and the output is available immediately.

Organizations have a vast amount of data. Some organizations filter data and
keep the ‘good data’ in a structured way. This process is called data
warehousing. Data warehousing is the process of storing information for
further information and reporting. Data mining is the process of examining the
data in the data warehouse to identify patterns to predict future behavior. This is
also called predictive analysis.

Most organizations today operate in a network environment. A computer

network is where two or more computers are connected together and share
information and other resources. A network that allows sharing of information
within an organization is called an intranet. An extranet allows an organization
to share resources with its key stakeholders like the suppliers and wholesalers.
The internet is the global computer network.

Self-Check 4:Solutions

1.What is the difference between an extranet and the

Internet? The extranet allows access only to selected outsiders, while the
Internet is open to an unlimited number of outsiders (essentially anyone having
access to the Internet). On the other hand, extranets are typically used by
 companies to interact with specific suppliers and customers who have been
granted access to a company’s network.

2.What is the difference between batch processing, online processing,

and real time processing?
These are:
a) Batch processing involves the grouping of similar transactions to be processed
together;
b) Online processing involves processing individual transactions, one-at-a-time;
and
c) Real-time processing is an online processing method that involves the
immediate processing of individual transactions.

The Internal Control Structure of Organisations

All business processes must be controlled to ensure that correct data are input into the
system, the data are processed correctly, the outputs are useful in decision making, and
data and information are stored securely. Lack of controls will pose many risks on the
organisations and their survival will be under threat.

Organisations will not be able to control all risks, but they can implement policies and
procedures to reduce risks. Organisations use IT to implement internal controls to
manage risks. IT-enabled internal controls are very important to ensure that AIS
effectively and efficiently manage the accounting processes.

Accountants play an important role in reducing risks in the following categories:

         Reducing the risks of assets being stolen and misused.

         Reducing errors in accounting data or information.

         Reducing the changes of fraudulent activity by employees, managers, or vendors.

         Reducing inherent risks in the IT systems such as erroneous data input and processing,
computer security breaches, and computer fraud.  

A number of internal control support structures exist to help management establish a

control environment. These structures include:

         Enterprise Risk Management – This part of the wider COSO framework. The COSO
framework, developed by the Committee of Sponsoring Organisations of the Treadway
Commission (COSO) provides guidance to organisations on critical aspects of
organisational governance, business ethics, internal control, enterprise risk
management, fraud, and financial reporting. We will discuss this framework later in this
course.

         Code of Ethics – is developed and adopted by an organisation in an attempt to assist

those in the organisation called upon to make a decision,  understand the difference
between 'right' and 'wrong', and to apply this understanding to their decision. A code of
ethics can reduce opportunities for managers or employees to conduct fraud.

         IT Controls – Most business processes today are IT-intensive. This means that most of
the business processes are managed by IT. This requires appropriate IT controls. IT
 controls are general and application controls. General controls apply to the overall IT
systems. Application controls are used specifically in applications like accounting and
would relate to inputs, processes, and outputs. We will discuss these IT controls later in
this course.  

         Corporate Governance - Corporate governance is the set of processes, customs,

policies, laws, and institutions affecting the way a corporation (or company) is directed,
administered or controlled. Corporate governance also includes the relationships among
the many stakeholders involved and the goals for which the corporation is governed. The
principal stakeholders are the shareholders, the board of directors, executives,
employees, customers, creditors, suppliers, and the community at large.

         IT Governance - IT governance, focusing on information and IT assets, specifies the

decision rights and accountability framework to encourage desirable behaviour in the use
of IT. This behaviour relates to the form of the leadership, and organisational structures
and processes that ensure that the organisation's IT sustains and extends the
organisation's strategies and objectives. IT governance essentially places structure
around how organisations IT strategy aligns with business strategy. This alignment will
ensure that organisations continue to achieve their strategies and goals, and
implementing ways to evaluate its performance.

Self Check 5: Solutions

1. What is the difference between general controls and

application controls?

General controls are those controls that apply overall to the IT accounting
system. They are controls that are not restricted to any particular accounting
application. An example of a general control is the use of passwords to allow
only authorized users to log into an IT based accounting system. Application
controls are those controls that are used specifically in accounting applications to
control inputs, processing, and output. Application controls are intended to
insure that inputs are accurate and complete, processing is accurate and
complete, and that outputs are properly distributed, controlled, and disposed.

2. Give a brief summary on enterprise risk management, corporate

governance, and IT governance.
These are:
a. enterprise risk management is an ongoing strategy-setting and risk
assessment process that is effected by top management but involves personnel
across the entire entity.
b. corporate governance is an elaborate system of checks and balances whereby
a company’s leadership is held accountable for building shareholder value and
creating confidence in the financial reporting process.
c. IT governance is the corporate governance process that applies specifically to
the proper management, control, and use of IT systems.

Accountants and AISs

 Accountants today make extensive use of AIS to perform their activities. These activities
may include using AIS to process accounting data and audit AIS to ensure controls put in
place are effective. Accountants may also help with the design and implementation of
AIS.

Today’s AIS provide accountants access to a lot of information. This information may
tempt accountants to engage in unethical and fraudulent practices by manipulating the
internal controls that are in place to avoid such practices. The concept of ethics is very
important in the accounting profession. Accountants must understand the potential for
unethical behaviour because:

         They assist in developing internal controls structures to lesson and control

unethical behaviour.

         They often get entangled to assist in or cover up unethical actions.

         Deal with business data and records that may easily tempt them to engage in unethical
behaviour.

Self-Check 6: Solutions

1.What is the relationship between accountants and AIS?

Accountants are users of the AIS, they assist in the design of the AIS, and they
are auditors of the AIS.

 2.Adrienne is currently pursuing her accounting degree. She has done

well in her courses, but struggles in her computer classes and with
assignments requiring use of computers. Nevertheless, she feels
confident that she will become an excellent accountant. Comment on the
practical and ethical implications of her position.

Adrienne is mistaken in her position for the following reasons:

 • Practically speaking, accountants need to be well-informed about the
operation of accounting information systems, which nearly always involve
computer technology. The AIS is the foundation of most accounting functions, so
to resist computer technology would be unreasonable, if not impossible. Also, in
order to assist in developing internal controls, accountants must understand the
processes within the AIS, including the use of technology, so that effective
controls can be developed and implemented to reduce risks.
 • Ethically speaking, accountants need to be well-informed about the operation
of the AIS so that they are poised to recognize fraud and errors that may occur.

Without an understanding of the underlying technology, accountants would be

unable to effectively capture and monitor business processes. Rather than
fulfilling her responsibility as an accountant to develop and implement internal
controls, Adrienne’s ignorance of the AIS could actually allow for fraud to be
perpetrated without being prevented or detected.
For these reasons, Adrienne’s viewpoint is quite dangerous.
Introduction to MYOB

You will also use an AIS in this course to practice completing AIS processes. This
course introduces you the MYOB. MYOB - Mind Your Own Business is an
accounting software that manages various accounting processes in the
accounting system. This includes the purchasing process, sales process,
inventory management process, banking process, payroll and asset management
process.

Unit 2: Study Guide

Business Processes, Internal Controls and Flowcharting

Foundational AIS Concepts

James is venturing into unfamiliar situation. James’s excitement is gradually

diminishing because he is realizing that there is lot to learn about the AIS before
he is able to make an informed decision on what type of AIS to adopt. James
finds out that the processes in AIS will be interrelated, but is not sure on how to
achieve this.

James conducts some search on the internet using the term “accounting
information system” and finds hundreds of different types of AIS. James is
worried how the data will be ‘entered’ into the AIS, how data will be processed,
where he will get the reports from, and where data will be stored. He also
realizes that the new AIS will mean new hardware resources and is wondering
what type of hardware sharing will be best for his business.

We will consider these issues in this unit. Understanding on these issues is

critical to have control on your AIS or any information system. Organizations
may get into problems if they are not clear on what type of AIS to adopt and
how the AIS will input, process, report, and store information

The Interrelationship of Business Processes and the AIS

In Unit 1, we learned that a business process is a sequence of steps performed to
produce a desired result for the organization. We also learned that an organization is
made of numerous processes. A number of process completions have resulted in you
studying this course this semester. Few more processes will follow (examination and
assessment) to provide an outcome to your current activity.

The accounting reports are the outcome of AIS. This outcome is the result of flow of
various processes from initiation of an activity to its completion. Organizations engage in
processes to perform activities. We refer to majority of these activities as transactions.

A transaction is an activity (exchange of goods and services) that can be quantified into
monetary terms. Transactions from all processes filter into an AIS. The AIS will manage
and process these transactions and prepare and present reports for decision making by
various stakeholders.
Self-Check 1: Solutions!

1. How are the business processes and the AIS related?

As the systematic steps are undertaken within business processes, the

corresponding data generated must be captured and recorded by the accounting
information system.

2. Recall when you last visited a dentist. What business processes

affected you as a customer (patient)? What accounting and
administrative processes support this type of businesses?

As a patient, you would experience the revenue processes as you receive

services from the hygienist and dentist. You would also be affected by the billing
and collections processes when you receive an invoice for services rendered and
submit payment for those services. The dental office would need to have specific
steps in place for recording the services provided to each patient so that they
can be properly billed and reported.

