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Accounting Information Systems

AccountingInformationSystemsSEVENTH EDITIONJAMES A. HALLP eter E. Bennett Chair inBusiness and EconomicsLehigh Information Systems ,Seventh EditionJames A. HallVP/Editorial Director: Jack W. CalhounEditor-in-Chief: Rob DeweySr. Acquisitions Editor: Matt FilimonovEditorial Assistant: Lauren AthmerDevelopmental Editor: Maggie KubaleMarketing Manager: Natalie KingMarketing Coordinator: Heather McAuliffeAssociate Content Project Manager: Jana LewisManager of Technology, Editorial: Matt McKinneyMedia Editor: Bryan EnglandSr. Manufacturing Buyer: Doug WilkeProduction Technology Analyst: Starratt AlexanderProduction House: Cadmus CommunicationsPrinter: Edwards BrothersArt Director: Stacy Jenkins-ShirleyMarketing Communications Manager: Libby ShippPermissions Acquisition Manager: Roberta BroyerCover Designer: Itzhack ShelomiCover Image: iStock PhotoPrinted in the United States of America123451312111009 2011, 2008 Cengage LearningALL RIGHTS RESERVED. No part of this work covered by the copy-right herein may be reproduced, transmitted, stored or used in any formor by any means graphic, electronic, or mechanical, including but notlimited to photocopying, recording, scanning, digitizing, taping, Webdistribution, Information networks, or Information storage and retrievalsystems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of more Information about our products, contact us at:Cengage Learning Academi

THE RELATIONAL DATABASE MODEL 407 Relational Database Concepts 408 Anomalies, Structural Dependencies, and Data Normalization 412 DESIGNING RELATIONAL DATABASES 419 Identify Entities 419 Construct a Data Model Showing Entity Associations 421 Add Primary Keys and Attributes to the Model 422 Normalize Data Model and Add Foreign Keys 422

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Transcription of Accounting Information Systems

1 AccountingInformationSystemsSEVENTH EDITIONJAMES A. HALLP eter E. Bennett Chair inBusiness and EconomicsLehigh Information Systems ,Seventh EditionJames A. HallVP/Editorial Director: Jack W. CalhounEditor-in-Chief: Rob DeweySr. Acquisitions Editor: Matt FilimonovEditorial Assistant: Lauren AthmerDevelopmental Editor: Maggie KubaleMarketing Manager: Natalie KingMarketing Coordinator: Heather McAuliffeAssociate Content Project Manager: Jana LewisManager of Technology, Editorial: Matt McKinneyMedia Editor: Bryan EnglandSr. Manufacturing Buyer: Doug WilkeProduction Technology Analyst: Starratt AlexanderProduction House: Cadmus CommunicationsPrinter: Edwards BrothersArt Director: Stacy Jenkins-ShirleyMarketing Communications Manager: Libby ShippPermissions Acquisition Manager: Roberta BroyerCover Designer: Itzhack ShelomiCover Image: iStock PhotoPrinted in the United States of America123451312111009 2011, 2008 Cengage LearningALL RIGHTS RESERVED. No part of this work covered by the copy-right herein may be reproduced, transmitted, stored or used in any formor by any means graphic, electronic, or mechanical, including but notlimited to photocopying, recording, scanning, digitizing, taping, Webdistribution, Information networks, or Information storage and retrievalsystems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of more Information about our products, contact us at:Cengage Learning Academic Resource Center,1-800-423-0563 For permission to use material from this text or product, submit arequest online Cengage Learning, a part of Cengage , the Star logo, and South-Western are trademarks usedherein under of Congress Control Number: 2009938064 ISBN-13: 978-1-4390-7857-0 ISBN-10.

