Marshall B. Romney

Marshall B. Romney liri^ham YounI ... Contents Preface 19 Conceptual Foundations of Accounting Information Systems 27 ... Revenue Cycle Information Sy...

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Marshall B. Romney liri^ham YounI nivcrsitv

Paul John Steinbart . \ri:oiid Statt' l 'nivcrsitv

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Contents

Preface

19 Conceptual Foundations of Accounting Information Systems 27

CHARTER 1 Accounting Information Systems: An Overview 28 Introduction 29 Information Needs and Business Processes 31 Information Needs 31 Business Processes 32 Accounting Information Systems 36 How an AIS Can Add Value to an Organization 37 The AIS and Corporate Strategy 38 The Role of the AIS in the Value Chain 40 Summary and Case Conclusion 41 • Key Terms 42 AIS IN ACTION: Chapter Quiz 42 • Discussion Questions 43 • Problems 44 CASE 1-1 Ackoff's Management Misinformation Systems 47 AIS IN ACTION SOLUTIONS: Quiz Key 48 CHARTER 2 Overview of Transaction Processing and Enterprise Resource Planning Systems 50 Introduction 51 Transaction Processing: The Data Processing Cycle 52 Data Input 52 Data Storage 53 Data Processing 59 Information Output 59 Enterprise Resource Planning (ERP) Systems 61 Summary and Case Conclusion 64 • Key Terms 64 AIS IN ACTION: Chapter Quiz 64 • Discussion Questions 65 • Problems 66 CASE 2-1 Bar Harbor Blueberry Farm 70 AIS IN ACTION SOLUTIONS: Quiz Key 71 CHAPTER 3 Systems Documentation Techniques Introduction 75 Data Flow Diagrams 76 Subdividing the DFD 78

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CONTENTS Flowcharts 82 Types of Flowcharts 83 Program Flowcharts 86 Business Process Diagrams 88 Summary and Case Conclusion 90 • Key Terms 90 AIS IN ACTION: Chapter Quiz 90 • Comprehensive Problem 91 • Discussion Questions 92 • Problems 92 CASE 3-1 Dub5 99 AIS IN ACTION SOLUTIONS: Quiz Key 100 • Comprehensive Problem Solution 102 CHAPTER 4 Relational Databases 108 Introduction 108 Files Versus Databases 109 Using Data Warehouses for Business Intelligence 110 The Advantages of Database Systems 111 The Importance of Good Data 111 Database Systems 112 Logical and Physical Views of Data 112 Schemas 112 The Data Dictionary 114 DBMS Languages 114 Relational Databases 114 Types of Attributes 114 Designing a Relational Database for S&S, Inc. 116 Basic Requirements of a Relational Database 118 Two Approaches to Database Design 119 Creating Relational Database Queries 119 Query 1 121 Query 2 123 Query 3 124 Query 4 124 Query 5 126 Database Systems and Wie Future of Accounting 126 Summary and Case Conclusion 127 • Key Terms 128 AIS IN ACTION: Chapter Quiz 128 • Comprehensive Problem 129 • Discussion Questions 130 • Problems 130 CASE 4-1 Research Project 136 AIS IN ACTION SOLUTIONS: Quiz Key 136 • Comprehensive Problem Solution 138 • Appendix: Data Normalization 140 • Summary 143 • Second Normalization Example 143 Control and Audit of Accounting Information ••[•II Systems 147 CHAPTER 5 Computer Fraud 148 Introduction 149 AIS Threats 150 Introduction to Fraud 152 MisappropriationofAssets 153 Fraudulent Financial Reporting 154 SAS No. 99: The Auditor's Responsibility to Detect Fraud 154 Who Perpetrates Fraud and Why 155 The Fraud Triangle 155

CONTENTS Computer Fraud 160 The Rise in Computer Fraud 160 Computer Fraud Classification 162 Preventing and Detecting Fraud and Abuse 164 Summary and Case Conclusion 165 • Key Terms 166 AIS IN ACTION: Chapter Quiz 166 • Discussion Questions 167 • Problems 168 CASE 5-1 David L. Miller: Portrait of a White-Collar Criminal 170 CASE 5-2 Heirloom Photo Plans 171 AIS IN ACTION SOLUTIONS: Quiz Key 173 CHAPTER 6 Computer Fraud and Abuse Techniques 176 introduction 176 Computer Attacks and Abuse 177 Social Engineering 185 Malware 190 Summary and Case Conclusion 199 • Key Terms 200 AIS IN ACTION: Chapter Quiz 201 • Discussion Questions 202 • Problems 202 CASE 6-1 Shadowcrew 210 AIS IN ACTION SOLUTIONS: Quiz Key 211 CHAPTER 7

