is 530 : accounting information systems dn58412/is530/is530_f15.htm purchases & accounts...

IS 530 : Accounting Information IS 530 : Accounting Information SystemsSystems

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Purchases &Purchases &Accounts Payable/Accounts Payable/

Cash Disbursement (AP/CD)Cash Disbursement (AP/CD)Lecture 7Lecture 7

Purchasing ProcessPurchasing Process

Relationship between the purchasing process and its business environment, including the organization’s supply chain.

Improve the effectiveness of the purchasing process with new technologies (enterprise systems, e-business …)

Supply Chain Management (SCM) system in a global business environment.

Logical and physical characteristics of a typical purchasing process.

Control matrix for a typical purchasing process

IS 530 : Lecture 7 2

Process Definitions and Process Definitions and FunctionsFunctions

The purchasing process is an interacting structure of people, equipment, activities, and controls that is designed to accomplish the following:• Handle the repetitive work routines of the purchasing

department and the receiving department.

• Support the decision needs of those who manage the purchasing and receiving departments.

• Assist in the preparation of internal and external reports.


An Internal PerspectiveAn Internal Perspectiveof the Purchasing Processof the Purchasing Process


Description of Information Description of Information FlowsFlows


Possible Goal ConflictsPossible Goal Conflicts

Individual managers’ goals may not be in congruence with organizational objectives.• Purchasing may buy large quantities to reduce ordering

costs and increase discounts leading to increased receiving, inspecting, and carrying costs.

Ambiguity often exists in defining goals and success in meeting goals. • A purchasing goal might be to select a vendor who will

provide the best quality at the lowest price by the promised delivery date. Realistically, one vendor may not satisfy all three conditions.


Possible Goal Conflicts . . .Possible Goal Conflicts . . .

Prioritization of goals is necessary in choosing the best solution given the various conflicts and constraints placed on the process.• Trade-offs are made in prioritizing among the goals that

conflict.

• If the market is sensitive to satisfying customer needs, the company may pay higher prices to ensure that it can obtain the highest quality goods on a timely basis.


Organization’s Supply Chain (A Organization’s Supply Chain (A Value System)Value System)


Supply ChainSupply Chain

Supply chain: the connections from the suppliers of merchandise and raw materials through to an organization’s customers. These connections include the flow of information, materials, and services.

Organizations manage links in their supply chains to get the right goods, in the right amount, at the right time, and at minimal cost (i.e., efficiency) to create maximum value for their customers (i.e., effectiveness).


Supply Chain ManagementSupply Chain Management

Supply chain management (SCM): the combination of processes and procedures used to ensure the delivery of goods and services to customers at the lowest cost while providing the highest value to the customers.

SCM software helps an organization execute the steps in the supply chain.

The multiplication of false orders up the supply chain can cause wild demand and supply fluctuations known as the bullwhip effect.


Categories of SCM SoftwareCategories of SCM Software

Supply chain planning software • Accumulates data about orders from retail customers,

sales from retail outlets, and data about manufacturing and delivery capability to assist in planning for each of the SCM steps.

Supply chain execution software• Automates the SCM steps.

• Includes ERP software that receives and routes orders, and executes invoices.

• Many connections in the supply chain are B2B automated interfaces.


Benefits of SCMBenefits of SCM

Lower costs to the customer.Higher availability of product.Higher response to customer requests.Reduced inventories along the supply chain.Improved buyer-seller relationships.Smooth shipping and receiving.Reduced item cost.Increased customer orders.Reduced product defects.


Potential Problems with SCM Potential Problems with SCM InitiativesInitiatives

Data not collected or not shared across functional boundaries.

Information is not shared between supply chain partners.

Inaccurate data negatively affects the entire chain.

Over-reliance on demand forecasting that may be inaccurate.

Competing marketing and sales objectives can lead to unrealistic forecasts.


Mitigating Problems with SCM Mitigating Problems with SCM Initiatives Initiatives

Types of Collaboration in the Supply Chain• CRP: Continuous Replenishment also called:

o Vendor Managed Inventory (VMI)o Supplier Managed Inventory (SMI)

• Co-managed Inventory (a form of CRP)

• CFAR: Collaborative Forecasting and Replenishment (precursor to CPFR)

• CPFR: Collaborative Planning Forecasting and Replenishment


CPFR ProcessCPFR Process


Purchasing ProcessPurchasing ProcessContext DiagramContext Diagram


Purchasing ProcessPurchasing ProcessLevel - 0 DFDLevel - 0 DFD


Triggering the Purchasing Triggering the Purchasing ProcessProcess

Purchase requisition: internal request to acquire goods and services.

