1-1 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low Chapter 6 Accounting Information Systems and Internal Control

1-2 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low Chapter 6 Objectives Describe and illustrate the relationship between the accounting information system (AIS) and the management information system (MIS) Explain and demonstrate the importance of internal control Identify and explain various internal control procedures

1-3 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low Chapter 6 Objectives Explain and illustrate the importance of documents to an accounting information system (AIS) Demonstrate the use of external verification in control of cash Demonstrate the importance of control of cash

1-4 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low Chapter 6 Overview 6.1 Management information systems (MIS) and accounting information systems (AIS) 6.2 Internal control

1-5 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low Chapter 6 Overview 6.3 Documents in the accounting information system 6.4 Control and verification of cash

1-6 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low Introduction Management information systems –Provide a wide variety of information to the management of an organisation to help make the many decisions required of them in their role Accounting information systems –Subset of management information systems –Provide the framework in which the recording and summarisation of the data produced by business transactions occurs Internal control procedures are built into these systems –These procedures are vital to:  Ensure accuracy in recording and  Safeguard business assets especially cash from fraud and theft

1-7 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low Looking back (previous chapter) The accounting information system involves a process of input, processing and output InputProcessingOutput (accounting events) (accounting records) (financial statements)

1-8 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low Looking forward This chapter focuses on: The accounting information system (AIS) as a subset of the management information system (MIS) The use of internal controls to protect assets and improve the accuracy of data Control procedures built into a manual accounting system (Appendix)

1-9 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.1 Management information systems (MIS) and accounting information systems (AIS) Managers plan, control and evaluate the activities in an organisation To effectively plan, control and evaluate managers must have information through: –Informal information systems –Formal information systems

1-10 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.1 Management information systems (MIS) and accounting information systems (AIS) Informal information systems –May arise from communication such as discussions with staff at lunch or coffee breaks –Might provide some important information that is capable of assisting with decision making –May be unreliable –May lack control features, because of their nature

1-11 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.1 Management information systems (MIS) and accounting information systems (AIS) Formal information systems: –Provide management with more reliable information –Are specifically designed and structured to ensure accuracy –Encompass the process of data collection and processing, include information generation –Include information communication for the entire organisation

1-12 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.1 Management information systems (MIS) and accounting information systems (AIS) The accounting information system is a subset of the management information system Management information system Accounting information system

1-13 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.1 Management information systems (MIS) and accounting information systems (AIS) Accounting information systems –contains information relating to the financial aspects of an organisation –Has interrelated procedures which collect, process and report data to interested users

1-14 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.1 Management information systems (MIS) and accounting information systems (AIS) Observe Collect Process Report User activities data data information Data storage and retrieval Accounting information systems

1-15 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.1 Management information systems (MIS) and accounting information systems (AIS) An accounting system may be manual or computerised Computers allow generation of a massive volume of information very rapidly

1-16 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.2 Internal control According to the Australian auditing standard (AUS 402), internal control consists of the following components: –Control environment –Entity’s risk assessment process –Information system  Including related business processes relevant to financial reporting and communication –Control activities and –Monitoring of controls

1-17 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.2 Internal control Financial and other controls established within this framework: –The organisation’s business is conducted in an orderly and efficient manner –Assets are subject to safeguards –Accounting records are accurate and complete

1-18 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.2 Internal control Internal control defined: –The plan of organisation and all of the methods used to safeguard assets, check accuracy and reliability of data, promote operational efficiency and encourage adherence to policies How important is internal control?

1-19 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.2 Internal control Billions of dollars are lost worldwide through fraud and mistakes!! YET Very simple internal control procedures are often all that is required to prevent this

1-20 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.2 Internal control Two broad types of internal control are: 1. Administrative controls 2. Accounting controls

1-21 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.2 Internal control Administrative controls –Promote efficient operations and ensure policies are followed –Include quality control rules, hiring rules and use of budgets to analyse variances

1-22 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.2 Internal control Accounting controls –Ensure records and reports are accurate and reliable and prevent assets being stolen or accidentally damaged –Use of double-entry accounting is one key control for transactions –Other examples include:  Trial balance  Lists of assets (asset register)  Debtors and creditors ledgers

1-23 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.2 Internal control Important internal control procedures: –Adequate documents and records –Clear authorisation and responsibility –Separation of duties within an accounting system –Independent verification –Accurate security for assets –Use of mechanical and electronic equipment

1-24 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.2 Internal control Internal control in the electronic environment –Computers and the online environment allow rapid generation and transfer of data –There are many risks attached with this environment:  No paper trail to analyse and verify results  Ability to delete/lose/accidentally transfer data

1-25 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.2 Internal control Internal control in the electronic environment –Controls are required to make sure that problems do not occur  Importance is placed on accurate data entry  Data-entry verification is required  Security of data entry is required  Separation of duties (eg. printing of cheques)  Use of passwords and security access