2 1-4390-7857-2 Cengage Learning5191 Natorp BoulevardMason, OH 45040 USAB rief ContentsPreface xviiPart I Overview of Accounting InformationSystems 1 Chapter 1 The Information system : AnAccountant s Perspective 3 Chapter 2 Introduction to TransactionProcessing 41 Chapter 3 Ethics, Fraud, and Internal Control 111 Part II Transaction Cycles and BusinessProcesses 151 Chapter 4 The Revenue Cycle 153 Chapter 5 TheExpenditureCyclePartI:Purchases and Cash DisbursementsProcedures 217 Chapter 6 TheExpenditureCyclePartII:PayrollProcess ing and Fixed AssetProcedures 265 Chapter 7 The Conversion Cycle 305 Chapter 8 Financial Reporting and ManagementReporting Systems 349 Part III Advanced Technologies in AccountingInformation 395 Chapter 9 Database Management Systems 397 Chapter 10 The REA Approach to DatabaseModeling 459 Chapter 11 Enterprise Resource Planning Systems489 Chapter 12 Electronic Commerce Systems 523iiiPart IV Systems Development Activities 571 Chapter 13 Managing the Systems DevelopmentLife Cycle 573 Chapter 14 Construct, Deliver, and MaintainSystems Project 605 Part V Computer Controls and Auditing 663 Chapter 15IT Controls Part I: Sarbanes-Oxleyand IT Governance 665 Chapter 16IT Controls Part II: Security andAccess 703 Chapter 17IT Controls Part III.

3 SystemsDevelopment, Program Changes, andApplication Controls 737 Glossary 773 Index 791ivBrief ContentsContentsPreface xviiAcknowledgments xxviDedication xxviiPart IOverview of Accounting InformationSystems 1 Chapter 1 The Information system : An Accountant sPerspective 3 THE Information ENVIRONMENT 4 What Is a system ? 5An Information Systems Framework 7 AIS Subsystems 9A General Model for AIS 10 Acquisition of Information Systems 14 ORGANIZATIONAL STRUCTURE 15 Business Segments 15 Functional Segmentation 16 The Accounting Function 19 The Information Technology Function 20 THE EVOLUTION OF Information system MODELS 24 The Manual Process Model 24 The Flat-File Model 25 The Database Model 27 The REA Model 28 Enterprise Resource Planning Systems 31 THEROLEOFTHEACCOUNTANT 31 Accountants as Users 32 Accountants as system Designers 32 Accountants as system Auditors 32 SUMMARY 33 Chapter 2 Introduction to Transaction Processing 41AN OVERVIEW OF TRANSACTION PROCESSING 42 Transaction Cycles 42 Accounting RECORDS 44 Manual Systems 44 The Audit Trail 50vComputer-Based Systems 51 DOCUMENTATION TECHNIQUES 53 Data Flow Diagrams and Entity Relationship Diagrams 53 system Flowcharts 57 Program Flowcharts 64 Record Layout Diagrams 67 COMPUTER-BASED Accounting Systems 67 Differences between Batch and Real-Time

4 Systems 68 Alternative Data Processing Approaches 69 Batch Processing Using Real-Time Data Collection 71 Real-Time Processing 74 DATA CODING SCHEMES 74A system without Codes 74 ASystemwithCodes 76 Numeric and Alphabetic Coding Schemes 76 SUMMARY 79 APPENDIX 80 Chapter 3 Ethics, Fraud, and Internal Control 111 ETHICAL ISSUES IN BUSINESS 112 Business Ethics 112 Computer Ethics 112 Sarbanes-Oxley Act and Ethical Issues 116 FRAUD AND ACCOUNTANTS 117 Definitions of Fraud 117 The Fraud Triangle 118 Financial Losses from Fraud 119 The Perpetrators of Frauds 120 Fraud Schemes 122 INTERNAL CONTROL CONCEPTS AND TECHNIQUES 128 SAS 78/COSO Internal Control Framework 132 SUMMARY 137 Part IITransaction Cycles and Business Processes151 Chapter 4 The Revenue Cycle 153 THE CONCEPTUAL system 154 Overview of Revenue Cycle Activities 154 Sales Return Procedures 160 Cash Receipts Procedures 163viContentsRevenue Cycle Controls 166 PHYSICAL Systems 170 MANUAL Systems 171 Sales Order Processing 171 Sales Return Procedures 174 Cash Receipts Procedures 174 COMPUTER-BASED Accounting Systems 177 Automating Sales Order Processing with Batch Technology 177 Keystroke 178 Edit Run 180 Update Procedures 180 Reengineering Sales Order Processing with Real-TimeTechnology 180 Transaction

