Q.4 Briefly explain the various credit loss estimation techniques.

Answer:

(20)

Answer on pdf

Q.5 How an effective Accounting Information System can be developed?

(20)

Answer:
An accounting information system (AIS) is a structure that a business uses to
collect, store, manage, process, retrieve and report its financial data so that
it can be used by accountants, consultants, business analysts,
managers, chief financial officers (CFOs), auditors and regulatory and tax
agencies. In particular, specially trained accountants work with AIS to ensure
the highest level of accuracy in a company's financial transactions and
recordkeeping and to make financial data easily available to those who
legitimately need access to it, all while keeping data intact and secure. This
article will describe the primary components of an AIS and some of its reallife applications.
Components of an Accounting Information System
Accounting information systems generally consist of six main parts: people,
procedures and instructions, data, software, information technology
infrastructure and internal controls. Let's look at each component in detail.
People
The people in an AIS are simply the system users. Professionals who may
need to use an organization's AIS include accountants, consultants, business
analysts, managers, chief financial officers and auditors.

An AIS helps the different departments within a company work together. For
example, management can establish sales goals for which staff can then
order the appropriate amount of inventory. The inventory order notifies the
accounting department of a new payable. When sales are made, sales
people can enter customer orders, accounting can invoice customers, the
warehouse can assemble the order, the shipping department can send it off,
and the accounting department gets notified of a new receivable. The
customer service department can then track customer shipments and the
system can create sales reports for management. Managers can also see
inventory costs, shipping costs, manufacturing costs and so on.
With a well-designed AIS, everyone within an organization who is authorized
to do so can access the same system and get the same information. An AIS
also simplifies getting information to people outside of the organization when
necessary. For example, consultants might use the information in an AIS to
analyze the effectiveness of the company's pricing structure by looking at
cost data, sales data and revenue. Also, auditors can use the data to assess
a company's internal controls, financial condition and compliance with
the Sarbanes-Oxley Act (SOX).
The AIS should be designed to meet the needs of the people who will be
using it. The system should also be easy to use and should improve, not
hinder, efficiency.
Procedure and Instructions
The procedure and instructions of an AIS are the methods it uses for
collecting, storing, retrieving and processing data. These methods will be
both manual and automated, and the data can come from both internal
sources (e.g., employees) and external sources (e.g., customers' online
orders). Procedures and instructions will be coded into AIS software; they
should also be "coded" into employees through documentation and training.
Procedures and instructions must be followed consistently to be effective.
To store information, an AIS must have a database structure such as
structured query language (SQL), a computer language commonly used for
databases. The AIS will also need various input screens for the different

types of system users and different types of data entry, as well as different
output formats to meet the needs of different users and different types of
information. (Does a job as a financial sleuth sound interesting to you?
Data
The data contained in an AIS is all the financial information pertinent to the
organization's business practices. Any business data that impacts the
company's finances should go into an AIS. The data included in an AIS will
depend on the nature of the business, but it may consist of the following:

sales orders

customer billing statements

sales analysis reports

purchase requisitions

vendor invoices

check registers

general ledger

inventory data

payroll information

timekeeping

tax information

This data can then be used to prepare accounting statements and reports
such as accounts receivable aging, depreciation/amortization schedules, trial
balance, profit and loss, and so on. Having all this data in one place - in the
AIS - facilitates a business's recordkeeping, reporting, analysis, auditing and
decision-making activities. For the data to be useful, it must be complete,
correct and relevant.