1-26 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.2 Internal control Internal control in the electronic environment –Two special problems of control relating to computer- based systems:  Use of the Internet for transacting business and ‘publishing’ information about themselves  Use of EDI (electronic data interchange) EDI involves organisations having their systems linked so that each organisation has access to certain information on the other’s data files –For example: suppliers of goods and their customers

1-27 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.3 Documents in the accounting information system Design of an accounting system that incorporates adequate internal control features must look at: –Documents to be produced to:  Ensure that relevant data is collected  Ensure that data entering the system is reliable –Documents include: invoices, receipts and employee time sheets

1-28 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.3 Documents in the accounting information system Document design –Design is important, documents:  provide the source of the data for entries in the accounting records  supply the auditor with evidence in support of the accounting entity  should be designed carefully in order to capture all the required information

1-29 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.3 Documents in the accounting information system Document design –Design is important, documents:  may provide information for several purposes, perhaps covering more than one transaction cycle  should also be designed to facilitate the orderly arrangement of data, making the data easier to enter, read and check  normally carry serial numbers

1-30 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.3 Documents in the accounting information system Documents and internal control –Example: Purchase of goods in a university Table 6.1: Departments in the purchase transaction cycle and the functions to be performed University departments DepartmentFunctionDocuments produced PurchasingPlace orders for goodsPurchase order StoresReceive, store and issue goods AccountsCheck and approve paymentsPayment voucher CashierReceive and disburse cashCheques Various teaching departmentsTeaching and researchPurchase requisition

1-31 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.3 Documents in the accounting information system Documents and internal control –Example continued: Purchase of goods in a university  Control 1 The purchasing department should check that the requisition has been signed by an authorised officer  Control 2 Staff in the faculty of commerce should check the purchase order against the original requisition to ensure that the correct goods have been ordered  Control 3 The stores department should check the physical quantity and quality of the goods against the supplier’s delivery docket.

1-32 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.3 Documents in the accounting information system Documents and internal control –Example continued: Purchase of goods in a university  Control 4 Before approving payment, the accounts department must match the following documents: –Supplier’s invoice –Original purchase order, and –Delivery docket  Control 5 The paying clerk should check that all documents have been verified- that is, that all the required internal checks have been followed  Control 6 The supplier will make an independent check for discrepancies in payment received

1-33 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.4 Control and verification of cash Cash is the most negotiable of all assets For this reason: –Should be the subject of rigorous internal control procedures  Most important internal control procedure: Separation of duties –To ensure that those responsible for handling cash do not have access to the recording systems for it –Roles should be arranged such that there is a strict verification of tasks

1-34 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.4 Control and verification of cash Important internal control functions for cash: –All cash should be banked daily –All payments should be made by cheque –Duties, with respect to collecting cash and preparation of bank reconciliations, should be segregated and –Cheques should be signed by two independent members of staff

1-35 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.4 Control and verification of cash External verification of cash: the bank reconciliation statement –Checking the organisation’s records and comparing them to the bank’s records (the bank statement) is one way of verifying that cash is safeguarded –This is called a ‘bank reconciliation’

1-36 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.4 Control and verification of cash Procedure for reconciliation of cash records 1.The comparison step 2.The adjustment step 3.The reconciliation step

1-37 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.4 Control and verification of cash Procedure for reconciliation of cash records –Step 1 - The comparison step:  identifies timing discrepancies: Unpresented cheques Deposits not credited Unexplained items appearing on the bank statement and Possible errors  Compare bank statement with cash payments and receipts journals to find examples of: Comparison of bank deposits in the customer’s records and the deposit entries in the bank statement Differences like bank charges and direct debits Cheques issued which have not been presented Mistakes

1-38 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.4 Control and verification of cash Procedure for reconciliation of cash records –Step 2 – The adjustment step  Adjusts the organisation’s records by including legitimate items which appear directly on the bank statement, and correcting any errors identified in the organisation’s records  Valid items or errors found during the comparison step are then adjusted in organisation’s records

1-39 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.4 Control and verification of cash Procedure for reconciliation of cash records –Step 3 – The reconciliation step  Explains why the two sets of records still disagree  The only remaining differences will be unpresented cheques and deposits not yet credited

1-40 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low 6.4 Control and verification of cash Procedure for reconciliation of cash records –By preparing a bank reconciliation statement we are able to reconcile the organisation’s bank account figure with the bank statement Bank reconciliation statement As at 30 June 2008 Balance as per bank statement (favourable)$ plus Deposits not yet shown on statement less Unpresented cheques5 800 Balance as per our records (favourable)$58 800

1-41 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low Summary An AIS is part of the MIS and provides financial information to managers to help them plan, control and evaluate Internal control is used to improve efficiency, reduce fraud and mistakes and make sure administrative and accounting policies are followed

1-42 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low Summary Internal control procedures include: –Adequate documents and records –Clear authorisation and responsibility –Separation of duties –Independent verification –Security for assets –Use of mechanical/electronic equipment The bank reconciliation process helps in the control of cash