AIS Exam 1

What are managements responsibilities under Sections 302 and 404?

-302: Requires management to certify organizations internal controls on a quarterly and annual basis. -404: Requires management to assess internal control effectiveness.

Transaction Processing (Defined)

-An economic event that affects the asset and equities of the firm, is reflected in its accounts, and is measured in monetary terms. -Communication with other people. -Next step in the process is the GLS/FRS. -The transaction processing cycles have interactions with external parties. -Involves day to day operations.

FR

-Annual report -Balance sheet

Examples of Detective Controls:

-Bank reconciliation -Periodic reconciliation between physical counts of assets and accounting records -Mandatory vacations -Review of work by supervisors -Review of shipping log by shipping supervisor Fixed assets need to be reconciled

MRS

-Budget -Variance -Cost by area

What is the relationship among data, information, and an information system:

-Data: facts collected in "raw" form and make meaningful by organizing/classifying/math manipulating/summarizing. The meaningful data is considered to be information. -Information- causes the user to act. Information System- taking data and putting it into financial statements.

Internal stakeholders in Corporate Governance

-Employees- should be included in corporate governance -Top management- CEO, CFO, President Executive Officers -Supervisors- Oversee employees -Internal audit- help management insure that corporate governance is effective -Board of directors- job to align the interests of management and investors (and other external) -Audit committee- part of the board of directors whose responsibility it is for oversight of the financial reporting system. -OVERALL: this is a FIDUCIARY RESPONIBILITY for the internal stakeholders

SOX has caused a change in the expectations of good corporate governance. Which of the following are changes from SOX?

-Increased management oversight -Increased internal control reporting and compliance -Increased financial stewardship

Discuss the difference between internal and external users of information and their needs and demands on an information system. Historically, which type of user has the firm catered to most?

-Internal--> managers. Now it is more internally catered to. -External--> lenders,IRS, SEC, and stockholders. Financial reporting, regulators. They were more historically catered to.

External stakeholders in Corporate Governance

-Investors (want to have a good return and avoid bankruptcy) -Creditors (want to be paid) -Customers (want assurances as to the quality of products produced -Suppliers (want to have a continuing relationship) -Regulators (want to insure that we are doing what we say we are doing and that we are upholding legal and ethical requirements)

Examples of Preventive Controls:

-Locking doors -Background checks -Insurance of property -Accounting input terminals require access passwords *No control is absolutely effective it is PREVENTIVE.

PETER = Internal Control

-Policies: laws/practices for the enterprise "police". -Efficiency: Management reporting system support. -Theft and Errors: safeguarding assets and reducing errors. -Reliability of accounting records: FRS/ledger, transaction processing

Management is accountable for:

-Quality of financial reporting -Internal controls reporting -Evaluate and re-evaluate the internal controls -Report on weakness in internal controls

Revenue Cycle

-The business of selling products or providing services and the related transactions. -Every process from customer ordering to customer payment. -Sales, returns, billing, acc. rec., order taking to collection of $.

Conversion Cycle

-The conversion of labor, material, and overhead into products which will be sold in the revenue cycle. -Creating something to sell (restaurants). -Taking raw material, converting it so something and tracking the whole process.

Expenditure Cycle

-The expending of resources for assets or for expenses and the related transactions. There will be a cash outlay at some point. -Spending, buying fixed assets, payroll, disbursements, cutting a check, accts. pay. -Liability and paying for the things.

Security needs:

-data kept "reasonably free of errors" -limited access to those with authorization -should not be accessible by outsiders (hacking, security of customer records, security of sensitive data)

Accounting systems support the following:

-external financial reporting -internal reporting -decision-making by management and day to day operations -information flow to outside stockholders- vendors and buys of our products.

Needed Components of the AIS:

1. Ability to capture data from business processes. 2. Document data (make documents and records). 3. Internal Controls 4. Classify, summarize, consolidate, and communicate.

