CORE CONCEPTS OF Accounting Information Systems Eleventh Edition Nancy A. Bagranoff, DBA Professor Dean, College of Business and Public Administration Old Dominion University Mark G. Simkin, Ph.D. Professor Department of Accounting and Information Systems University of Nevada Carolyn Strand Norman, Ph.D., CPA Associate Professor Department of Accounting Virginia Commonwealth University JOHN WILEY & SONS, INC For Larry (Nancy Bagranoff) In memory of my father, Edward R. Simkin (Mark G. Simkin) Thank you to my students—especially the Spring 2009 class who helped select our cover design (Carolyn Strand Norman) VP and Publisher George Hoffman Associate Publisher Christopher DeJohn Editorial Assistant Kara Taylor Project Editor Ed Brislin Media Editor Greg Chaput Executive Media Editor Allison Morris Senior Marketing Manager Julia Flohr Marketing Assistant Laura Finley Photo Editor Hilary Newman Designer RDC Publishing Group Sdn Bhd Production Manager Janis Soo Senior Production Editor Joyce Poh Cover Credit: © Carol & Mike Werner/Visuals Unlimited This book was set by Laserwords Private Limited, and printed and bound by R.R. Donnelley. The cover was printed by R.R. Donnelley. This book is printed on acid free paper. Copyright © 2010, 2008, 2005, 2001 John Wiley & Sons, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc. 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748-6008, website http://www.wiley.com/go/permissions. To order books or for customer service please, call 1-800-CALL WILEY (225-5945). Library of Congress Cataloging-in-Publication Data Bagranoff, Nancy A. Core concept of accounting information systems / Nancy A. Bagranoff, Mark G. Simkin, Carolyn Strand Norman.—11th ed. p. cm. Includes index. ISBN 978-0-470-50702-5 (pbk.) 1. Accounting–Data processing. 2. Information storage and retrieval systems–Accounting. I. Simkin, Mark G. II. Norman, Carolyn Strand. III. Title. HF5679.M62 2010 657.0285–dc22 2009026526 Printed in the United States of America 10987654321 ABOUT THE AUTHORS Nancy A. Bagranoff received her A.A. degree from Briarcliff College, B.S. degree from the Ohio State University, and M.S. degree in accounting from Syracuse University. Her DBA degree was conferred by The George Washington University in 1986 (accounting major and information systems minor). From 1973 to 1976, she was employed by General Electric in Syracuse, New York, where she completed the company’s Financial Management Training Program. Dr. Bagranoff passed the CPA examination in the District of Columbia in 1982. She spent fall 1995 as Faculty in Residence at Arthur Andersen where she worked for the Business Systems Consulting and Computer Risk Management groups. Professor Bagranoff has published several articles in such journals as Journal of Information Systems, Journal of Accounting Literature, Computers and Accounting, The Journal of Accounting Education, Behavioral Research in Accounting, Journal of Accountancy,and The Journal of Accounting and EDP. Dr. Bagranoff is also co-author of Core Concepts of Consulting for Accountants and Core Concepts of IT Auditing. She is currently Professor of Accounting and the Dean of the College of Business and Public Administration at Old Dominion University. She was formerly President of the Information Systems section and Vice President—Education, of the American Accounting Association. She is currently the President of the American Accounting Association. Mark G. Simkin received his A.B. degree from Brandeis University and his MBA and Ph.D. degrees from the Graduate School of Business at the University of California, Berkeley. Before assuming his present position of professor in the Department of Accounting and Information Systems, University of Nevada, Professor Simkin taught in the Department of Decision Sciences at the University of Hawaii. He has also taught at California State Uni- versity, Hayward, and the Japan America Institute of Decision Sciences, Honolulu; worked as a research analyst at the Institute of Business and Economic Research at the University of California, Berkeley; programmed computers at IBM’s Industrial Development—Finance Headquarters in White Plains, New York; and acted as a computer consultant to business companies in California, Hawaii, and Nevada. Dr. Simkin is the author of more than 100 articles that have been published in such journals as Decision Sciences, JASA, The Journal of Accountancy, Communications of the ACM, Interfaces, The Review of Business and Economic Research, Decision Sciences Journal of Innovative Education, Information Systems Control Journal,andtheJournal of Bank Research. Carolyn Strand Norman received her B.S. and M.S.I.A. degrees from Purdue University and her Ph.D. from Texas A&M University. Dr. Norman is a Certified Public Accountant, licensed in Virginia. She is a retired Lieutenant Colonel who was a management analyst with the United States Air Force. At the Pentagon, she developed compensation and entitlements legislation, working frequently with House and Senate staffers. Prior to assuming her current position, Dr. Norman taught at Seattle Pacific University where she co-authored the book, XBRL Essentials with Charles Hoffman, and was selected as Scholar of the Year for the School of Business and Economics. Dr. Norman has published more than 40 articles in such journals as Behavioral Research in Accounting, Journal of Accounting and Public Policy, Journal of Information Systems, Advances in Accounting Behavioral Research, Issues in Accounting Education, Journal of Accounting Education,andResearch in Government and Nonprofit Accounting. iii PREFACE Information technologies impact every aspect of accounting, including financial reporting, managerial accounting, auditing, and tax. The nature of the work done by accountants continues to evolve as these technologies advance. For example, less than 30 years ago, accountants could have spent much of their day footing ledgers and making hand calculations. Today, of course, accountants use the many helpful functions in spreadsheet software, and update or change calculations instantly, instead of the days it would have taken with paper and pencil. Internet technologies continue to change the way accountants do things. And because most accounting systems are now computerized, accountants must understand software and system processes to effect and evaluate systems of internal control. Business and auditing failures continue to force the profession to emphasize internal controls and to rethink the state of assurance services. As a result, the subject of accounting information systems (AIS) will continue to be an important part of the new vision of the accounting profession. The purpose of this book is to help students understand basic AIS concepts. Exactly what comprises these AIS concepts is subject to some interpretation, and is certainly changing over time, but most accounting professionals believe that it is the knowledge that accountants will need for understanding and using information technologies and for knowing how an AIS gathers and transforms data into useful decision-making information. In this edition of our textbook, we include the core concepts of accounting information systems indicated by chapter in the table below. The book is flexible enough that instructors may choose to cover the chapters in any order. ACCOUNTING INFORMATION SYSTEMS COURSE CONTENT AREA COVERAGE Content Area 7,8,9 AIS Applications 7,8,9 Auditing 14 Database Concepts 4,5,6 Internal Control 10,11,12 Management of Information Systems 1,2,13 Management Use of Information 1,3,7,8,9,15 Systems Development Work 13 Technology of Information Systems 2, All Use of Systems Technology All About This Book Despite the commonality of subjects in the AAA study, the content of AIS courses continues to vary widely from school to school. Some schools, for example, use their AIS courses to teach accounting students how to use computers. In other colleges and universities, the course focuses on business processes and data modeling. Other courses emphasize transaction processing and accounting as a communication system, and have little to do with the technical aspects of how underlying accounting data are processed or stored. Given the variety of objectives for an AIS course and the different ways that instructors teach it, we developed a textbook that attempts to cover only the core concepts of AIS. In writing the text, we assumed that students have completed basic courses in financial and managerial accounting and have a basic knowledge of computer hardware and software v vi Preface concepts. The text is designed for a one-semester course in AIS and may be used at the community college, baccalaureate, or graduate level. Our hope is that individual instructors will use this book as a foundation for an AIS course, building around it to meet their individual course objectives. Thus, we fully expect that many instructors will supplement