The levels of aggregation in an accounting information system refer to the various levels at which accounting related data and information is recorded and summarized. From a top down perspective, each financial statement item is comprised of one or more account balances; each account balance is comprised of transactions of various classes; each transaction is represented by an economic event. There are thus four levels of aggregation, each of which is described below.
The top level of aggregation is the level at which the aggregated account balance data in the general ledger is summarized into a balance sheet and profit and loss statement and is referred to as the financial statement level. Each item in the financial statements is an aggregation of a number of account balances. For example, the financial statement item "Inventory" is an aggregation of a number of different inventory-related account balances.
When management prepares the financial statements, it asserts that the financial statement items are complete, valid and accurate. Auditors, in forming their opinion on the financial statements, test these assertions by gathering and evaluating audit evidence that relate to each of these financial statement level assertions.
The account balance level is the next highest level of aggregation. It is the level at which the aggregated transaction data contained in the various journals (e.g. cash receipts, sales and general journals) is recorded in, or 'posted to', the account balances in the general ledger to which the transactions relate. (In an IT environment, the account balance data may be recorded in computer files or databases). For example, if the cash receipts journal for a particular accounting period contains 300 transactions relating to four different account balances in the general ledger (e.g. trade accounts receivable, cash sales, sale of fixed assets, cash on deposit), then there are just four transfers, or 'postings', of cash receipt transactions to the four general ledger account balances during the period.
When management assert that the financial statements are complete, valid and accurate, it impliedly asserts that the underlying account balances are also complete, valid and accurate. For example, the assertion that "Inventory" in the financial statements is comcplete, valid and accurate, implies that underlying account balances such as "raw materials", "goods in transit", "finished goods", are also complete, valid and accurate.
Account balance assertion level. Auditors consider each account balance assertion individually. For example, the auditor gathers different evidence to test management's assertion that "raw materials" is complete, compared to the assertion that "raw materials" is valid.
The third highest level of aggregation is the level at which the source documents (e.g. cash receipt advices, delivery advices, journal vouchers) are processed as transactions. It is called the class of transaction level. Each source document is recorded in a journal (e.g. cash receipts journal, sales journal, general journal). There is one journal for each class of transaction. In an IT environment, the transactions may be summarized in a transaction file or recorded in a database. In this level of aggregation, the extent of summarization is usually considerable — there is just one journal for many transactions. Thus, if there are 1,000 source documents prepared during an accounting period and five different classes of transactions, the 1,000 transactions will be summarized in five different journals (or, simply, transaction summaries).
An implied assertion that an account balance is complete, valid and accurate is also an implied assertion that classes of transaction underlying the account balance are also complete, valid and accurate. For example, the assertion that "raw materials" account balance is comcplete, valid and accurate also implies that underlying classes of transactions (e.g. purchases and sales transactions) are also comcplete, valid and accurate.
The bottom level of aggregation is the level at which economic events relating to an entity (e.g. the receipt of money from a debtor, the sale of goods to a customer, the depreciation of an asset) are captured and input into the information system. This is called the economic event level. Each economic event is recorded on a source document (e.g. cash receipt advice, sales invoice, journal voucher), which in a computerized system could be in the form of a preformatted screen [fn].
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