These steps may be very detailed, especially in instances where patient fees
must be allocated between dental insurance companies and the patients
themselves. There would also need to be processes in place for purchasing, as a
dentist’s office is expected to make regular purchases of supplies as well as to
handle the other operating costs of the business. Payroll processes would also be
needed to account for the time and pay of each employee in the dentist’s office,
and fixed asset processes would be needed to support the investments in and
depreciation of office furniture and equipment, fixtures, and dental equipment.

Finally, it is possible that the business may have administrative processes in

place to handle investment, borrowing, and capital transactions. Once these
transactions are recorded, the business must have processes in place to post the
related data to the general ledger and summarize it in a manner that facilitates
the preparation of financial statements and other accounting reports.

ypes of AIS

Recall that AIS capture, records, processes, and reports accounting information
in a systematic way. Organizations can have a manual AIS, a legacy AIS or a
modern integrated AIS. Recall that James uses manual AIS and is planning to
adopt modern AIS. Manual AIS does not use IT, whereas modern and integrated
AIS make extensive use of IT. Legacy AIS use old and outdated IT. Let’s look at
these AISs in some detail.

Manual AISs use paper-based ledgers and journals. We use ledgers and

journals to systemically record transactions. This means that all transactions will
be recorded on paper, which becomes the source documents. A source
document captures the key data of a transaction. Examples of source documents
are sales invoices, purchase orders, and cash receipts.

A legacy system is an existing system in organizations that use old technology.

They are very rigid and normally output very limited reports. Most of the legacy
systems do not engage in sharing data and are essentially locked in an
organization. The systems are difficult to update and do not have user friendly
interfaces. Because they ‘lock away” data, they are generally very safe systems.

Modern Integrated AISs allow for easy sharing to data within and across
organizations. These systems are also very flexible and the users of these
systems can request and print a variety of reports as and when they may wish
to. Most of the processes in integrated AISs are automated and transactions are
generally processed on a real time basis.

Self-Check 2: Solutions!

1. How is integration across business processes different between

legacy systems and modern integrated systems?

Integration across business processes within a legacy system is extremely

challenging and costly, as those systems are usually not based on user-friendly
interfaces that are difficult to modify. It is also difficult to find programmers to
perform such tasks. The result is that organizations which integrate business
processes between legacy systems typically must resort to enhancements to
their existing software or bridging their existing software to new systems or
interfaces. On the other hand, modern integrated systems are based on a single
software system that integrates many or all of the business processes within the
organization, thus eliminating the coordination and updating efforts required by
the older systems.

2. How could organizations change from their legacy systems and

modern integrated systems without completely replacing the legacy
systems?

One approach to updating a legacy system is to use screen scrapers, or

frontware, which add modern, user-friendly screen interfaces to an existing
system. Another approach is to bridge the legacy system to new hardware and
software using enterprise application integration, or EAI.

Accounting Software Market Segments

Many AIS software exist in the market. Software is the collection of computer programs
and related data that provide the instructions telling a computer what to do. AIS operate
with a set of instructions collectively termed a program.
Organizations’ processes differ with their size and complexity. James has to make a
decision on what type of software he intends to acquire. Common AIS software
segments are small, midmarket, beginning Enterprise Resource Planning (ERP) and Tier
1 ERP. The MYOB software that you use in this course is best suited for small firms.

An organizations choice of AIS will depend upon the number and complexity of
transactions it processes. One common indicator of this complexity is the organizations
annual revenue. There is also a positive relationship between the size of the firm and
their AIS adoption capacity. Bigger organizations acquire integrative AISs like beginning
and tier 1 ERPs.

ERP integrates internal and external management information across an entire

organization, embracing finance/accounting, manufacturing, and sales and service. ERP
systems automate this activity with an integrated software application. Its purpose is to
facilitate the flow of information between all business functions inside the boundaries of
the organization and manage the connections to outside stakeholders. Smaller
organizations may do with applications like MYOB or QuickBooks.

elf-Check 3: Solutions!

1. How would accounting software requirements of large

corporations differ from requirements for small companies?

There are different market segments for accounting software to support the different
needs of organizations    depending on their size and the complexities of their business
processes.

2. How are ERP systems different from the accounting software for small
companies like MYOB?

ERP systems are multimodule software systems designed to manage all aspects of an
enterprise. The modules (financials, sales, purchasing, inventory management,
manufacturing, and human resource) are based on a relational database system that
provides extensive set-up options to facilitate customization to specific business needs.
Thus, the modules work together to provide a consistent user interface. These systems
are also extremely powerful and flexible. Many of the software systems in the small and
mid market categories are not true ERP systems with fully integrated modules; however,
these systems assimilate many of the features of ERP systems.
Accounting Software Market Segments

Input, Process, and Output Methods in Business Processes

Use of AIS will provide the organizations with various ways to input data into the
system. This will include the manual keying of data and data entered into the system
through reading and scanning devices.

Recall the various ways the cashiers enter transaction data in the supermarkets. Manual
entry of data into business processes can be very challenging for large organizations that
have to process a large number of transactions.
Organizations, however, need to enter some data manually. Adequate internal controls
will ensure the accuracy of this data. Organizations also capture data using ‘reading
devices”. One such device is the scanner or a bar code reader.

Organizations also interchange data electronically. This is formally termed electronic

data interchange (EDI). Customers may send sales orders electronically, businesses
may present purchase requisitions to vendors electronically. Most of these electronic
data are captured by the AIS. Organizations today are also extensively involved in e-
commerce and e-business initiatives. Much of the data in this environment passes
electronically between the buyers and sellers via the internet. These data are captured
by the AIS.

Data can be processed at particular times (batch processing) or as data are input into
the system (real time processing). We discussed different types of data processing in
Unit 1. We also discussed the benefits and disadvantages of these data processing
methods.

Batch processing is economical when a large volume of data must be processed. It is

suitable to such applications as payroll, and the preparation of client, patient, or
customer bills. However, it requires sorting, reduces timeliness and in some cases
requires sequential file organization.

AIS output includes documents for further processing like invoices, documents for
internal use, and reports for internal and external use. Management use internal reports
to evaluate past performance and make plans to achieve set strategies and objectives.
Internal reports vary in size, type and frequency. External reports normally follow set
guidelines, for example income statement and balance sheet, and are normally of
interest to the external stakeholders (shareholders, lenders etc.).

Self-Check 4: Solutions!

1. How could a bar code system reduce data input errors compared
to a manual system of data entry?
With manual input, human efforts are required to write on the source documents and to
manually key in the data. Errors tend to occur with such a system. On the other hand,
the manual steps of writing and keying are   eliminated when using a bar code system,
thus reducing the likelihood of error.

2. How do internal reports differ from external reports?

Although internal and external reports are both forms of output from an accounting
information system, they have different purposes. Internal reports provide feedback to
managers to assist them in running the business processes under their control. On the
other hand, external reports (such as the financial statements) are used by external
parties to provide information about the business organization.

3. What type of accounting reports are prepared by financial accountants? What

type of accounting reports are prepared by management accountants?

Financial accountants are most likely to prepare external reports (such as financial
statements and other reports provided to external users of the company’s accounting
information); whereas managerial accountants are most likely to prepare internal reports
(such as journals and other reports that provide feedback to managers about their areas
of responsibility).

Documenting Processes and Systems

Remember an IS, like the AIS, help in managing businesses processes. IS, therefore,
play a vital role in successful operation of business processes. The way organizations
conduct their activities may change over time. IS must also change to ensure they
continue to play a vital role in the successful operation of business processes.

How can organizations achieve this objective?

The answer lies in the level of understanding they have about their business processes.
Understanding of AIS helps accountants to analyze the procedures and processes of the
business and that the AIS operate in the desired way. One of the best ways to
understand the business processes and the associated AIS is through their
documentation. We can represent processes and systems with:
 Process maps
 System flowcharts
 Document flowchart
 Data flow diagrams
 Entity Relationship (ER) Diagrams

A process map is a pictorial representation of a business process that shows the flow of
sequence of events in the process. Think about the steps involved in registering for a
course at USP. Process maps are drawn with five key symbols as shown below.

A system flowchart depicts the entire system, including the inputs, processing,

outputs, and storage. A system flowchart may not show the details of each process –
this is shown using a process map. Rather, it displays the sequence of processes and
input, output, and storage associated with it.

Below are the common system flow chart symbols.

A document flowchart shows the flow of documents and information within

departments or sections in an organization. Recall that a systems flowchart depicts the
whole system. This makes the document flowchart a special kind of a systems flowchart.
Documents move from a section to another as processes are completed. Imagine what
happens to the registration documents that you use to register in a course at your
university. The documents are filed at their final destination. Below is an example of a
document flowchart parking services process.
 

A data flow diagram (DFD) shows the logical design of a system. The DFD can display
the system at conceptual level (brief level) and then exploded into detailed levels. DFDs
use only four symbols as shown below.

Below is an example of sales process DFD

An Entity Relationship Diagram is a pictorial representation of the logical structure of

databases. Recall a database is a structured approach to storing data. A database
represents relationships between entities.
Below are the entity relationship diagram symbols.

Self-Check 5: Solutions

1. What are benefits of documenting systems through pictorial

representations like process maps and flowcharts?

A pictorial representation of an accounting information system is beneficial because it

provides a concise and complete way for accountants to analyze and understand the
procedures, processes, and the underlying systems that capture and record the
accounting data.