Requisitions are received from authorized personnel within an organization are :• For inventory replenishment.

• Received from automated inventory replenishment systems, such as SCM processes.

• Routed by workflow for approval by the requisitioning department supervisor.


Purchasing ProcessPurchasing ProcessLevel-1 DFD for 1.0Level-1 DFD for 1.0


Determining RequirementsDetermining Requirements

Need to determine what inventory to order, when to order it, and how much to order.

Push-based supply chain: goods and services are ordered in anticipation of demand based on sales and demand forecasts.

Pull-based supply chain: uses data from vendors and customers to make purchasing decisions on the basis of actual demand.


Inventory Reorder MethodsInventory Reorder Methods

Reorder point (ROP) analysis: each item is assigned a reorder point based on its sales rate.

Economic order quantity (EOQ): order quantity based on costs of ordering and carrying inventory.

ABC analysis: technique for ranking items in a group based on the output of the items. Can be used to categorize inventory items according to their importance.


Purchasing Inputs and OutputsPurchasing Inputs and Outputs

Purchase order (PO): request for the purchase of goods or services from a vendor.

Blind copy: certain data on a document (or computer screen) is blanked out (i.e., blinded), such as quantities ordered on the PO available to receiving personnel.

Vendor packing slip: accompanies the purchased inventory from the vendor and identifies the shipment.


Purchasing Inputs and Outputs Purchasing Inputs and Outputs . . .. . .

Receiving report: a document, such as a PO, annotated with the quantity received that is used to record merchandise receipts.

Acceptance report: documents services received to formally acknowledge the satisfactory completion of a service contract.


Purchasing Process Data Purchasing Process Data StoresStores

Inventory master data: record of each item stocked or regularly ordered.

Vendor master data: record of each vendor approved for use by the organization.

Purchase requisition data: data on all purchase requisitions.

Purchase order master data: open POs including status of items on order.

Purchase receipts data: record of each receipt of goods and services.


ERD for the Purchasing ERD for the Purchasing ProcessProcess


Selected Relational Tables (Partial) Selected Relational Tables (Partial)

for the Purchasing Processfor the Purchasing Process



for the Purchasing Process . . .for the Purchasing Process . . .


Technology and the Purchasing Technology and the Purchasing ProcessProcess

E-procurement: use of information technology to automate significant portions of the procurement process to reduce the number of people and amount of time required for the procurement process. For example, a purchasing organization can use intelligent agents, Web Services, and B2B exchanges.

Paperless systems: eliminate documents and forms as the medium for conducting business.


Technology and the Purchasing Technology and the Purchasing Process . . .Process . . .

B2B marketplaces: which are particular Web sites or portals that may be used as sources of supply in the procurement process.

Radio-frequency identification (RFID): a system for sending and receiving data, using wireless technology, between an RFID tag and an RFID transceiver. (RFID tags are computer chips containing information about the object to which the tag is attached and an antenna that sends and receives data.) Replacing bar-codes


Purchasing ProcessPurchasing ProcessSystems FlowchartSystems Flowchart


Purchasing ProcessPurchasing ProcessSystems Flowchart . . .Systems Flowchart . . .


Fraud and the Purchasing Fraud and the Purchasing FunctionFunction

Because the end of the purchase-to-pay process is the payment of cash, manipulation of purchasing is involved in many frauds.

Typical cases:• An employees places orders with a particular vendor in

exchange for a kickback, secret commission, or other form of inducement from the vendor.

• An employee has a conflict of interest between his responsibilities to his employer and his financial interest—direct or indirect—in a company with whom the employer does business.


Control Matrix for the Control Matrix for the Purchasing Process ..Purchasing Process ..


Control Matrix for the Control Matrix for the Purchasing Process Purchasing Process


Validity of PO InputsValidity of PO Inputs

Valid PO inputs (i.e., purchase requisitions): start with a requisition that is approved by the appropriate cost center authorities and results in POs that are themselves approved and issued to an authorized vendor.• To be added to the vendor master data, a vendor should

be investigated for the quality of its processes and products.

• By adding a vendor to the vendor master data, management has provided authorization to do business with that vendor.