COSO's 5 Physical Control Activities:

1. Authorization of transactions. 2. Segregation of duties, ARC 3. Adequate records and documents 4. Security of assets and documents 5. Independent checks and reconciliation

Segregation of duties ARC

1. Authorization- ex. authorization of purchase order 2. Recording- journal entries 3. Custody- receipt of merchandise and storage or distribution *You need one person each for ARC. *If 1 individual has 2 components of ARC, its a violation.

COSO Control Environment (Tone at the Top)

1. Commitment to integrity and ethical values. 2. Oversight responsibility 3. Establish structure, authority, and responsibility 4. Commitment to competence 5. Enforces accountability

COSO Framework has 5 components for an effective internal control:

1. Control environment (top down, rules, policies). 2. Risk Assessment. 3. Control activities (starts with segregation of duties) 4. Information and Communication 5. Monitoring

Which cycles would be more dominant in businesses in the following industries? 1. Manufacturing 2. Merchandising 3. Service

1. Conversion 2. Expenditure 3. Revenue

What are the levels of data hierarchy?

1. Data attribute (field)- column 2. Record- a line in excel 3. File- particular worksheet 4. Data Base- all tabs

Adequate records ad documents

1. Keep original documentation and the documents to the j.e. 2.Verification (reconciliations) of accounting records by an independent person. Check for reasonableness. 3. Journals, ledgers, trial balances, and financial statements. 4. Forms (documents) should be consecutively pre-numbered. One form can be used for multiple related purposes.

Security of assets and documents

1. Limit access to assets. 2. Consider that forms authorizing actions have value. Ex would be a blank check in the wrong person's hand. -checks and locked up in one box and the stamp in another.

Forms of documents:

1. Manual- all paper documents with backup digital documents. 2. Digital- no paper documents 3. Hybrid- Digital input with creations of physical documents.

COSO Monitoring (Responsibility of Management)

1. Ongoing and/or separate evaluations. 2. Evaluates and communicate deficiencies.

3 types of Control Environments:

1. Preventive- Designed to maintain internal controls and to prevent or preclude threats to safeguarding of assets or threats to accuracy of recordkeeping. 2. Detective- Designed to detect breaches in internal controls. 3. Corrective- The steps taken once internal controls have been breached and that breach has been detected. The new steps necessary to safeguard the company.

Conversion Transaction Process (Production and Cost Accounting)

1. Production- Involves the planning and usage of resources. Reviews logistic resources. 2. Cost Accounting- Inventory, labor, and overhead are converted into inventory for sale. This information is used for budgeting, inventory valuation, cost control.

Expenditure Transaction Processes (Purchase and Payment)

1. Purchases/accounts payable system- Purchases, purchase returns, and adjustments, orders, discounts. 2. Cash disbursements system. Payments, disbursement processing (error corrections). 3. Payroll system. Payroll processing (disbursements, accruals, tax, benefit plans). 4. Fixed asset system. Acquisition and authorization of fixed assets. Recordkeeping with fixed assets (Depreciation, disposal, linkage to tax system).

Independent checks and reconciliation

1. Reconciliation, comparison of physical with accounting, recalculations, analysis of reports, review of batch totals. 2. Require employees to take vacations. 3. Reconciliation = detective controls.

What are the characteristics o good or useful information?

1. Relevant 2. Timeliness 3. Accuracy 4. Completeness 5. Summarization

Information is valuable if it is:

1. Relevant- what is needed by the decisionmaker? 2. Timeliness- current and up to date 3. Accuracy- 4. Completeness- the information has to tell the whole story 5. Summarization- data is voluminous but information is summarizing.

What are the 3 primary transaction cycles?

1. Revenue 2. Expenditure 3.Conversion

Revenue Transaction Process (Sales and Cash Receipts)

1. Sales Order Processing- Preparation of customer order, authorization of credit, sales returns and adjustments). 2. Cash Receipt Processing- Collection and processing of cash receipt, deposit, treasury function, and journal entry.

COSO's Control Activities (Policies and Procedures):

1. Selects and develops control activities to mitigate risks. 2. Selects and develops information technology general controls. 3. Deploys controls through policies and procedures. *This is where the detective, corrective, and preventive controls come into the COSO model.