Client - Server Computing

Recall that an IS constitutes both hardware and software. James also needs to
make a decision on how he intends to share the computing resources amongst
the workers. One of the ways of sharing computing resources is through Client-
Server Computing.

Client–server computing is a distributed application structure that divides

tasks or workloads between service providers, called servers, and service
requesters, called clients. Often clients and servers communicate over a
computer network on separate hardware, but both client and server may reside
in the same system.

A server machine is a host that is running one or more server programs that

share its resources with clients. A client does not share any of its resources, but
requests a server's content or service function. Clients therefore initiate
communication sessions with servers that await (listen for) incoming requests.

Self-Check 6: Solutions!

1. How does client-server divide the processing load between the

client and the server?

In client-server computing, the processing load is assigned to either the server or the
client on the basis of which one can handle each task most efficiently. The server is more
efficient in managing large databases, extracting data from databases, and running high-
volume transaction processing software applications. The client is more efficient at
manipulating subsets of data and presenting data to users in a user-friendly, graphical-
interface environment.

 2. Why do you think the client computer may be a better platform for
presentation of data?

The client computer is better for presentation of data because it manipulates subsets of
data without being bogged down by the processing load of the entire data set. In
addition, the client computer maintains presentation software in a user-friendly format
for reporting purposes.

Below is a simple entity relationship diagram showing the relationship between

student, course and teacher.

Unit 3: Study Guide

Fraud and Ethics

AIS, Accountants, and Ethics

Computerized processing of transactions at times does not provide a clear trail

of the processing of transactions. This introduces the risk of fraud if the
accountants engage in unethical behavior. James realizes that his new AIS will
expose his business to threats relating to fraud. He is also aware of the recent
major corporate scandals that questioned the ethics of accountants. James must
understand his business and the AIS that will manage his accounting data. He
learns that he needs to embed controls within the AIS.
We will consider the issues of fraud, ethics, and internal control in this unit.
Accounting related fraud can occur when code of ethics and internal controls are
less than adequate and not properly implemented.
The Need for Code of Ethics and Internal Controls

The Need for Code of Ethics and Internal Controls

We have heard a lot in the recent time about companies’ fraudulent reporting.
The result of this has been a number of corporate collapses with the likes of
Enron Corp and WorldCom Inc. Fraud is more likely to occur when managers
engage in unethical practices. Management are entrusted with the stewardship
function where they are required to carefully and responsibly manage and use
the assets of the organization. This means that management must demonstrate
that they maintain a system that allows for appropriate use of the entrusted
assets.

Fraud is the theft, concealment, and conversion to personal gain of another’s

money, physical assets, or information. Instances of fraud in organizations imply
that management has not properly undertaken their stewardship function.

Organizations can control unethical behavior by implementing and strictly

following a set of code of ethics. Code of Ethics is a set of documented
guidelines for moral and ethical behavior within the organization. Recall our
discussion of on code of ethics in unit 1. We said in unit 1 that code of ethics is
developed and adopted by an organization in an attempt to assist those in the
organization called upon to make a decision, understand the difference between
'right' and 'wrong', and to apply this understanding to their decision. 

Unethical behavior can be further controlled by implementing a set of internal

controls. Internal Control is a process, affected by entities, boards of directors,
management and other personnel, designed to provide reasonable assurance
regarding the achievement of an organization's objectives.
We will look at these issues in greater detail in this unit.       

Self-Check 1: Solution

1. Management is held accountable to various parties, both

internal and external to the business organization. To whom does
management have stewardship obligation and to whom does it have
reporting responsibilities?

Management has a stewardship obligation to the shareholders, investors, and

creditors of the company, i.e., any parties who have provided funds or invested
in the company.  Management has a reporting responsibility to business
organizations and governmental units with whom the company interacts.

Accounting-Related Frauds
Recall that fraud is the theft, concealment, and conversion to personal gain of
another's money, physical assets, or information. A common accounting fraud is
the intentional misstatement of financial records that often involves falsification
of accounting reports. This activity is often referred to as earnings
management or fraudulent financial reporting.
Accounting-related fraud can be perpetrated by management, employees,
customers, and vendors.

Let’s look at these categories of accounting-related frauds in some detail.

Management Fraud

Management Fraud is committed by top-level management, usually in the

form of fraudulent financial reporting. This normally includes use of a scheme
and is normally very systemic (complexity).  Managers intentionally misstate
financial statements to receive some benefits. These benefits include:

•    Increased share price – especially when management own company stocks.
•    Improve financial statements to achieve an event or target, like merger,
compliance with debt requirements.
•    New opportunities (promotion) or avoid negative consequences (demotion or
termination).
•    Manage cash flow.
•    Receive better incentives

Self-Check 2: Solutions

1. Do you think a manager may perpetrate fraud but still have

the company’s best interest  in   mind? Discuss?

Those agreeing that it is possible may refer to the fraud triangle and note that
the incentive may be job-related (such as opportunities to produce enhanced
financial statements, which may increase the company’s stock price, increase
compensation, avoid firings, enhance promotions, and delay bankruptcy) and the
rationalization may involve plans to make restitution. On the other hand, some
students may reject the notion that management fraud could be in a company’s
best interest, as it puts the company at great risk. When frauds are discovered,
they are often devastating as a result of the financial restatements and loss of
trust.

2. What are some of the motivations for management-related fraud?

Management might be motivated to perpetrate fraud in order to improve the

financial statements, which may have the result of increasing the company’s
stock price and increasing incentive-based compensation. Altered financial
information might also have the effect of delaying cash flow problems and/or
bankruptcy, as well as improving the potential for business transactions such as
mergers, borrowing, stock offerings, etc.

Employee Fraud
Employee Fraud is committed by the non-management employees. This mainly
involves theft of cash or assets for personal gain. Employees may often steal cash from
the business. This can be done before the cash is recorded (skimming), after cash is
recorded (larceny) by one employee or two or more employees working
together (collusion).

Customer and Vendor Fraud

Customer and Vendor fraud are externally driven fraud. Much of customer fraud may
originate from e-commerce. Vendor fraud mainly deals with obtaining payments for
which they are not entitled

Computer Fraud

Computer Fraud relates to deceive, misrepresent, destroy, steal information,

or cause harm to others by accessing information through deceptive and illegal
means. Computer fraud can be committed internally by employees or externally
by hackers. At times, computers are used to commit fraud.

Internal sources of computer fraud include input manipulation, program

manipulation, and output manipulation.

Input manipulation is where employees alter data that is input in the

computer. Examples include altering payroll time cards, creating fictitious data
inputs, and entering data without proper source documents.

Program manipulation occurs when a program is altered in some way to

commit fraud. Salami slicing is a series of many minor actions, often
performed by concealed means, that together result in a larger action that would
be difficult or illegal to perform at once. An example of salami slicing is the
fraudulent practice of stealing money repeatedly in extremely small quantities,
usually by taking advantage of rounding to the nearest cent (or other monetary
unit) in financial transactions. It would be done by always rounding down, and
putting the fractions of a cent into another account. The idea is to make the
change small enough that any single transaction will go undetected.

Output Manipulation is where a person alters reports to commit fraud. This

type of fraud is generally successful because people generally trust computer
outputs and may not question their accuracy.

External sources of computer fraud are committed by someone outside the

organization who gains unauthorized access to the computing resources. These
individuals are commonly referred to as hackers.

Hacking refers to the re-configuring or re-programming of a system to function

in ways not facilitated by the owner. Hacking may be undertaken to steal
information, destruct data, alter data, or at times for thrill seeking. Hacking can
cause organizations a lot of damage financially and may also question the
reputation of the organization.

A denial-of-service attack (DoS attack) – a type of hacking - is an attempt

to make a computer resource unavailable to its intended users. This results in
website site or internet service from not functioning efficiently or at all,
temporarily or indefinitely. 

 
Spoofing attack is a situation in which one person or program successfully
masquerades as another by falsifying data and thereby gaining an illegitimate
advantage. This is common for emails (junk mails) and internet use. Webpage
spoofing, also known as phishing is where a legitimate web page such as a
bank's site is reproduced in "look and feel" on another server under control of
the attacker. The main intent is to fool the users into thinking that they are
connected to a trusted site, for instance to obtain usernames and passwords.

Self-Check 3: Solutions

1. What are the differences between internal and external

sources of fraud?

Employees are the source of internal computer fraud.  When employees misuse
the computer system to commit fraud (through manipulation of inputs,
programs, or outputs), this is known as internal computer fraud.  On the other
hand, external sources of computer fraud are people outside the company or
employees of the company who conduct computer network break-ins. When an
unauthorized party gains access to the computer system to conduct hacking or
spoofing, this is known as external computer fraud.

2. What are some of the internal sources of computer fraud?

The three types of internal source computer fraud are input manipulation,
program manipulation, and output manipulation. Input manipulation involves
altering data that is input into the computer. Program manipulation involves
altering a computer program through the use of a salami technique, Trojan
horse program, trap door alteration, etc. Output manipulation involves altering
reports or other documents generated from the computer system.

Avoiding Fraud and Errors

Recall we established that a code of conduct and internal controls are important
to prevent and detect fraud. Using computerized AIS like MYOB means we need
to consider two types of internal controls – the accounting internal controls and
the IT controls.

