Chapter 2 AIS

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Chapter 2 AIS

Auditing

Internal and Exernal

External: ensures financial statements are prepred in accordance with GAAP

Internal: help promote organizational efficiency and encourage compliance with management directives

5 steps of Ttansaction Analysis:

1. Identify accounts affected by the transaction 2. Identify the effect of the transaction on each account 3. Determine the element of financial statements represented by each account 4. Based on Dr and Cr principles, determine which kind of entity is required for each account 5. Verify Dr=Cr for each transaction

Source Documents

can be paper or electronic their use helps retain some level of objectivity can inclue purchase orders, remittance advices, and invoices

2 Basic AIS Transactions

1. External Transactions 2. Internal Transactions

Internal: include adjusting entries, closing entries, and reversing entries

External: those that involve exchanges of goods and services with other individuals and business entities

Accounting Cycle

1. Obtain information about external transactions from source documents 2. Analyze transactions 3. Record transactions in journal 4. Post to general ledger 5. Prepare unadjusted trial balance 6. Record adjusting entries and post to general ledger 7. Prepare adjusted trial balance 8. Prepare financial statements 9. Close temporary accounts to retained earnings (year end) 10. Prepare post-closing trial balance (year-end)

How do these steps relate to the five elements of AIS?

Step 1 (input) Steps 2-7 & 9-10 (processes) Step 8 (output)- general purpose financial stmts

What is Accounting?

Financial Statements of Accounting:

1. Income Statement 2. Statement of changes in Stockholder's Equity 3. Balance Sheet 4. Statement of Cash Flows

The process of identifying, measuring, and communicating economic information to permit informd judgements and decisions by users of the information