5 Processing Procedures 180 General Ledger Update Procedures 182 Advantages of Real-Time Processing 183 Automated Cash Receipts Procedures 183 Reengineered Cash Receipts Procedures 185 Point-of-Sale (POS) Systems 185 Daily Procedures 185 End-of-Day Procedures 187 Reengineering Using EDI 187 Reengineering Using the Internet 188 Control Considerations for Computer-Based Systems 188PC-BASED Accounting Systems 190PC Control Issues 190 SUMMARY 191 APPENDIX 192 Chapter 5 The Expenditure Cycle Part I: Purchases andCash Disbursements Procedures 217 THE CONCEPTUAL system 218 Overview of Purchases and Cash Disbursements Activities 218 The Cash Disbursements Systems 225 Expenditure Cycle Controls 228 PHYSICAL Systems 230A Manual system 230 The Cash Disbursements Systems 232 COMPUTER-BASED PURCHASES AND CASHDISBURSEMENTS APPLICATIONS 234 Automating Purchases Procedures Using Batch ProcessingTechnology 234 ContentsviiCash Disbursements Procedures 239 Reengineering the Purchases/Cash Disbursements system 240 Control Implications 242 SUMMARY 243 Chapter 6 The Expenditure Cycle Part II.

6 PayrollProcessing and Fixed Asset Procedures 265 THE CONCEPTUAL PAYROLL system 266 Payroll Controls 274 THE PHYSICAL PAYROLL system 275 Manual Payroll system 275 COMPUTER-BASED PAYROLL Systems 277 Automating the Payroll system Using Batch Processing 277 Reengineering the Payroll system 279 THE CONCEPTUAL FIXED ASSET system 281 The Logic of a Fixed Asset system 281 THE PHYSICAL FIXED ASSET system 283 Computer-Based Fixed Asset system 283 Controlling the Fixed Asset system 286 SUMMARY 288 Chapter 7 The Conversion Cycle 305 THE TRADITIONAL MANUFACTURINGENVIRONMENT 306 Batch Processing system 307 Controls in the Traditional Environment 318 WORLD-CLASS COMPANIES AND LEANMANUFACTURING 320 What Is a World-Class Company? 320 Principles of Lean Manufacturing 320 TECHNIQUES AND TECHNOLOGIES THAT PROMOTE LEANMANUFACTURING 322 Physical Reorganization of the Production Facilities 322 Automation of the Manufacturing Process 323 Accounting IN A LEAN MANUFACTURINGENVIRONMENT 326 What s Wrong with TraditionalAccounting Information ?

7 326 Activity-Based Costing (ABC) 328 Value Stream Accounting 329 Information Systems THAT SUPPORT LEANMANUFACTURING 331 Materials Requirement Planning (MRP) 331viiiContentsManufacturing Resource Planning (MRP II) 331 Enterprise Resource Planning (ERP) Systems 333 SUMMARY 334 Chapter 8 Financial Reporting and ManagementReporting Systems 349 THE GENERAL LEDGER system 349 The Journal Voucher 350 The GLS Database 350 GLS Procedures 352 THE FINANCIAL REPORTING system 352 Sophisticated Users with Homogeneous Information Needs 352 Financial Reporting Procedures 352 XBRL REENGINEERING FINANCIAL REPORTING 355 XML 355 XBRL 356 The Current State of XBRL Reporting 361 CONTROLLING THE FRS 362 SAS 78/COSO Control Issues 362 Internal Control Implications of XBRL 364 THE MANAGEMENT REPORTING system 365 FACTORS THAT INFLUENCE THE MRS 365 Management Principles 365 Management Function, Level, and Decision Type 368 Problem Structure 370 Types of Management Reports 371 Responsibility Accounting 374 Behavioral Considerations 378 SUMMARY 380 Part IIIA dvanced Technologies in AccountingInformation 395 Chapter 9 Database Management Systems 397 OVERVIEW OF THE FLAT-FILE VERSUS DATABASEAPPROACH 398 Data Storage 398 Data Updating 398 Currency of Information 399 Task-Data Dependency 399 The Database Approach 399 Flat-File Problems Solved 400 ContentsixControlling Access to the Database 400 The Database Management system 400 Three Conceptual Models 401 ELEMENTS OF THE DATABASE ENVIRONMENT 401 Users 401 Database Management system 401 Database Administrator 404 The Physical Database 407 THE relational DATABASE MODEL 407 relational Database Concepts 408 Anomalies, Structural Dependencies.

