Accounting information – Coursework
Some academics believe that there is a direct relationship between accounting information systems and organisations. It is thought there is a two-way system whereby organisations shape their accounting information systems but are also shaped by them. This report will look at the highlighted relationship and in the context of the information literacy and management skills that are needed by an accountancy graduate in the 21st Century. The report will also cover the importance of the factors that shape an accounting information system and what the needs are essential to have an effective and efficient system in this present day. The purpose of accounting information systems is to support management and the controls of topics that have a connection with the economic financial area. With technology advancing every day, accounting information systems are providing firms with a strategic viewpoint. This allows for measures to be used regarding accounting information systems that will allow the organisation to become more competitive. Every firms accounting system may differ depending on the size of the firm, industry area and accounting procedures that may be in place. The accounting system will be chosen by management and whereby this would be an argument for an organisation shaping their systems. Accounting information systems must suit the needs of both management as well as federal laws such as the preparation of financial statements.
Therefore, it is important that management choose the correct accounting information system that will meet all needs not only for the company’s benefits but also to remain compliant with the law. In this report I will look at articles by Kotb and Hopwood which I feel has widened my perspective and understanding of accounting information systems in the 21st century. Kotb’s article is tailored around e-business where he focuses on the impact of technological advances in businesses today. Hopwoods article looks more on the economy crisis and how accounting procedures have to manage throughout this time and overcome the restraint from the economy. When producing an accounting information system it is important that it is cost-effective to the organisation. This can be explained as the value of the information produced should be less than the cost to produce it. As time goes on, technological advances makes this easier to ensure, however, the initial cost of the equipment may be expensive. Management may have a difficult role, depending on the size of the company, determining which information system to be used and consider the use of information literacy. Information literacy can be defined as “when individuals recognize when information is needed and have the ability to locate, evaluate and use effectively the needed information.” (University of Arizona, 2012) The importance of information literacy in AIS is that it aids with non-deterministic questions and issues, cutting edge problems and prevents nuances of words and thoughts. According to the University of Arizona there are three broad types of information; sponsored, practitioner and scholar. The criteria which is used to evaluate information is authority, accuracy, objectivity, currency and coverage. The basic purpose of an accounting information system is to “interpret and record the effects of business transactions, classify the effects of similar transactions and communicate the information contained in the system to decision makers.”(McGraw, 2008) Many companies have different accounting systems and the way they are differentiated will be based on the manner, frequency and speed with which the information systems have to meet the needs of the business regarding the size of the company.
Small companies may not require an intense and complex accounting system as they may only record a small amount of transactions per day. However, large companies have a lot more detailed and computerised accounting information systems to process and manage their large scale of business activity. For example, a large company may deal with hundreds of thousands of transactions per hour therefore a manual system would be inefficient. When management are compiling the appropriate accounting information systems they must be aware of internal controls. Internal controls can be defined as “an accounting procedure or system designed to promote efficiency or assure implementation of a policy or safeguard assets or avoid fraud.”(Princeton University, 2012) Management or directors are usually responsible for developing and monitoring internal control and factoring in the five components. These components are known as the control environment, risk assessment, control activities, communication and monitoring. The main component for the internal controls is the control environment as it provides a base for the organisation. The purposes of the control environment is for manager’s oversight, integrity and ethical
principles, attention and direction by the board of directors. The control environment is one of the most crucial factors of internal controls as fraudulent financial reporting usually comes from the ineffective control environment. According to Hopwood, “audit industry is currently in the midst of intensifying its lobbying of government for legislative changes in the limits on its legal liability.” This conveys the idea that auditors today have not got enough authority or availability to company’s information systems and that is the reason for the problems. Another component of internal control which management must address is risk assessment. This involves identifying organisational risks, analysing the potential of risks and cost-benefit analysis. Risk assessment and information/communication area also components of internal control where management need to use their skills and expertise in the process of accounting information systems. A common time where company’s may evaluate the risk assessment is during the annual review where the can use company budgets. With this component factors such as policies and procedures and informing employees of roles and responsibilities need to be targeted to ensure effectiveness of controls. Lastly, monitoring is a component of internal controls which involves the evaluation of internal controls and also whether to initiate corrective action when necessary. The monitoring process of the internal controls can sometimes be known as an annual check-up where management evaluate the accounting information system and determine if any improvements are needed. With the process of choosing accounting information systems organisations also have to take account of corporate governance codes. This is the system in which companies are directed and controlled by the government.
There are four main elements of corporate governance; managing, control, supervision and transparency. Therefore, organisations need to shape their accounting systems around these elements to ensure they are following governance codes. Corporate government codes have three components which managers will have to consider. The first being, objective setting where they will have to address factors such as strategic goals, day-to-day efficiency from operations, reporting and compliance. The second component, looks at the event identification and risk response. This is where management will identify threats, analyse risks and implement cost-effective counter-measures. Risk response is the third component that will be included in the consideration as this is the aspect which identifies the business risks along with their causes and responses to create a risk register. As internal controls are one of the main elements in compiling an accounting information system, management have to look at the appropriate control activities. Control activities that are common in large businesses include having a good audit trail, sound personnel policies, separation of duties and physical protection of assets. When analysing a good audit trail it is important to know the uses of the trail. This involves following the path of data that is recorded in transactions and gathering the original source of documents to finalise the disposition of data. According to Kotb, “For auditors in particular, the computerisation of clients’ systems and the recent growth in e-business present new audit challenges.”
This relates to accounting information systems being so complex that auditors may struggle to find information. The key purpose of the audit trail is to verify the accuracy of any recorded transactions and to detect any errors or irregularities. This is why it is essential that accounting information systems ensure they are sufficient enough to allow management to have a good audit trail. An organisation also has to adhere their accounting information systems to make sure they have sound personnel policies. As there is specific procedures for hiring employees it is important that information systems have an efficient way of holding and searching employee details. For example, if an employee has undergone specific training programs then the systems need to record and show this information clearly as it may be relating to the ability to complete specific jobs. The separation of duties is another example of control activities whereby management structure the work assignments of employees. This may be where an employee checks another employee’s work to ensure accuracy and compliance. An example of separation of duties may be authorising transactions or recording transactions.
To conclude, it is evidently clear the importance that accounting information systems has on the organisation as a whole. As the choice and implementation of the systems is under control of management they must ensure to take account of not along how the information is used but also that the users are fully aware of the system to ensure effectiveness. Some academics believe that accounting information systems and the organisations in some way shape each other and from this report the assumption is strengthened. Almost all aspects of the accounting information systems are designed or tailored to the way in which the organisation operates or how it should adhere to an appropriate system.
Hopwood, Anthony G. (2009). The economic crisis and accounting. : Implications for the research community. 1 (1), 1. Kotb, Amr. (2012). E-business audit. Advisory jurisdiction or occupational invasion. 1 (1), 2.
Princeton University. (2012). Word net search. Available: http://wordnetweb.princeton.edu/perl/webwn?s=internal%20control. Last accessed 27 Oct 2013. University of Arizona . (2012). AIS 697A . Available: https://lro.library.arizona.edu/course-guide/330-AIS-697A. Last accessed 27 Oct 2013. Williams, Jan R. (2008). Accounting Systems. Available: highered.mcgraw-hill.com. Last accessed 27 Oct 2013.