Accounting internal controls help safeguard assets, maintain the accuracy

and integrity of the accounting data, promote operational efficiency, and ensure
compliance with management directives. Organizations need to adopt an overall
internal control system that should prevent, detect, and correct errors and
frauds.

Preventive Controls are the first line of defense in the control structure and
are passive techniques designed to reduce the frequency of occurrence of
undesirable events. Preventing errors and fraud is far more cost-effective than
detecting and correcting problems after they occur.

Detective Controls are the second line of defense. Detective controls are

devices, techniques, and procedures designed to identify and expose undesirable
events that evade preventive controls.

Corrective actions (controls) are taken to reverse the effects of detected

errors. Detective controls identify undesirable events and draw attention to the
problem; corrective controls address the problem.

The Committee of Sponsoring Organizations of the Treadway

Commission (COSO) is dedicated to providing guidance to executive
management and governance entities on critical aspects of organizational
governance, business ethics, internal control, enterprise risk management,
fraud, and financial reporting. COSO has established a common internal control
model against which companies and organizations may assess their control
systems. The COSO model has five components.

Control Environment - sets the tone of an organization, influencing the control

consciousness of its people. It is the foundation for all other components of
internal control, providing discipline and structure. Control environment factors
include the integrity, ethical values, management's operating style, delegation of
authority systems, as well as the processes for managing and developing people
in the organization.

Risk Assessment – organizations face variety of risks from external and

internal sources that must be assessed. A precondition to risk assessment is the
establishment of objectives and thus risk assessment is the identification and
analysis of relevant risks to the achievement of assigned objectives. Risk
assessment is a prerequisite for determining how the risks should be managed.

Control activities - Control activities are the policies and procedures that help
ensure management directives are carried out. They help ensure that necessary
actions are taken to address the risks that may hinder the achievement of the
entity's objectives. Control activities occur throughout the organization, at all
levels and in all functions. They include approvals, authorization, verification,
reconciliations, and reviews of operating performance, security of assets and
segregation of duties.

Information and communication - Information systems plays a key role in

internal control systems as they produce reports, including operational, financial
and compliance-related information, which make it possible to run and control
the business. In a broader sense, effective communication must ensure
information flows down, across and up the organization. Effective communication
should also be ensured with external parties, such as customers, suppliers,
regulators and shareholders about related policy positions.

Monitoring - Internal control systems need to be monitored to assess the

quality of the system's performance over time. This is accomplished through
ongoing monitoring activities or separate evaluations. Internal control
deficiencies detected through these monitoring activities should be reported
upstream and corrective actions should be taken to ensure continuous
improvement of the system.

IT controls ensure safety and security of the IT resources.

Self-Check 4: Solutions

1. How does mandatory leave and periodic job rotation practices help in
strengthening internal controls.

Mandatory vacations and periodic job rotation policies provide for independent monitoring of
the internal control systems. Internal control responsibilities can be rotated so that someone is
monitoring the procedures performed by someone else, which enhances their effectiveness.

2. What do you understand by periodic and continuous monitoring? Give some

examples of each form of reporting?
Any ongoing review activity may be an example of continuous monitoring, such as a
supervisor’s examination of financial reports and a computer system’s review modules. An
example of periodic monitoring is the annual audit performed by a CPA firm or a cyclical
review performed by internal auditors.

3. How would organizations access their risk?

It is not possible for an internal control system to provide absolute assurance because of the
following factors that limit the effectiveness of internal controls:
•    Flawed judgments
•    Human error
•    Circumventing or ignoring established controls

In addition, excessive costs may prevent the implementation of some controls.

Unit 4: Study Guide

Setting up MYOB, GST Basics and the General Ledger

Introduction - Getting Started with MYOB

You will also use an AIS in this course to practice completing AIS processes. This
course introduces you the MYOB. MYOB - Mind Your Own Business is
accounting software that manages various accounting processes in the
accounting system. This includes the purchasing process, sales process,
inventory management process, banking process, payroll and asset management
process.

We have chosen MYOB as it is the most popular accounting software for Small to
Medium Entities (SMEs) in Australia, New Zealand and the South Pacific. Its
popularity is due to its low cost, user friendliness and support during
troubleshooting. There are many other types of accounting software in the
market and all operate on a similar system to MYOB. For instance most
accounting software have modules based on transaction cycles such as
Purchases, Sales, Inventory, Banking, Payroll and General Ledger.

MYOB and the vast majority of computerized accounting packages are all based
on the manual processes and manual source documents. For instance, recording
a sale in MYOB would require the user to raise an invoice in MYOB. Once the
invoice is raised the related transactions are recorded by the software.

Computerized accounting software packages automate the manual accounting

process. In a manual accounting system source documents are raised, accounts
are journalized, ledger accounts are prepared and entries are passed to the
financial statements. This is tedious and increases the risk of errors being made.

However, in a computerized accounting system, as long as the source document

is entered correctly then the software will automatically update the ledgers and
financial statements. Computerized accounting packages also allows for faster
preparation of financial statements for users to make timely decisions.

GST Basics
Chapter 2 of your textbook provides and introduction to the basics of GST or Goods and
Services Tax. GST is a consumption tax paid by consumers on goods and services. Most
countries have some form of GST. Pacific Island Countries have some of GST but with
different names and different rates. Fiji for instance calls its form of GST as Value Added
Tax (VAT).

In theory GST is a simple concept as businesses charge tax on their outputs (sales) and
receive credits for tax paid on inputs (purchases). Next time you buy and good or service
check the receipt and see the portion with the tax portion.
It is important to understand GST as when you setup your company you will have to be
aware of the tax codes for various accounts. You will also need to understand GST when
you are recording transactions as some prices may include GST or exclude GST.

However, the chapter in the book is not intended to provide extensive detail on GST.
Instead the intention is to provide only a basic knowledge of GST and how to record GST
related transactions in MYOB.

General Ledger

A general ledger is the collection of all accounts for recording transactions of a

company. The general ledger is the core database for accounting-related data
recorded from the modules or subledgers such as expenditure, accounts
receivable, accounts payable, banking, fixed assets and projects. The general
ledger serves a fundamental role as the backbone of the accounting system. A
company’s financial statements are derived from the general ledger.

The construction of a meaningful set of financial statements is also dependent on

a correctly designed Chart of Accounts. A Chart of Accounts is a list of all
accounts used by an organization and is usually sorted by account number.

Unit 5: Study Guide

Purchases

Expenditure Processes and Controls for Purchases

Introduction to expenditure processes

James has now ventured into the accounting information systems and he needs
to streamline his operations with regard to different business processes within
the accounting information systems. James needs to exercise controls over the
expenditure processes, in particular the purchase controls and processes and he
intends to use MYOB accounting software for processing expenditure
transactions related to purchases. In this unit, we will look at the processes and
controls that are related to expenditures and in particular, the processes and
controls specifically related purchases transactions and application of MYOB
accounting for purchases using James Enterprises as an example.

The primary purpose of the expenditures on purchase process is to obtain the

resources the organization needs and to pay for these resources. Fundamentally,
every company requires materials or goods and must therefore incur
expenditures on purchases. Organizations exist to create value for their
stakeholders; the expenditure on purchase process is one element of that basic
purpose. The expenditure on purchase process is principally related to
procurement and inbound logistics. Procurement is a synonym for purchasing;
inbound logistics refers to the process of getting resources from ‘where they are
needed’. For example, McGraw Hill might use air and ground transportation to
ship books to university bookstores. When a purchase occurs, the information
resulting from that purchase must flow into the:

•    purchase recording systems;

•    accounts payable and cash disbursement systems; and
•    inventory tracking systems.

Although an expenditure process can have slight differences across organisations

and industries depending on the type of activities and operations the business is
involved in, its six basic steps include (Hollander, Denna, and Cherrington,
2000):

•    request goods and services based on monitored needs.

•    authorize a purchase.
•    purchase goods and services.
•    receive goods and services.
•    disburse cash.
•    when necessary, process purchases returns.

Keep in mind that these 6 steps are very generic because each organization will
have its own modifications to the basic steps since the fundamental idea is
purchasing the goods and services you need, when you need them, and paying
for them on time. The expenditure processes for purchases are the policies and
procedures that staff follows in completing the purchase of goods or materials,
capturing vendor data and purchase quantities, and routing the purchasing
documents to the respective departments within the organization for their
actions.

Figure 5.1 highlights this expenditure processes section of the overall accounting
information system.

Self-Check 1: Solutions

1. List down some of the inefficiencies inherent in a manual

expenditures processing system.

There is a physical matching of documents by humans and this process is time

consuming and error prone. Even if a software system such as Microsoft Dynamics GP is
used, there are many human tasks that are time consuming and error prone. Those
tasks are: keying of data for a purchase order; the manual process of comparing an
order received to the purchase order; keying in the receiving report and finding the
purchase order in the system to match it against; and the human decision making
process of which invoices to approve for payment. These inefficiencies cause a large
expenditure in salaries and wages for the personnel who do the matching.

Purchasing Processes – Documents & Process Maps

In this unit, we will look at the documents and process maps of the expenditure
processes on purchases followed by an in-depth illustration of processing
purchase related transactions with MYOB accounting software package.
 