All enterprises should have the following documents:

1. Source documents 2. Turnaround documents 3. GLS/FRS documents

COSO's Risk Assessment (Financial Reporting Risks):

1. Specifies clear objectives 2. Identifies and analyzes risk 3. Assess fraud risk 4. Identifies and analyzes significant changes

What documents do:

1. Start the AIS 2. Take different forms 3. Part of authorization process 4. Audit Trail 5. Valuable so protect them

Management must follow general accepted guidelines consistent with:

1. Technological feasibility 2. Cost/benefit analysis 3. Expectations of external auditors 4. Expectations of internal oversight: internal audit, board of directors, CEO.

Key points of AIS

1. The AIS is not stand alone (provides inputs to other systems) 2. The AIS needs to be dynamic (changes in operations = changes in AIS) 3. The AIS is driven by business processes 4. AIS supports: day to day operations, decision-making, stewardship (oversight) to the enterprise. 5. AIS Subsystems- Transaction Processing Systems, General Ledger/Financial Reporting Systems/ Management Reporting Systems

Accounting Cycle

1. Transaction occurs 2. Prepare documents 3. Record in journals 4. Post to ledgers 5. Prepare unadjusted trial balance 6. Prepare and post adjusting entries 7. Prepare adjusted trial balance 8. Prepare financial statements 9. Prepare closing entries

Additional values that AIS Information should contain:

1. occurrence 2. existence 3. value 4. rights and obligations 5. cutoff 6. classification and understandability

What is the focus on after SOX

Accountability

Which of the following is NOT an example of preventive control? 1. separation of responsibilities for the recording, custodial, and authorization functions. 2. requiring background checks on all employees. 3. Locking automobiles. 4. All of the above

All of the above

Which of the following is not true? 1. AIS maintains both detail and summary information? 2. Business processes may vary in details from company to company. 3. Regardless of computerizations, all AIS must capture data from transactions within business processes. 4. Business process (cycles) that handle expenditures are classified as revenue cycle events.

Business process (cycles) that handle expenditures are classified as revenue cycle events.

_____________ is a collection of activities or flow of work in an organization that creates value: 1. Economic event 2. Accounting transaction 3. Business process 4. Chart of accounts

Chart of Accounts

What does COSO stand for?

Committee of Sponsoring Organizations1

Issued check to Interstate Motor Freight for the amount of the freight bill for the Velocity Sporting Goods shipment received December 22. R, E, or C

Expenditure

Issued check to Velocity Sporting Goods for payment in full of their invoice No. 34719 for goods received December 22. R, E, or C.

Expenditure

Received office supplies from Chicago Office Supply as listed on purchase order NO. 327, a copy of which is being held in accounting. Chicago Office Supply's vendor invoice No. 2378 was received with the goods. All supplies ordered were received in good condition and taken directly to the office, but the invoice was not paid. R, E, or C

Expenditure

Received vendor invoice No 34719 from Velocity Sporting Goods for goods ordered December 18 and received December 22. R, E, or C

Expenditure

Increased employee pay rates, and employees changed their federal income tax withholding amount, both effective December 16. There were no changes in filing status or withholding allowances. R, E, or C

Expenditure Cycle

Ordered the following inventory on account from Velocity Sporting Goods, using purchase order NO. 328. R, E, or C

Expenditure Cycle

Received merchandise from Velocity Sporting Goods as listed on purchase order No. 328. All merchandise listed on the purchase order was delivered in good condition and in the quantities ordered, except that only 76 basketball pole pads were received. The goods were placed immediately in the inventory warehouse. R, E, or C

Expenditure Cycle

Which subsystem is not part of AIS? -Transaction Processing System -Expert System -General Ledger / Financial Reporting System -Management Reporting System

Expert System

Classify the following users as external or internal: Bondholders

External aggregate

Classify the following users as external or internal: Stockholders

External aggregate

Who are the stakeholders in Corporate Governance?

External and Internal

Good corporate governance is achieved when the interests of what groups are balanced?