Validity of Vendor Packing Slip Validity of Vendor Packing Slip InputsInputs

Valid vendor packing slip inputs are supported by an approved PO and an actual receipt of goods.• Vendor packing slips not supported by an approved PO

may result in overstocking inventory and, if the inventory cannot be used, an overstatement of the inventory asset.

• Vendor packing slips that do not correspond to an actual receipt of goods will cause inaccurate inventory records and an overstatement of inventory and liabilities.


Key Controls for the Key Controls for the Purchasing ProcessPurchasing Process

Approve purchase requisition: An authorized individual, or several individuals, such as cost center or department management, should approve purchase requisitions.

Use authorized vendor data: Vendors should be vetted to determine their suitability to provide the organization with goods and services. The screening process might include vendor financial viability and performance record.


Key Controls for the Key Controls for the Purchasing Process . . .Purchasing Process . . .

Independent vendor master data maintenance: should be a separation of duties between the personnel who create vendor records (to authorize purchases and payments) and those that create and approve POs, record accounts payable, and approve payments. Without this separation:• There could be kickbacks or conflict of interest.

• Accounts payable personnel could create a vendor account to create an invalid/fraudulent invoice.



Compare vendors for favorable prices, terms, quality, and product availability: Before executing a purchase, prospective vendors should be compared to determine that they are the optimal choice for the purchase.

Approve purchase order: appropriate personnel should approve POs to ensure that an appropriate supplier has been selected and that the correct goods and services, for the correct amounts, are being purchased.



Confirm purchase order to requesting: department: The requesting department should be informed when a PO has been issued in response to a purchase requisition.

Independent authorization to record receipt: Before a receipt can be accepted and recorded, the receipt data should be compared with the PO master data to determine that an approved PO, prepared by someone other than receiving personnel, is on file.



Compare input receipt data to PO data: Before a receipt can be accepted and recorded, the receipt data should be compared with the PO master data to determine that the correct goods have been received.

Inspect goods: To ensure that the correct goods are received in acceptable condition.


Accounts Payable /Accounts Payable /Cash Disbursement (AP/CD)Cash Disbursement (AP/CD)

Relationship between the AP/CD process and its business environment.

Improve the effectiveness of the AP/CD process with technologies ( e-invoicing, e-payments …)

Logical and physical characteristics of a typical AP/CD process.

Control matrix for a typical AP/CD


Process Definitions and Process Definitions and FunctionsFunctions

The accounts payable/cash disbursements (AP/CD) process is an interacting structure of people, equipment, activities, and controls that is designed to accomplish the following:• Handle the repetitive work routines of the accounts

payable department and the cashier.

• Support the decision needs of those who manage the accounts payable department and cashier.

• Assist in the preparation of internal and external reports.


Horizontal PerspectiveHorizontal Perspectiveof the AP/CD Processof the AP/CD Process


Description of Information Description of Information FlowsFlows


Vertical Perspective Vertical Perspective of the Purchasing and AP/CD of the Purchasing and AP/CD

ProcessesProcesses


AP/CD ProcessAP/CD ProcessLevel-0 DFDLevel-0 DFD


AP/CD ProcessAP/CD ProcessLevel-1 DFD for 1.0Level-1 DFD for 1.0


Process 1.1 : Validate InvoiceProcess 1.1 : Validate Invoice

Vendor invoice: business document—or electronic transmission—that notifies the purchaser of an obligation to pay the vendor for goods (or services) that were ordered by and shipped (or provided) to the purchaser.

Match invoice to vendor master data.Match invoice to PO and receiving report (i.e., the

three-way match).Update vendor mater data with purchase history.


AP/CD ProcessAP/CD ProcessLevel-1 DFD for 2.0Level-1 DFD for 2.0


Non-Invoiced DisbursementsNon-Invoiced Disbursements

In some cases disbursements are not invoiced, e.g., freight bills, rent, payroll.

The handling of non-invoiced disbursements depends on whether or not a voucher system is used.

A voucher system prepares a voucher for every expenditure from payroll to purchases of raw materials.


Processing Non-invoiced Processing Non-invoiced DisbursementsDisbursements


Logical Data Descriptions for the Logical Data Descriptions for the AP/CD ProcessAP/CD Process

Purchasing events data: contains, in chronological sequence, the details of each invoice that is recorded.

Accounts payable master data: repository of all unpaid vendor invoices.

Cash disbursements event data: contains, in chronological sequence, the details of each cash payment made.