If you recall, Unit 2 has highlighted the documenting processes and systems
used in accounting information systems. These documents and process maps
helps in managing business processes and accountants use these processes to
analyze and visualize pictorial representations of the flow of business processes
and activities. These documentation and process maps helps accountants to
illustrate and understand the business processes associated with accounting
information systems.

In unit 2 you have also learned that there are five ways to represent business
processes and systems showing the visual and pictorial representations of the
information flow and links to other business segments. These are

•    Process maps

•    System flowcharts
•    Document flowchart
•    Data flow diagrams
•    Entity Relationship (ER) Diagrams

So let us look at the expenditure processes relating to purchase transactions

using the process map for purchases. For simplicity, we will only cover
the process maps for purchase processes while other four modeling will be
covered in AF302 Information Systems. Some of the typical purchase processes
are as follows:

Common expenditures processes for purchases include:

      Prepare a purchase requisition and/or purchase order.

      Notify vendor (supplier) of goods or services needed.  
      Receive goods or services.
      Record the payable.
      Paying invoice.
      Updating records

Figure 5.2 shows the business process map illustrating the flow of information
and activities in a typical purchasing system.

   Source:Turner & Weickgenannt, 2009

James has learnt about the importance of purchasing processes and now he
wants to use the process maps to document his purchasing system. The
purchasing process map illustrates the flow of purchasing information and the
activities within a business accounting information system.

Purchasing process begins when an employee of the business recognizes the

need to make purchases, typical as a result of observing low inventory levels
and/or unfilled sales orders. It may be that a warehouse keeper notices a low
stock level or when an accountant detects potential shortages in inventory
quantities or when additional inventory is needed for upcoming sales demand in
the market or where an IT system determines when the order is necessary. Then
the purchase requisition form should be prepared which will show the need and
request for the purchase items and the quantities to be purchased. A purchase
requisition then must be authorized by persons in authority.

Once the purchase requisition is approved it triggers the next step when it will
be forwarded to the purchasing department which will then raise a purchase
order form.  A purchase order is a source document sent to the supplier by the
business indicating the goods which the business wants to buy with their
respective prices and quantities.

Once the purchase order is ready, the purchasing/procurement department will

determine the respective supplier. Suppliers are also known as the vendors.
The purchasing department needs to consider the vendors pricing, quality of the
goods, delivery time and credit terms.

Once goods are received from the vendor, it needs to be inspected by the store
keeper at the warehouse, simultaneously checking for its quality and matching
with the invoice received with the goods. The goods need to be counted with
assessment of any damages. The receiving clerk is normally responsible for
counting and inspecting all goods received and once this is done, the receiving
clerk prepares a goods received note, a copy of which is sent to the accounts
payable department. The accounts payable department receives invoice from the
vendor and matches with the purchase order and goods received note.
The accounts payable department is responsible for recording the liabilities
and will ensure that correct vendors are paid in the correct amounts.

Many of the goods received are likely to be inventory items and therefore,
inventory control department is part of the purchasing process. The inventory
control department maintains and updates the inventory records each time a
purchase or sales transaction occurs. Finally, to complete the purchasing
process, the general ledger function is designed for posting and reconciling
transactions from the respective accounts payable and inventory subsidiary
ledgers.  

Self-Check 2: Solutions
1.   Why should a receiving clerk be denied access to
information on a purchase order?
This practice is called a “blind purchase order” and the advantage is that it
forces a physical count of goods received. A clerk cannot complete the “quantity
received” field of a receiving report until the goods have been counted. If the
purchase order contained quantities ordered, the clerk could assume that the
quantity received is equal to quantity purchased and therefore, skip the physical
count. However, conducting the physical count is a much better practice and the
blind purchase order serves as a control to force such a count.

2. What accounting records are used by the accounts payable personnel

to keep track of amounts owed to each vendor?
An accounts payable subsidiary ledger is used to record the detail of amounts
owed to each vendor.

3. Under what circumstances would it be necessary to manually update

accounts payable prior to the receipt of a vendor’s invoice?
When the receipt of goods occurs at the end of a period, but the invoice is not
received until the next period, the liability should be recorded in the first period
even though the invoice has not yet been received.

Controls and Risks in Purchasing Processes

It is important to establish internal control policies and IT controls to help prevent or
detect fraud, ethical lapses, or errors in purchasing expenditures. Corporate governance
policies should incorporate the four areas of management oversight, internal controls,
financial stewardship, and ethical behavior.

Common control procedures associated with the expenditure processes for purchases:   

      Authorization of transactions

      Segregation of duties
      Adequate records and documents
      Security of assets and documents
      Independent checks and reconciliation
      Cost-benefit considerations

However, there are certain characteristics that indicates risk with the purchasing

processes such as; when goods are received it is difficult to differentiate, count, or
inspect; or when high volumes of goods are received, or goods are of high value and the
inventory pricing arrangements become more complex or is based on estimates;
frequent changes occur in purchase prices or vendors; when the company depends on
one or few key vendors and when the receiving and/or record keeping are performed at
multiple locations.

These characteristics imposes high risk to the purchasing processes.

Self-Check 3: Solutions

1. Why would some cheques need to include two signatures?

Large checks over a specified amount may require two signatures.Large checks
entail more risk for the company and the dual signature lessens risks.1.  

2.Identify each category of risk that can be reduced by using authority

tables, computer logs, passwords and firewalls.
The category of risk that these controls reduce is security and confidentiality
risk, and more specifically, unauthorized access.

IT Enabled Systems of Expenditure Processes in Purchases

IT systems include:   

 Computer-based matching and checking of purchasing documents

 Evaluated receipt settlement (ERS)
 Electronic forms of purchase and payment

Computer- based matching

Businesses use IT system and the accounting software packages to check for
purchasing documents and apply computer-based matching system. This
concept is known as automated matching – where the software matches an
invoice to its related purchase order and receiving report. It’s a “Three-Way
Match” - matching of a purchase order to the related goods receiving report and
the invoice received. This will save time, cost and reduce errors for the business
and will provide accurate reports. It will also help in detecting duplicate
payments in invoice processing.

Evaluated receipt settlement (ERS)

Prior to 2000, some companies, began implementing invoice-less matching
systems for purchasing and paying vendors known as – Evaluated receipt
settlement (ERS) - receipt of goods is carefully evaluated and, if it matches
the purchase order, settlement of the obligation occurs through this system.
 
Electronic forms of purchase and payment.
Some companies have also started the electronic form of payments known as
the Electronic Invoice Presentment and Payment (EIPP). Businesses take
advantage of the connectivity of the Internet to electronically send invoices or
payments electronically. In addition, there are some companies which have
introduced the Procurement card system known as the “P-cards”. These are the
credit cards that organization gives to certain employees to make designated
purchases. It is normally not used to purchase raw materials or products but
used for small
Self-Check 4: Solutions

1. What specifically does a cash disbursements clerk do when

he or she cancels an invoice? How does this compare with the
procedures followed when computer-based matching in the system is
utilized?
To cancel an invoice means to mark or stamp it with the date paid and check
number.  The purpose is to help prevent duplicate payment of an invoice.  In an
automated matching system, the system would be programmed to ensure that
there were no previous payments that would make a new payment a duplicate
payment.

2. Explain how procurement cards provide for increased efficiency in the

accounts payable department.
P-cards are used for purchases of things such as supplies, maintenance, and
travel and entertainment expenses.  Without p-cards, many companies find they
have a large volume of these small dollar transactions that would still require the
regular matching process in accounts payable.  The p-card eliminates this time
consuming matching process for items purchased with the p-card.  This
eliminates soliciting bids, keying PO and invoice data, matching documents,
reconciling mismatches, and writing small dollar amount checks.  Instead, the
company receives one monthly bill from the credit card issuer. 

Processing Purchases - Related Transactions with MYOB

James is now ready to process purchases related transactions with MYOB. In

large company, there may be hundreds of thousands of purchasing transactions
occurring each and everyday. The company must have systems and processes in
place to capture, record, summarize and report these transactions. When
accounting software is used to record purchasing and receiving transactions, the
software automatically processes these information.

In this Unit, we will look at the application of MYOB accounting software as used
in the expenditure process for purchases. MYOB software is divided into
modules. A module is a portion of a program that carries out a specific function
and may be used alone or combined with other modules of the same program.
You will learn about the Purchases module in this Unit. The purchases
module is used to record goods received from and amounts owed to Suppliers.

Unit 6: Study Guide

SALES

Introduction to Revenue processes

James has already ventured into the expenditure processes and controls relating
to the purchasing system within an accounting information system and now
James needs to streamline his business operations with regard to the revenue
processes and controls for sales system. James need to exercise controls over
the revenue processes, in particular the sales controls and processes and he
intends to use MYOB accounting software for processing revenue transactions
related to sales processes. In unit 5, we looked at the expenditure processes and

controls relating  to the purchasing systems for James Enterprises. In

this unit , we will look at the revenue processes and controls that are related to
sales systems for James Enterprises.

The fundamental purpose of the revenue processes on sales is to provide goods

and services to clients and to collect payment from them. There are many kinds
of companies selling many kinds of products and services, and as such there are
many methods of conducting revenue transactions. For instance, retailers sell
their products to customers in their stores through cash registers with bar coding
systems called point of sale (POS) systems. These systems record the sale,
collect cash and update the inventory records.

Systems and processes must be in place to capture, record, summarize, and

report sales transactions. When a sales occurs, the information resulting from
that sales must flow into the sales recording systems, the accounts receivable
and cash collection systems, and the inventory tracking systems.