On the other hand, examples of data that would not go into an AIS include
memos, correspondence, presentations and manuals. These documents
might have a tangential relationship to the company's finances, but
excluding the standard footnotes, they are not really part of the company's
financial recordkeeping.
Software
The software component of an AIS is the computer programs used to store,
retrieve, process and analyze the company's financial data. Before there
were computers, AISs were manual, paper-based systems, but today, most
companies are using computer software as the basis of the AIS. Small
businesses might use Intuit's Quickbooks, Sage Peachtree Accounting, or
Microsoft's Small Business Accounting but there are many others. Small to
mid-sized businesses might use SAP's Business One. Mid-sized and large
businesses might use Microsoft's Dynamics GP, Sage Group's MAS 90 or MAS
200, Oracle's Peoplesoft or Epicor Financial Management.
Quality, reliability and security are key components of effective AIS software.
Managers rely on the information it outputs to make decisions for the
company, and they need high-quality information to make sound decisions.
AIS software programs can be customized to meet the unique needs of
different types of businesses. If an existing program does not meet a
company's needs, software can also be developed in-house with substantial
input from end users or can be developed by a third-party company
specifically for the organization. The system could even be outsourced to a
specialized company.
Information Technology Infrastructure
Information technology infrastructure is just a fancy name for the hardware
used to operate the accounting information system. Most of these hardware
items are things a business would need to have anyway - they include
personal computers, servers, printers, surge protectors, routers, storage
media, and possibly a backup power supply. In addition to cost, factors to
consider in selecting hardware include speed, storage capability and whether
it can be expanded and upgraded.

Perhaps most importantly, the hardware selected for an AIS must be

compatible with the intended software. Ideally, it would be not just
compatible, but optimal, a clunky system will be much less helpful than a
speedy one. One way businesses can easily meet hardware and software
compatibility requirements is by purchasing a turnkey system that includes
both the hardware and the software that the business needs. Purchasing a
turnkey system means, theoretically, that the business will get an optimal
combination of hardware and software for its AIS.
A good AIS should also include a plan for maintaining, servicing, replacing
and upgrading components of the hardware system, as well as a plan for the
disposal of broken and outdated hardware so that sensitive data is
completely destroyed.
Internal Controls
The internal controls of an AIS are the security measures it contains to
protect sensitive data. These can be as simple as passwords or as complex
as biometric identification. An AIS must have internal controls to protect
against unauthorized computer access and to limit access to authorized
users which includes some users inside the company. It must also prevent
unauthorized file access by individuals who are allowed to access only select
parts of the system.
An AIS contains confidential information belonging not just to the company
but also to its employees and customers. This data may include Social
Security numbers, salary information, credit card numbers, and so on. All of
the data in an AIS should be encrypted, and access to the system should be
logged and surveilled. System activity should be traceable as well.
An AIS also needs internal controls that protect it from computer viruses,
hackers and other internal and external threats to network security.
Furthermore, it must be protected from natural disasters and power surges
that can cause data loss. AISs In Real Life
We've seen how a well-designed AIS allows a business to run smoothly on a
day-to-day basis or hinders its operation if the system is poorly designed. A
third use for an AIS is that when a business is in trouble, the data in its AIS

can be used to uncover the story of what went wrong. The cases of
WorldCom and Lehman Brothers provide two examples.
In 2002, WorldCom internal auditors Eugene Morse and Cynthia Cooper used
the company's AIS to uncover $4 billion in fraudulent expense allocations
and other accounting entries. Their investigation led to the termination of
CFO Scott Sullivan as well as new legislation. (section 404 of the SarbanesOxley Act, which regulates companies' internal financial controls and
procedures. (Does a job as a financial sleuth sound interesting to you?
When investigating the causes of Lehman's collapse, a review of its AIS and
other data systems was a key component, along with document collection
and review and witness interviews. The search for the causes of the
company's failure "required an extensive investigation and review of
Lehman's operating, trading, valuation, financial, accounting and other data
systems," according to the 2,200-page, nine-volume examiner's report.
Lehman's systems provide an example of how an AIS should not be
structured. Examiner Anton R. Valukas's report states, "At the time of its
bankruptcy filing, Lehman maintained a patchwork of over 2,600 software
systems and applications ... Many of Lehman's systems were arcane,
outdated or non-standard."
The examiner decided to focus his efforts on the 96 systems that appeared
most relevant, and the examination required training, study and trial and
error just to learn how to use the systems.
Valukas's report also noted, "Lehman's systems were highly interdependent,
but their relationships were difficult to decipher and not well documented. It
took extraordinary effort to untangle these systems to obtain the necessary
information."
Conclusion
The six components of an AIS all work together to help key employees
collect, store, manage, process, retrieve, and report their financial data.
Having a well-developed and maintained accounting information system that

is efficient and accurate is an indispensable component of a successful

business.