Control and Accounting Information Systems 214 Introduction 215 Why Threats to Accounting Information Systems are Increasing 215 Overview of Control Concepts 216 The Foreign Corrupt Practices and Sarbanes-Oxley Acts 217 Control Frameworks 218 C0BIT Framework 218 COSO's internal Control Framework 220 COSO's Enterprise Risk Management Framework 220 The Enterprise Risk Management Framework Versus the Internal Control Framework 222 The Internal Environment 222 Managements Philosophy, Operatlng Style, and Risk Appetite 223 Commltment to Integrity, Ethical Values, and Competence 223 Internal Control Oversight by the Board of Dlrectors 224 Organlzational Structure 224 Methods of Assigning Authority and Responsibiiity 224 Human Resources Standards that Attract, Develop, and Retain Competent Individuais 224 Extemal Influences 226 Objective Setting 226 Event Identification 227 Risk Assessment and Risk Response 227 Estimate Likelihood and Impact 228 Identify Controls 229 Estimate Costs and Benefits 229 Determine Cost/Benefit Effectiveness 229 Implement Control or Accept, Share, or Avoid the Risk 229 Control Aetivities 230 Proper Authorization of Transactions and Aetivities 230 Segregatlon of Duties 231 Project Development and Acquisition Controls 233 Change Management Controls 234

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CONTENTS Design and Use of Documenta and Records 234 Safeguard Assets, Records, and Data 234 Independent Check-s on Performance 235 Information and Communication 236 Monitoring 236 Perform Internal Control Evaluation 236 Implement Effective Supervision 236 Use Responsibility Accounting Systems 236 Monitor System Activities 237 Track Purchased Software and Mobile Devices 237 Conduct Periodic Audits 237 Employ a Computer Security Officer and a Chief Compliance Officer 238 Engage Forensic Specialists 238 Install Fraud Detection Software 238 Implement a Fraud Hotline 239 Summary and Case Conclusion 239 • Key Terms 240 AIS IN ACTION: Chapter Quiz 240 • Discussion Questions 242 • Problems 242 CASE 7-1 The Greater Providence Deposit & Trust Embezzlement 250 AIS IN ACTION SOLUTIONS: Quiz Key 251 CHAPTER 8 Controls for Information Security 254 Introduction 254 Two Fundamental Information Security Concepts 256 Security is a Management Issue, Not Just a Technology Issue 256 Defense-in-Depth and the Time-Based Model of Information Security 257 Understanding Targeted Attacks 258 Preventive Controls 259 People: Creation of a "Security-Conscious" Culture 259 People: Training 260 Pmcess: User Access Controls 261 It Solutions: Antimalware Controls 264 It Solutions: Network Access Controls 264 It Solutions: Device and Software Hardening Controls 269 It Solutions: Encryption 270 Physical Security: Access Controls 271 Change Controls and Charge Management 272 Detective Controls 273 Log Analysis 273 Intrusion Detection Systems 274 Penetration Testing 274 Continuous Monitoring 274 Corrective Controls 274 Computer Incident Response Team (CIRT) 275 Chief Information Security Officer (CISO) 275 Patch Management 276 Security Implications of Virtualization and the Cloud 276 Summary and Case Conclusion 277 • Key Terms 278 AIS IN ACTION: Chapter Quiz 278 • Discussion Questions 279 • Problems 280 CASE 8-1 Assessing Change Control and Change Management 283 CASE 8-2 Role-Play: Designing an Effective Information Security Program 283 AIS IN ACTION SOLUTIONS: Quiz Key 284