Although a revenue process can have slight differences across organizations and
industries depending on the type of activities and operations the business is
involved in, its seven basic steps include (Hollander, Denna, and Cherrington,
2000):

•    taking a customer’s order

•    approving customer’s credit
•    filling the order based on approved credit
•    delivering or shipping the product
•    billing the customer
•    collecting payment
•    processing uncollectable receivables as necessary.

Keep in mind that these 7 steps are very generic because each organization will
have its own modifications to the basic steps since the fundamental idea is
selling the goods and services and receiving payments for these sales.

The revenue processes for sales are the policies and procedures that staffs follow
in completing the sales of goods or services, capturing customer data and sales
quantities, and routing the sales documents to the respective departments
within the organization for their actions.

Figure 6.1 highlights this revenue processes section of the overall accounting

information system.

Self-Check 1: Solutions
1. Rev enue systems are crucial in the health care industry,
where hundreds of billions of dollars are spent annually reconciling
revenues and billing data from the perspectives of providers (doctors
and clinics, etc…) and payers (insurance companies).

Briefly describe how electronic exchange of data would be beneficial in

this industry.

In an electronic exchange system such as the EDI system, the computer

systems of the biller and payer are connected and they would greatly speed up
the billing and paying process, as well as decrease the errors in the process.
Without EDI, there would be keying errors, delays related to keying data and
mailing bills and payments. 

Sales Processes – Documents & Process Maps

In this unit, we will look at the documents and process map of the revenue
processes related to sales; followed by an in-depth illustration of processing
sales related transactions with MYOB accounting software package. If you recall,
Unit 2 has highlighted the documenting processes and systems used in
accounting information systems. These documents and process maps helps in
managing business processes and accountants use these processes to analyze
and visualize pictorial representations of the flow of business processes and
activities. These documentation and process maps helps accountants to illustrate
and understand the business processes associated with accounting information
systems.

In unit 2 you have also learnt that there are five ways to represent business
processes and systems showing the visual and pictorial representations of the
information flow and links to other business segments such as process maps;
system flowcharts; document flowchart; data-flow diagrams; and entity
relationship diagrams.

Let us look at the revenue processes relating to sales transactions using the
process map for sales. For simplicity, we will only cover the process maps for
sales processes while other four modeling will be covered in AF302 Information
Systems. Some of the typical sales processes are as follows:

Common revenue processes for sales include:

•    policies and procedures
•    capturing customer data
•    routing transactions.

The revenue cycle for any business is based on the credit sales transactions such
as accepting customer orders, approving credit, filling & dispatching orders,
invoicing customers and recording the sales. Cash receipts transactions will
include receiving cash over the counter or through mail receipts, depositing cash
in bank and recording receipts. The sales adjustment transactions would include
cash discounts, sales returns & allowances and bad debts. The Accounting
System uses this flow of sales documents to various departments to record,
summarize, and report the results of the sales transactions.

Figure 6.2 shows the business process map illustrating the flow of information
and activities in a typical sales system.

James has learnt about the importance of sales processes and now he wants to
use the process maps to document his sales system. The sales process map
illustrates the flow of sales information and the activities within a business
accounting information system.

Sales process begins when a customer places an order with the company, which
raises a sales order and enters in the sales system. This could be either
manually entered or read automatically by the system. Once a sales order is in
the system, the customers’ credit status must be checked. The credit limit is
the maximum dollar amount that a customer is allowed to carry as an accounts
receivable balance. At this stage the business will check the inventory to
determine whether the items ordered are in stock. If the items are in stock,
a pick list is prepared. A pick list documents the quantities and description of
items ordered. The items on the pick list should be pulled from the warehouse
shelves and packed for the customer accompanied by a packing slip which
documents all the items included in the shipment or delivery. Finally, inventory
records are updated and goods are delivered. A sales invoice is prepared and
sent to the customer. When customers are billed accounts receivable, records
should be updated and a sale should be recorded in the sales journal so that the
amount will be included in the revenue.

The accounts receivable department is responsible for recording the assets and
will ensure that correct customers are charged with the correct amounts. Many
of the goods received are likely to be inventory items and therefore, inventory
control department is part of the sales process. The inventory control
department maintains and updates the inventory records each time a purchase
or sales transaction occurs.  Periodically, the sales amounts in a sales journal are
posted to the general ledger to complete the sales process.

Unit 6: Study Guide

Self-Check 2: Solutions

1. Distinguish between a pick list and a packing slip.

Although the information on these two documents is essentially the same, they are used
for two different purposes.  Both documents contain the items and quantities for a
particular customer order.  However, the pick   list is used in the warehouse to pull items
from the warehouse shelves, while the packing slip is included in the box or boxes
shipped to the customer.  The packing slip tells the customer which items should be in
the shipment.

2.Use the process map in this unit to answer the following questions:

a) What would a credit manager do if a sales order received caused a customer

to exceed its credit limit?
The sale should be disapproved (rejected).

b) What happens after the shipping department verifies that the quantities and
descriptions of goods prepared for shipment are consistent with the sales
order?
The goods are shipped, an invoice is prepared and mailed; the following records are
updated: sales, general ledger; and a month end statement is prepared and mailed to
the customer.

c) What would an accounts receivable clerk do if a $100 credit memo is issued

to a customer whose accounts receivable balance is $1000?
The clerk should first check to make sure of the balance.  Then, that customer’s balance
would be decreased to $900.

d) When is it necessary for an accounts receivable clerk to notify a customer?

An accounts receivable clerk would not need to notify customers.

Controls and Risks in Sales Processes

It is important to establish internal control policies and IT controls to help

prevent or detect fraud, ethical lapses, or errors in sales and revenue processes.
Corporate governance policies should incorporate the four areas of management
oversight, internal controls, financial stewardship, and ethical behavior.

Types of misstatements in sales cycle generally result of clerical mistakes,

employee fraud, mis-applied accounting principles, especially around some
revenue recognition issues and the management fraud (as discussed in Unit 4).

Common control procedures associated with the sales revenue process:

•    Authorization of transactions
•    Segregation of duties

•    Adequate records and documents

•    security of assets and documents
•    Independent checks and reconciliation
•    Cost-benefit considerations

Some of the characteristics indicating risk with respect to sales revenue

processes are:

 changes to sales prices

 complex pricing structure
  large volume of sales transactions
 one or few key customers
 shipments not controlled directly by the company
 product mix is difficult to differentiate and when shipping and/or record
keeping are done at multiple locations.

Self-Check 3: Solutions

1.What controls should a company implement to ensure

consistency of sales information between the front end and back-end of
its systems?
Reconciliations and verification are important in the integration of front end and
back end systems.  As data moves from a front end system, such as an online
sales system, to a back end system, such as warehouse   systems, a
reconciliation or verification can ensure the data was transmitted between
systems accurately.

2.Describe how company employees can misuse the sales revenues

cutoff.
This is called leaving sales open.  It counts sales from the first few days of the
next month in the current month, and thereby inflates sales.

3.Describe how the matching of key information on supporting

documents can help a company determine that its revenue transactions
have not been duplicated.
For any sale return or cash transaction, only one set of matching documents
should exist.  Once the documents are matched and recorded for a particular
transaction, they should be filed as a completed transaction.  Thus, that same
transaction would not be recorded again since the source documents are filed.

IT Enabled Systems of Revenue Processes in Sales

Sophisticated, highly integrated IT systems capture, record, and process revenue and
cash collection events. Such systems include:

•    e-commerce systems

•    electronic data interchange (EDI) systems
•    point of sales (POS) systems

-commerce systems
 E-commerce is electronically enabled transactions between a
business and its customers. Electronic commerce encompasses the entire online
process of developing, marketing, selling, delivering, servicing, and paying for
products and services transacted on inter-networked, global marketplaces of
customers, with the support of a worldwide network of business partners.

An example of e-commerce is illustrated below showing the on-line sales of Nike

shoes.

Electronic data interchange (EDI) systems

Electronic data interchange is the inter-company, computer-to-computer transfer

of business documents in a standard business format.

                       Advantages to an EDI system: 

•    Elimination of data keying and errors

•    Elimination of costs & time
•    Elimination of delays & postage costs
•    Reduction in inventory levels
•    Competitive advantage

Point of Sale (POS) systems

Point of sale systems uses computer terminals in retail stores that serve the function of a
cash register as well as collecting sales data and performing other data processing
functions.

Point of Sale systems features include: 

•    Touch screen menus

•    Bar code scanning

•    Real-time access
•    Credit card authorizations
•    Real-time update of cash, sales, and inventory
•    Immediate summaries and analyses
•    Integration with the company’s general ledger system

Point of Sale systems can reduce some processing integrity risks within revenue and
cash collection such as pricing errors for products sold, cash average shortage errors,
errors in inventory, and invalid sales voids.

Self-Check 4: Solutions

1. Identify and distinguish between the 3 types of IT systems

used in the sales process.
The three types of IT systems described are EDI, e-commerce, and point of sale
systems.  EDI and e-commerce are used in company to company sales of goods
and services.  In EDI systems, the buyer and seller computer systems are
connected and order data is exchanged electronically.  EDI typically uses a value
added network (VAN), while Internet EDI uses the internet to exchange data.  E-
commerce is usually much more cost effective than EDI because the exchange
via the Internet can be cost free.  A POS system is used in end consumer sales
such as retail stores and restaurants.  A POS system usually is a touch screen,
or bar code system at the cash register that records the sale and updates the
appropriate cash, sales, and inventory accounts.  All three systems are IT
enablement of the sales process and they each improve the efficiency and
effectiveness of sales processes.