8 And Data Normalization 412 DESIGNING relational DATABASES 419 Identify Entities 419 Construct a Data Model Showing Entity Associations 421 Add Primary Keys and Attributes to the Model 422 Normalize Data Model and Add Foreign Keys 422 Construct the Physical Database 423 Prepare the User Views 424 Global View Integration 427 DATABASES IN A DISTRIBUTED ENVIRONMENT 427 Centralized Databases 428 Distributed Databases 429 SUMMARY 433 APPENDIX 433 Chapter 10 The REA Approach to DatabaseModeling 459 THE REA APPROACH 460 The REA Model 460 DEVELOPING AN REA MODEL 462 Differences between ER and REA Diagrams 463 View Modeling: Creating an Individual REA Diagram 463 VIEW INTEGRATION: CREATING ANENTERPRISE-WIDE REA MODEL 470 Step 1. Consolidate the Individual Models 470 Step 2. Define Primary Keys, Foreign Keys, and Attributes 475 Step 3. Construct Physical Database and Produce User Views 477 REA and Value Chain Analysis 481 REA Compromises in Practice 482 SUMMARY 482xContentsChapter 11 Enterprise Resource Planning Systems 489 WHAT IS AN ERP?

9 490 ERP Core Applications 491 Online Analytical Processing 492 ERP system CONFIGURATIONS 492 Server Configurations 492 OLTP Versus OLAP Servers 493 Database Configuration 496 Bolt-on Software 496 DATA WAREHOUSING 497 ModelingDatafortheDataWarehouse 497 Extracting Data from Operational Databases 498 Cleansing Extracted Data 498 Transforming Data into the Warehouse Model 500 Loading the Data into the Data Warehouse Database 501 Decisions Supported by the Data Warehouse 501 Supporting Supply Chain Decisions from the Data Warehouse 502 RISKS ASSOCIATED WITH ERP IMPLEMENTATION 503 Big Bang Versus Phased-in Implementation 503 Opposition to Changes in the Business s Culture 504 Choosing the Wrong ERP 504 Choosing the Wrong Consultant 505 High Cost and Cost Overruns 506 Disruptions to Operations 507 IMPLICATIONS FOR INTERNAL CONTROLAND AUDITING 507 Transaction Authorization 507 Segregation of Duties 508 Supervision 508 Accounting Records 508 Independent Verification 508 Access Controls 509 Internal Control Issues Related to ERP Roles 509 Contingency Planning 511 SUMMARY 512 APPENDIX 512 Chapter 12 Electronic Commerce Systems 523 INTRAORGANIZATIONAL NETWORKS AND EDI 524 INTERNET COMMERCE 524 Internet Technologies 524 ContentsxiProtocols 527 Internet Protocols 528 Benefits from Internet Commerce 530 RISKS ASSOCIATED WITH ELECTRONIC COMMERCE 532 Intranet Risks 532 Internet Risks 533 Risks to Consumers 533 SECURITY, ASSURANCE.

10 AND TRUST 539 Encryption 539 Digital Authentication 540 Firewalls 542 Seals of Assurance 542 IMPLICATIONS FOR THE Accounting PROFESSION 543 Privacy Violation 543 Continuous Auditing 544 Electronic Audit Trails 545 Confidentiality of Data 545 Authentication 545 Nonrepudiation 545 Data Integrity 545 Access Controls 545A Changing Legal Environment 546 SUMMARY 546 APPENDIX 546 Part IVSystems Development Activities 571 Chapter 13 Managing the Systems Development LifeCycle 573 THE Systems DEVELOPMENT LIFE CYCLE 574 Participants in Systems Development 575 Systems STRATEGY 576 ASSESS STRATEGIC Information NEEDS 576 Strategic Business Needs 576 Legacy Systems 577 User Feedback 577 DEVELOP A STRATEGIC Systems PLAN 580 CREATE AN ACTION PLAN 580 The Learning and Growth Perspective 581 The Internal Business Process Perspective 582xiiContentsThe Customer Perspective 582 The Financial Perspective 582 Balanced Scorecard Applied to IT Projects 582 PROJECT INITIATION 583 Systems ANALYSIS 583 The Survey Step 583 The Analysis Step 586 CONCEPTUALIZATION OF ALTERNATIVE DESIGNS 587 How Much Design Detail Is Needed?