CONTENTS CHARTER 9 Confidentiality and Privacy Controls 286 Introduction 286 Preserving Confidentiality 287 Identify and Classify Information to be Protected 287 Protecting Confidentiality With Encryption 288 Controlling Access to Sensitive Information 288 Training 290 Privacy 290 Privacy Controls 290 Privacy Concerns 291 Privacy Regulations and Generally Accepted Privacy Principles 293 Encryption 294 Factors that Influenae Encryption Strengt# 295 Types of Encryption Systems 296 Hashing 298 Digital Signatures 298 Digital Certificates and Public Key Infrastructure 300 Virtual Private Networks (VPNS) 301 Summary and Case Conclusion 302 • Key Terms 302 AIS IN ACTION: Chapter Quiz 303 • Discussion Questions 304 • Problems 304 GASE 9-1 Confidentiality of Examination Question Papers 308 CASE 9-2 Generally Accepted Privacy Principles 308 AIS IN ACTION SOLUTIONS: Quiz Key 309 CHAPTER 10 Processing Integrity and Availability Controls 312 Introduction 312 Processing Integrity 312 Input Controls 313 Processing Controls 315 Output Controls 316 Illustrative Example: Credit Sales Processing 317 Processing Integrity Controls in Spreadsheets 318 Availability 319 Minimizing Risk of System Downtime 319 Recovery and Resumption of Normal Operations 320 Summary and Case Conclusion 324 • Key Terms 325 AIS IN ACTION: Chapter Quiz 325 • Discussion Questions 326 • Problems 327 CASE 10-1 Ensuring Systems Availability 332 CASE 10-2 Ensuring Process Integrity in Spreadsheets 333 AIS IN ACTION SOLUTIONS: Quiz Key 334 CHAPTER 11 Auditing Computer-Based Information Systems 336 Introduction 337 The Nature of Auditing 338 Overview of the Audit Process 338 The Rlsk-Based Audit Approach 340 Information Systems AudHs 341 Objective 1: Overall Security 341 Objective 2: Program Development and Acquisition 343 Objective 3: Program Modification 344 Objective 4: Computer Processing 345 Objective 5: Source Data 348 Objective 6: Data Ries 349

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Audit Software 350 Operational Audits of an AIS 352 Summary and Case Conclusion 352 • Key Terms 353 AIS IN ACTION: Chapter Quiz 353 • Discussion Questions 354 • Problems 355 CASE 11-1 Preston Manufacturing 359 AIS IN ACTION SOLUTIONS: Quiz Key 359 ßßSZn Accounting Information Systems Applications

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CHAPTER 12 The Revenue Cycle: Sales to Cash Collections 364 Introduction 366 Revenue Cycle Information System 367 Process 367 Threats and Controls 368 Sales Order Entry 370 Taking Customer Orders 371 Credit Approval 373 Checking inventory AvailaDHity 375 Responding to Customer Inquines 377 Shipping 378 Pick and Pack the Order 378 Ship the Order 380 Billing 383 Invoicing 383 Maintain Accounts Receivable 385 Cash Collections 388 Process 388 Threats and Controls 389 Summary and Case Conclusion 391 • Key Terms 392 AIS IN ACTION: Chapter Quiz 392 • Discussion Questions 393 • Problems 393 CASE 12-1 Research Project: How CPA Firms Are Leveraging New Developments in IT 401 AIS IN ACTION SOLUTIONS: Quiz Key 401 CHAPTER 13 The Expenditure Cycle: Purchasing to Cash Disbursements 404 Introduction 405 Expenditure Cycle Information System 407 Process 407 Threats and Controls 409 Ordering Materials, Supplies, and Services 412 Identifying What, When, and How Much to Purchase 412 Choosing Suppliers 415 Receiving 419 Process 419 Threats and Controls 420 Approving Supplier Invoices 421 Process 421 Threats and Controls 423 Cash Disbursements 425 Process 425 Threats and Controls 425