2. List some advantages of a POS system.

Advantages are: ease of use by employees, the elimination of manually entered
data, real-time access to prices and inventory levels, real-time credit card
authorization, real-time update of affected accounting records, immediate
summaries and reports of sales and cash, and integration with the general
ledger accounts.

Processing Sales-Related Transactions with MYOB

James is now ready to process sales-related transactions with MYOB. In a large

company, there may be hundreds of thousands of sales transactions occurring
each and everyday. The company must have systems and processes in place to
capture, record, summarize and report these transactions. When accounting
software is used to record sales and cash collection transactions, the software
automatically processes these information.

In this Unit, we will look at the application of MYOB accounting software as used
in the revenue process for sales. You will learn about the Sales module in this
Unit. The sales module is used to record goods sold to customers, cash
collections and amounts owed from debtors.

The Chapter is related to the Sales module is in Chapter 5 of your MYOB

textbook
Unit 7: Study Guide

Inventory

Introduction to Inventory Processes

James has already ventured into the expenditure processes and controls relating
to the purchasing and sales system within an accounting information system and
now James needs to streamline his business operations with regard to the
inventory processes and controls. James need to exercise controls over the
inventory processes and he intends to use MYOB accounting software for
processing inventory-related transactions and processes. In the last unit 6, we
have looked at the revenue processes and controls relating to the sales systems
for James Enterprises.

In this unit 7, we will look at the inventory processes and controls that are
related to the inventory systems for James Enterprises. Inventory consists of
goods to be sold or used in the production of saleable
goods. Inventories include all materials, products and supplies on hand at
balance date. Inventories are synonymously known as either ‘Goods’ or
‘Stock’. All three terms symbolizes the same concept of physical goods acquired
by a retail business for the purpose of resale in the ordinary course of the
business.

The fundamental purpose of the inventory processes is to provide updated

records of goods in and out of the business. There are many different
inventory software packages used for recording inventory movements in
businesses. For instance, retailers sell their products to customers in
their stores through cash registers with bar coding systems called point
of sale (POS) systems. These systems record the sale, collect cash and
update the inventory records at the same time.

Businesses need to ensure that inventories actually exist, are owned

and are properly valued in the financial reports. You need to properly
record purchases transactions represent inventories acquired during the
period, recorded transfers representing inventories transferred between
locations or categories during the period and recording sales
transactions representing inventories sold during the period.

Accounting for inventories involve recording the cost of purchased

inventories and to determine that part of the cost of inventories to be
allocated to cost of sales and to an asset representing ending inventory
on hand. Cost of sales must always be known in order to calculate gross
profit, and ending inventory must be known in order to prepare a
balance sheet.

Two distinctly different inventory systems, perpetual and periodic are used

to determine the amounts reported for ending inventory and cost of
sales. The system adopted by a business entity largely depends on the
type of inventory held and the sophistication of the computer system
used to keep records of inventory on hand. The perpetual inventory
system has become more common esp Perpetual Inventory Systems

Perpetual Inventory Systems Involves keeping current and continuous

records of all inventory transactions and a separate card or computer file is kept
for each inventory item showing the quantity and unit cost for each
sale/purchase and the running inventory balance. These details of inventory
movements are either kept on an inventory card (or stock card) and/or on a
computer file. A perpetual system is commonly used in practice because it
provides more timely information to managers for decisions relating to
controlling and planning inventory. This system is used by businesses selling
inventory of high value such as vehicles, air-conditioning units, pianos and white
goods.

Businesses which sell a large number of items with a low cost per unit
sometimes find the maintenance of perpetual inventory records for all types of
inventory too costly and time consuming to be practical, unless they have access
to a computerized inventory system. Such businesses include fruit shops,
newsagents, butchers, and coffee shops. A store operating with high volume
may conveniently record the amount of each sale, but would find it difficult to
trace the cost of each item sold back to detailed inventory records. So entities
that do not use a perpetual inventory system use a periodic inventory system.

ecially for businesses using computerized inventory systems.

Periodic Inventory Systems

Periodic inventory systems are based on end of period inventory counting

where beginning balance of inventory is not changed until the end of the period
and the purchases are recorded in a ‘purchases’ account. Only one entry is made
for sales to record the selling price of the goods sold and the ending balance is
determined by stock counting process.

Self-Check 1: Solutions

1. Differentiate between the perpetual and periodic methods

of inventory system listing its advantages and disadvantages.
    Perpetual inventory system – a system of accounting for inventory that
provides a continuous and detailed record of the goods on hand and the cost of
sales. Some of its advantages are that records are updated instantly, reports can
be generated anytime you need, cost of sales can be determined at the same
time, provides more timely information to managers for making decisions, its
feasible to use, data is entered automatically, less errors, it provides more
accurate data, and it provides a detailed inventory record. However, its
disadvantages may be that it’s costly since any investments in IT will be costly in
the beginning, it may not be suitable for small businesses or businesses with low
value items. There are risks in IT systems in terms of unauthorized access,
incorrect input of data, lack of backups and computer system failures.
Periodic inventory system – a system of accounting for inventory in which the
goods on hand are determined by a physical count and the cost of sales is equal
to the beginning inventory plus net purchases less ending inventory. Some of its
advantages are that it is less costly and more feasible for small businesses with
low value items and the counted inventory can be matched with the perpetual
system to determine any theft or inventory discrepancy. Also, stock take will
reflect accurate inventory on hand and will verify the accuracy of the inventory
records. However, some of its disadvantages are based on physical counting
where mistakes and errors are expected, theft of goods, performing stock take
may be costly and inventory records will not be updated instantly so this will be
more time consuming to extract reports. Instant reports can not be generated
and inventory movements will not be automatically updated.

2. What are the advantages of using a computerized inventory system?

Some of the advantages of using a computerized inventory system are that
inventory records will automatically updated, it will provide a detailed and
continuous record of inventory movements, data will be input automatically with
the help of point of sale terminals and optical-scan cash registers. Inventory
transactions will automatically be processed and inventory reports can be
automatically generated. You can also make queries with instant response. It is
very feasible and practical to generate inventory reports for decision making
purposes.

Counting & Costing inventory

Inventories are properly stated at the lower of cost and net realizable value,
determined in accordance with applicable accounting standards. Most businesses
count their inventories at the end of the period to determine how many
inventory items are left unsold. We call this process of counting inventories as
“stock-taking”. Stock counting is, however, is a good control for businesses since
this process will determine the exact amount of stock on hand at that point in
time. Once compared with the perpetual inventory records, businesses can
actually determine the amount of inventory loss, shortage or any theft during
that period. We call this as inventory discrepancies. In performing these
counting procedures the businesses can also identifying obsolete, excess and
slow-moving items. Businesses can check that inventory is counted correctly,
that prices for goods are applied correctly and that inventory is appropriately
valued at the lower of the cost and net realizable value.

The above model shows the stock-taking process as applied in the business process.

Step 1 starts with the inventory ticketing process where inventory items are tagged with
their descriptions and then stock is counted in step 2. In step 3,  stock is re-counted
for verification purposes and then in step 4, inventory records are examined and
updated in the stock sheets. In step 5, all inventories examined are collected and
collated together for costing purposes in step 6. There are 4 costing methods for
inventory systems: first-in first-out method; last-in first-out method, weighted
average method and specific identification method. Also at this stage, it is
necessary to value inventories either using a lower of cost or net realizable value rule.
Whichever, costing system provides lower value will be accounted for in the balance
sheet as closing stock. Finally, in step 7, inventory details are processed and updated in
the accounting system.

Free On Board (FOB) Points

FOB Shipping Point:

•    Supplier is responsible up until the point of shipping.
•    Buyer is responsible for goods in transit:
•    BUYER PAYS FREIGHT.

FOB Destination:
•    Supplier is responsible for the goods until they reach their destination.
•    Supplier is responsible for goods in transit:
•    SUPPLIER PAYS FREIGHT

Self-Check 2: Solutions

1. Discuss the ‘lower of cost or net realizable value’ rule for

inventory costing.
Cost is the main basis for recording and reporting inventories in the current
accounting practice. Two inventory costing methods - Lower of cost or net
realizable value method is the golden rule for inventory costing and valuation.
Under this method inventory is valued at lower of acquisition cost and net
realizable value at the reporting date. Net realizable value is the estimated
selling price of the inventory in the market less the estimated costs of
completion and the estimated cost in selling the inventory in the market.
Whichever amount is lower will be used to record inventory on hand in the
balance sheet under current assets.

2. List and explain the steps in the inventory counting process.

Step 1 starts with the inventory ticketing process where inventory items are
tagged with their descriptions and then stock is counted in step 2. In step 3
stock is re-counted for verification purposes and then in step 4, inventory
records are examined and updated in the stock sheets. In step 5 all inventories
examined are collected and collated together for costing purposes in step 6.