ERD for AP/CD ProcessERD for AP/CD Process



for the AP/CD Processfor the AP/CD Process


Selected Relational Tables (Partial)Selected Relational Tables (Partial)for the AP/CD Process . . .for the AP/CD Process . . .


Selected Relational Tables (Partial)Selected Relational Tables (Partial) for the AP/CD Process . . . for the AP/CD Process . . .


Technology Trends and Technology Trends and DevelopmentsDevelopments

E-invoicing: processing of invoices in electronic form:

• Scan documents.

• Use purchasing cards (p-cards).

• Invoices can be submitted electronically.

E-payments: electronic submission of payments:

• EDI and XML-based technologies.

• Settled through the Automated Clearing House (ACH) network, wire transfer or debit or credit card.


Technology Trends and Technology Trends and Developments . . .Developments . . .

Evaluated receipt settlement (ERS): a process by which an organization pays for a purchase on the basis of the goods receipt.

EDI is employed in the purchase-to-pay process, including the PO (processed in the OE/S process of the vendor), advanced shipping notice (ASN), invoice, and payment.


Technology Trends and Technology Trends and Developments . . .Developments . . .

Electronic invoice presentment and payment (EIPP) systems: B2B systems that combine e-invoicing and e-payment processes to send invoices to customers via a Web portal or secure network using a third-party service provider and to receive electronic payments that are initiated by the payer, processed by the third party, and settled by the ACH network, wire transfer, or debit or credit card company.


AP/CD ProcessAP/CD ProcessSystems FlowchartSystems Flowchart


Purchase Returns and Purchase Returns and AllowancesAllowances

Sometimes defective goods are returned or an allowance is made for non-conforming items.

This exception routine usually begins at the point of inspecting and counting the goods or at the point of validating vendor invoices.

Purchaser transmits a debit memo to the vendor requesting the account adjustment.

Vendor responds with a credit memo indicating the authorized account adjustment.


AP FraudAP Fraud

AP fraud usually involve phony vendors and fictitious invoices:• Create bogus vendor record to direct fraudulent

payments to that vendor.o Control: Segregate creation of vendor records from AP/CD.o Control: When vendor records are created, compare vendor

phone number, address, etc. to employee records.

• Embezzle vendor refunds.o Control: segregate AP from cashier who receives vendor

refunds.


CD FraudCD Fraud

CD fraud includes check forgery and fraudulent wire transfers:• Stealing and passing stolen checks; changing amounts on

legitimate checks; check forgery.o Control: Segregate check preparation from check signing.o Control: Segregate disbursements from bank reconciliation.

• Capture online banking credentials with spear phishing and key logging.o Controls: Firewalls, anti-virus software, educate employees

regarding phishing.o Control: Computers used for wire transfers should be used

for no other purpose such as e-mail and Internet access.


Exposure to Loss and Destruction Exposure to Loss and Destruction of Resourcesof Resources

Resource losses due to unintentional mistakes and inadvertent errors are as costly as, or more costly, than those caused by intentional acts of fraud.

Examples:• Making payments for incorrect amounts.

• Paying the wrong vendor.

• Paying the same invoice twice.


Control Matrix for the AP/CD Control Matrix for the AP/CD ProcessProcess


Validity of AP/CD InputsValidity of AP/CD Inputs

Input validity (IV) of vendor invoices: Achieved when recorded vendor invoices are for goods actually ordered and actually received (i.e., the invoices are supported by proper POs and receiving reports).

Input validity (IV) of payment inputs: Achieved when there is a documented valid, unpaid vendor invoice for each payment.


Key Controls for the AP/CD Key Controls for the AP/CD ProcessProcess

Independent validation of vendor invoices: authority to record a vendor invoice should come from the PO and receiving report data created by entities other than the entity that records the vendor invoice.

Match invoice, purchase order, and receiving report: The invoice should be matched to the PO and receiving report data to ensure that items on the invoice were ordered and received and that the invoice is accurately recorded.


Key Controls for the AP/CD Key Controls for the AP/CD Process . . .Process . . .

Independent authorization to make payment: accounts payable records on which the payment is based should be created by an entity other than the entity that executes the payment.

Reconcile bank account: Records of cash disbursements should be matched to the bank’s records to ensure that all disbursements actually made by the bank were authorized and accurate.


is 530 : accounting information systems dn58412/is530/is530_f15.htm purchases & accounts...

Documents

purchasing goal

typical purchasing process

purchasing department

supply chainsupply chain

purchasing processis

purchasing processrelationship

supply fluctuations

process definitions