CONTENTS Summary and Case Conclusion 427 • Key Terms 428 AIS IN ACTION: Chapter Quiz 428 • Discussion Questions 429 • Problems 430 CASE 13-1 Research Project: Impact of Information Technology on Expenditure Cycle Aetivities, Threats, and Controls 437 AIS IN ACTION SOLUTIONS: Quiz Key 438 CHAPTER 14 The Production Cycle 440 Introduction 441 Production Cycle Information System 443 Process 444 Threats and Controls 444 Product Design 445 Process 445 Threats and Controls 447 Planning and Scheduling 447 Production Flanning Methods 447 Key Documents and Forms 447 Threats and Controls 450 Production Operations 452 Threats and Controls 452 Cost Accounting 454 Process 454 Threats and Controls 455 Summary and Case Conclusion 460 • Key Terms 461 AIS IN ACTION: Chapter Quiz 461 • Discussion Questions 462 • Problems 462 CASE 14-1 The Accountant and CIM 465 AIS IN ACTION SOLUTIONS: Quiz Key 466 CHAPTER 15 The Human Resources Management and Payroll Cycle 468 Introduction 489 HRM/Payroll Cycle Information System 470 Overview of HRM Process and Information Needs 470 Threats and Controls 473 Payroll Cycle Aetivities 475 Update Payroll Master Database 475 Validate Time and Attendance Data 477 Prepare Payroll 479 Disburse Payroll 483 Calculate and Disburse Employer-Paid Benefits Taxes and Voluntary Employee Deductions 484 Outsourcing Options: Payroll Service Bureaus and Professional Employer Organizations 485 Summary and Case Conclusion 486 • Key Terms 487 AIS IN ACTION: Chapter Quiz 487 • Discussion Questions 488 • Problems 488 CASE 15-1 Research Report: HRM/Payroll Opportunitles for CPAs 493 AIS IN ACTION SOLUTIONS: Quiz Key 494 CHAPTER 16 General Ledger and Reporting System Introduction 497 General Ledger and Reporting System 498 Process 498 Threats and Controls 499

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CONTENTS Update General Ledger 501 Process 501 Threats and Controls 501 Post Adjusting Entries 504 Process 505 Threats and Controls 505 Prepare Financial Statements 506 Process 506 Threats and Controls 510 Produce Managerial Reports 512 Process 512 Threats and Controls 512 Summary and Case Conclusion 516 «Key Terms 517 AIS IN ACTION: Chapter Quiz 517 • Discussion Questions 518 • Problems 519 CASE 16-1 Exploring XBRL Tools 523 CASE 16-2 Evaluating a General Ledger Package 523 CASE 16-3 Visualization tools for Big Data 523 AIS IN ACTION SOLUTIONS: Quiz Key 524 ÜSEBE The REA Data Model

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CHAPTER 17 Database Design Using the REA Data Model 528 Introduction 528 Database Design Process 529 Entity-Relationship Diagrams 530 The REA Data Model 531 Three Basic Types of Entities 532 Structuring Relationships: The Basic REA Template 532 Developing an REA Diagram 535 Step 1: Identify Relevant Events 535 Step 2: Identify Resources and Agents 537 Step 3: Oetermine Cardinalities of Relationships 538 Summary and Case Conclusion 544 «Key Terms 545 AIS IN ACTION: Chapter Quiz 545 • Comprehensive Problem 548 • Discussion Questions 548 • Problems 549 CASE 17-1 REA Data Modeling Extension 552 AIS IN ACTION SOLUTIONS: Quiz Key 552 • Comprehensive Problem Solution 556 CHAPTER 18 Implementing an REA Model in a Relational Database Introduction 561 Integrating REA Diagrams Across Cycles 561 Rules for Combining REA Diagrams 564 Merging Redundant Resource Entities 564 Merging Redundant Event Entities 565 Validating ttie Accuracy of Integrated REA Diagrams 566 Implementing an REA Diagram in a Relational Database 566 Step 1: Create Tables for Eacli Distinct Entity and M:N Relationship 566 Step 2: Assign Attributes to Each Table 568 Step 3: Use Foreign Keys to Implement 1:1 and 1 :N Relationships 569 Completeness Check 570 Using REA Diagrams to Retrieve Information from a Database 571 Creating Journals and Ledgers 571