3. Differentiate between free on board shipping point and destination

points and determine who has the responsibility under each transit
process.
In FOB Shipping Point the Supplier is responsible up until the point of shipping
so the Buyer is responsible for goods in transit and the buyer pays the freight.
Under FOB Destination the Supplier is responsible for the goods until they reach
their destination so the supplier is responsible for goods in transit and the
supplier pays for the freight costs.

Inventory Processes – Documents & Process Maps

In this unit, we will look at the documents and process maps of the inventory
processes followed by an in-depth illustration of processing inventory related
transactions with MYOB accounting software package.
 
If you recall, Unit 2 has highlighted the documenting processes and systems
used in accounting information systems. These documents and process maps
helps in managing business processes and accountants use these processes to
analyze and visualize pictorial representations of the flow of business processes
and activities. These documentation and process maps helps accountants to
illustrate and understand the business processes associated with accounting
information systems.

In unit 2 you have also learnt that there are five ways to represent business
processes and systems showing the visual and pictorial representations of the
information flow and links to other business segments. These are process
maps; system flowcharts; document flowchart; data-flow diagrams and
entity relationship diagrams.

So let us look at the processes and controls relating to inventory transactions

using the process map for inventory processes. For simplicity, we will only cover
the process maps for inventory processes while other four modeling will be
covered in AF302 Information Systems. Some of the typical inventory processes
are as follows:

Common inventory processes include:

•    inventory polices and procedures
•    inventory counting
•    inventory costing
•    inventory storage/warehouse
•    inventory data relating to purchases and sales
•    updating inventory-related transactions

The Accounting System uses this flow of inventory documents to various

departments to record, summarize, and report the results of the inventory
transactions. The inventory processes relating to sales and purchases are the
policies and procedures that staffs follow in completing the inventory records
when there are purchase and sale of goods, capturing customer and supplier
data and the purchase and sale quantities, and then routing the sales and
purchases documents to the respective departments within the organization for
updating inventory movements.

Major transactions involving inventory: increase to inventory when goods

purchased and decrease to inventory when goods sold.

James has learnt about the importance of inventory processes and now he wants
to use the process maps to document his inventory system. The inventory
process map illustrates the flow of inventory information and the activities within
a business accounting information system.

Inventory process begins when the business buys goods for resale. Typically,
when there is a low inventory level, goods will be bought and stored in the
warehouse for resale. Suppliers will be contacted for prices and quantities and
then goods will be delivered to the business. Once goods are received from the
vendor, it needs to be inspected by the store keeper at the warehouse,
simultaneously checking for its quality and matching with the invoice received
with the goods. The goods need to be counted with assessment of any damages.
Then inventory records will be updated since purchases increases inventories
followed by updates in the general ledger.

Inventory process relating to sales begins when the goods are sold to customers.
When a customer places an order with the company, sales order is raised and
entered in the sales system automatically. At this stage the business will check
the inventory to determine whether the items ordered are in stock. The items on
the sales order will be pulled from the warehouse shelves and packed for the
customer for shipment or delivery. Finally, goods will be delivered and inventory
records relating to the sales transaction will be updated in the system.

Many of the goods received are likely to be inventory items and therefore,
inventory control department is part of the purchasing process. The inventory
control department maintains and updates the inventory records each time a
purchase or sales transaction occurs. Finally to complete the purchasing process,
the general ledger function is designed for posting and reconciling transactions
from the respective accounts payable and inventory subsidiary ledgers.  

Self-Check 3: Solutions

1. Explain why the availability of computer systems in the

receiving department is an important component of an automated
inventory process. 
In most automated inventory systems, there is a presumption that the receiving
personnel must reject shipments that do not match the purchase order. This
means that the receiving personnel must be able to look up the desired purchase
order at the same time the delivery is at the receiving dock.  The receiving
personnel must be able to reject the shipment, of necessary, while the delivery
person is still at the receiving dock.  In this circumstance, the purchase order
files must be online and readily accessible to receiving personnel.

Controls and Risks in Inventory Processes

It is important to establish internal control policies and IT controls to help

prevent or detect fraud or errors and stock shortages in inventory processes.
Inventory control policies should incorporate the ways to prevent and theft or
damages to the inventory items.

Common control procedures associated with the inventory process includes:

•    Authorization of transactions
•    Segregation of duties
•    Adequate records and documents
•    Security of inventory and documents
•    Independent checks and reconciliation
•    Warehouse standards & checks
•    Comparison of periodic and perpetual inventory records

Inventory is generally considered of high risk because it is significant to

determination of revenue & expenses; it involves a high volume of activity; it
involves accounting complexities; it is susceptible to theft and it is subject to
manipulation.

Point of Sale systems can reduce some processing integrity risks within
inventory systems such as pricing errors for products sold, cash shortage errors,
errors in inventory, and invalid sales voids.

Self-Check 4: Solutions

1. Kristine started a new business, a coffee and pastry cart located at

the MHCC in Suva. Kristine hired her brother, Pat as her assistant. Kristine and
Pat personally make all the purchases of items needed to stock the cart, using
procurement cards issued in the name of the company. Because Kristine is
personally liable for payments made on  the procurement cards, she recognizes
the need to establish policies for her brother to follow for the use of this card.

Suggest some controls that should be in place. Identify some resources

that need to be purchased for this business.
The credit card used should have a dollar amount limit as well as a daily limit. 
The card can also be restricted to certain kinds of vendors.  For example, hotels,
air fare, electronics stores, and liquor stores could all be vendors that would be
prohibited purchases on this credit card.  The types of resources that would be
purchased are paper products such as coffee filters, paper cups, napkins, and
plates; plastic utensils; ground coffee beans; creamer, sugar, sweetener, and
milk; pastries; and various cleaning supplies.  Finally, Chris should review all
charges on the credit card each month to detect any misuse of the card

T Enabled Systems of Inventory Processes

Systems and processes must be in place to capture, record, summarize, and report
inventory transactions. When a sales or purchase transaction occurs, the information
resulting from that sales and purchase transaction must flow into the inventory recording
system; into the accounts receivable and cash collection systems, into the accounts
payable and cash disbursement systems and into the inventory tracking systems.

With the introduction of computer based inventory systems, more and more businesses
have found it feasible to use a perpetual inventory system for planning and controlling
their inventory. Sophisticated, highly integrated IT systems capture, record, and process
inventory related transactions. Most retail businesses now use optical-scan cash
registers to read product bar codes. Such systems include: point of sales
(POS) systems as discussed in the previous unit.

Point of Sale systems features include touch screen menus, bar code scanning of
inventory items, real-time access and processing of inventory related transactions, real-
time update of purchases, sales, and inventory records, immediate summaries, reports
and analysis and integration of inventory records with the company’s general ledger
system. They not only record the sale price of the item but also enter the item sold for
inventory purposes. The cash registers are, in effect, data input computer terminals
entering transactions into the accounting and inventory records at the point of sale.

Computer packages such as MYOB and QuickBooks also automatically track goods and

sales tax (or value added tax) collections and outlays.

Self-Check 5: Solutions

1. You are the recent heir of $20 000 cash, with which you are considering
opening a sushi bar in the University of the South Pacific dining hall food court. You
would accept cash and credit card payments, which would be handled primarily by your
servers. You also plan to offer introductory specials to attract customers during the initial
months of business such as the orientation and enrollment weeks. You will be using the
point of sale (POS) system as part of this new business venture.

What internal controls should be implemented to reduce the risk of theft or

error related to the handling of cash, credit card payments and coupons?

The advantages of investing in a POS system as part of a new business venture include
the following:
•    Ease of use and ease of training servers.  This is expected to lead to fewer errors
and more accurate sales and inventory data.
•    Time savings related to the elimination of manual input processes. This includes
increased efficiency and reduced fraud related to processing of credit card payments
from customers.
•    Increased accuracy due to the real-time access to inventory and price data.  For
instance, if the sushi bar’s daily special is sold out, that information can be immediately
changed online so that servers can quickly inform customers of the change.
•    Enhanced accounting features such as real-time update of cash, sales, and inventory
records, immediate summaries and analyses, and the potential for integration with a
general ledger system will save manual steps and provide timely information for
management purposes.

Despite these many advantages, a new business venture would need to be especially
careful of the extensive hardware and software costs that are necessary to support a
POS system.  In addition, availability risks may be significant, as any hardware and
software failures could make the system unavailable and interrupt efficient business
processes.  Therefore, it is important that a new business venture consider these risks,
analyze the costs and benefits of the system, and implement backup systems should be
in place to reduce the availability risk.

In order to reduce the risk of theft or error related to the handling of cash, credit card
payments, and coupons, the sushi bar should be sure that its POS system includes all
relevant payment information, including options to enter the use of coupons and method
of payment.  In addition, summaries can be provided immediately, so servers should be
required to reconcile their transactions at the end of their shifts.
Processing Inventory related transactions with MYOB
James is now ready to process inventory-related transactions with MYOB. In a large
company, there may be hundreds of thousands of inventory related sales and purchase
transactions occurring each and everyday. The company must have systems and
processes in place to capture, record, summarize, report and update these transactions.
When accounting software is used for this update purpose, the software automatically
processes this information.
In this Unit, we will look at the application of MYOB accounting software as used in the
inventory processes. You will learn about the inventory module in this Unit. The
inventory module is used to record goods bought, sold and kept in the in the business.
MYOB for Inventories can be found in Chapter 7of your MYOB textbook.