External and Internal stakeholders

Classify the following users as external or internal: Lending Institutions

External both detailed and aggregate

Classify the following users as external or internal: Customers

External detailed

Classify the following users as external or internal: IRS

External detailed

Classify the following users as external or internal: Suppliers

External detailed

Classify the following users as external or internal: SEC

External generally aggregate but some detail

T/F Business processes never change

False

T/F Management reporting is the same for all businesses

False

Tone at the Top

Good corporate governance starts at the top. Top management and the board of directors take responsibility and establish values and behaviors that are enforced policies.

Do you think transaction processing systems differ significantly between service and manufacturing industries? Are they equally important to both sectors?

I do think they differ because service is time spent and manufacturing is materials spent. I think they are equally important.

What is the difference between data and information?

Information causes the user to act

Classify the following users as external or internal: Board of Directors

Internal aggregate

Classify the following users as external or internal: CEO

Internal aggregate

Classify the following users as external or internal: Inventory Control Manager

Internal detailed

General Ledger / Financial Reporting System (GL/FRS)

Involves the accounting cycle and generally used for external use.

What is not a component part of the COSO Framework? 1. Control Environment 2. Risk Assessment 3. Control Activities 4. Management Directives

Management Directives. While they should be included they are not considered an integral part of the COSO framework.

Can all the controls in the control environment be completed?

No, because there are always the chances of human error.

What does good corporate governance lead to?

Profitability and growth.

Management Reporting System (MRS)

Provides information for decision-making: budgeting, summary reporting, efficiency reports.

Transaction Processing System (TPS)

Providing information about transactions to the interested parties- vendors, buyers, outside partners in business transactions.

Borrowed $60,000 from First American Bank and Trust by issuing a two-year note payable with a stated annual interest rate of 5%. Check NO. 545 for $60,000 was received from the bank and deposited. Reviewed the terms and conditions of the note and signed its as the borrower. R, E, or C.

Revenue

Received all goods that Waren has authorized Eastern Wisconsin University to return on EWU's return request No. R8034 for credit against their account balance. R, E, or C

Revenue

Received check No 49326 from Eastern Wisconsin University in partial payment of the remaining amount on charge invoice No 729, and deposited the check R, E, or C

Revenue

Received check No 65891 for $7,855 and customer purchase order No. D9794 in the mail from Andrews College for a cash sale. All goods ordered were shipped and the cash sale was processed and recorded. R, E, or C

Revenue

Received check NO 28564 from Branch College for payment in full for charge invoice NO 730 and deposited the check. R, E, or C

Revenue Cycle

Received legal notification from Benson, Rosenbrook, and Martinson, P.C., attorneys at law, that Stevenson College had filed bankruptcy and will be unable to pay any of its outstanding debts to its suppliers. Write off the account as a bad debt. R, E, or C

Revenue Cycle

Received sales return request No. R8034 in the mail from Eastern Wisconsin University. The request was approved and the acknowledgment copy mailed to EWU. R, E, or C.

Revenue Cycle

Received validated deposit receipt from the bank for $7,931.96 for deposit made December 14. R, E, or C

Revenue Cycle

Received customer purchase order No. 37225 in the mail from University of Southern Iowa, approved their credit and shipped the goods. All goods ordered were shipped, except that only 56 shoulder pad sets were available for shipment. R, E, or C

Revenue cycle

When a company received returned goods from a customer, the process to adapt the return would most likely be: 1. administrative process (cycle) 2. Conversion process (cycle) 3. Expenditure process (cycle) 4. Revenue process (cycle)

Revenue process (Cycle)

What is the new emphasis after the financial crisis of 2006?

Risk Assessment

Authorization of transactions

Safeguarding of assets

Which of the following is not an objective of all information systems? -Support for the stewardship function of management -Support of the management decision making -Support for the day-to-day operations of the firm

They are all objectives

What is the purpose of corporate governance?

To promote efficient use of resources and also to hold persons accountable for the use of the resources.

T/F All businesses have details within the cycles which differ

True

T/F All businesses have the same standard cycles

True

T/F: All corporations are NOT equal when it comes to internal controls

True

Are transaction cycles present in all businesses?

Yes

Corporate governance is the....

efficient use of resources and accountability