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Generating Financial Statements 572 Creating Managerial Reports 573 Summary and Gase Conclusion 573 • Key Term 574 AIS IN ACTION: Chapter Quiz 574 • Comprehensive Problem 575 • Discussion Questions 575 • Problems 576 CASE 18-1 Practical Database Design 577 AIS IN ACTION SOLUTIONS: Quiz Key 577 • Comprehensive Problem Solution 579 CHAPTER 19 Special Topics in REA Modeling 582 Introduction 583 Additional Revenue and Expenditure Cycle Modeling Topics 583 Additional Revenue Cycle Events and Attribute Placement 583 Additional Expenditure Cycle Events and Attribute Placement 585 Saie of Services 588 Requisition of Intangibie Services 588 Digital Assets 589 Rental Transactions 589 Additional REA Features 591 tmployee Roles 591 M:N Agent-Event Relationships 591 Locations 591 Relationships Between Resources and Agents 591 Production Cycle REA Model 592 Additional Entities—Inteilectual Property 592 Production Cycle Events 594 New REA Feature 594 Combined HR/Payroll Data Model 595 HR Cycle Entities 595 irmcking Employees' Time 596 Firtancing Aetivities Data Model 597 Summary and Gase Conclusion 598 AIS IN ACTION: Chapter Quiz 601 • Discussion Questions 602 • Problems 603 CASE 19-1 Practical Database Assignment 607 AIS IN ACTION SOLUTIONS: Quiz Key 607 • Appendix: Extending the REA Model to Include Information About Policies 611 I2B13 The Systems Development Process

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CHAPTER 20 Introduction to Systems Development and Systems Analysis 614 Introduction 615 Systems Development 617 Fbe Systems Development Life Cycle 617 Tlie Players 618 Flanning Systems Development 619 Planning Techniques 620 Feasibility Analysis 621 Capital Budgeting: Calculating Economic Feasibility 622 Behavioral Aspects of Change 624 Why Behavioral Problems Occur 624 How People Resist Change 624 Preventing Behavioral Problems 625

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CONTENTS Systems Anaiysis 626 Initial Investigation 626 Systems Survey 627 Feasibility Study 629 Information Needs and Systems Requirements 629 Systems Anaiysis Report 631 Summary and Case Conclusion 632 • Key Terms 633 AIS IN ACTION: Chapter Quiz 634 • Comprehensive Problem 635 • Discussion Questions 635 • Problems 636 CASE 20-1 Audio Visual Corporation 643 AIS IN ACTION SOLUTIONS: Quiz Key 644 • Comprehensive Problem Solution 646 CHAPTER 21 AIS Development Strategies 648 Introduction 649 Purchasing Software 649 Selecting a Vendor 650 Acquiring Hardware and Software 650 Evaluating Proposais and Selecting a System 651 Development by In-House Information Systems Departments 653 End-User-Developed Software 653 Advantages and Dlsadvantages of End-User Computing 654 Mawaging and Controlling End-User Computing 655 Outsourcing the System 656 Advantages and Dlsadvantages of Outsourcing 656 Business Process Management 657 Internal Controls in a Business Process Management System 656 Prototyping 659 When to Use Prototyping 660 Advantages of Prototyping 660 Dlsadvantages of Prototyping 661 Computer-Aided Software Engineering 661 Summary and Case Conclusion 662 • Key Terms 663 AIS IN ACTION: Chapter Quiz 663 • Comprehensive Problem Freedom from Telemarketers—the do Not Call List 664 • Discussion Questions 664 • Problems 665 CASE 21-1 Professional Salon Concepts 670 AIS IN ACTION SOLUTIONS: Quiz Key 672 • Comprehensive Problem Solution 675 CHAPTER 22 Systems Design, Implementation, and Operation 676 Introduction 677 Conceptual Systems Design 677 Evaluate Design Alternatives 677 Prepare Design Specificmtions and Reports 679 Physical Systems Design 679 Output Design 680 File and Database Design 680 Input Design 681 Program Design 682 Procedures and Controls Design 683 Systems Implementation 684 Implementation Flanning and Site Preparation 684 Selecting and Training Personnel 685 Complete Documentation 686 Testing the System 686

CONTENTS Systems Conversion 687 Operation and Maintenance 688 Summary and Case Conclusion 689 • Key Terms 690 AIS IN ACTION: Chapter Quiz 690 • Comprehensive Problem Hershey's Big Bang ERP 691 • Discussion Questions 692 • Problems 693 CASE 22-1 Citizen's Gas Company 698 AIS IN ACTION SOLUTIONS: Quiz Key 699 • Comprehensive Problem Solution 701 Glossary 702 Index 723

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