I S 5 3 0 : A c c o u nti ng I n f orm at ion S y s t em s
h t t p : / / w w w. c s u n . e d u / ~ d n 5 8 4 1 2 / I S 5 3 0 / I S 5 3 0 _ F 1 5 . h t m
Purchases &
Accounts Payable/
Cash Disbursement (AP/CD)
Lecture 7
Purchasing 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 Functions
 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.
IS 530 : Lecture 7
3
An Internal Perspective
of the Purchasing Process
IS 530 : Lecture 7
4
Description of Information Flows
IS 530 : Lecture 7
5
Possible 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.
IS 530 : Lecture 7
6
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.
IS 530 : Lecture 7
7
Organization’s Supply Chain (A Value System)
IS 530 : Lecture 7
8
Supply 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).
IS 530 : Lecture 7
9
Supply 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.
IS 530 : Lecture 7
10
Categories 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.
IS 530 : Lecture 7
11
Benefits 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.
IS 530 : Lecture 7
12
Potential Problems with SCM Initiatives
 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.
IS 530 : Lecture 7
13
Mitigating Problems with SCM 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
IS 530 : Lecture 7
14
CPFR Process
IS 530 : Lecture 7
15
Purchasing Process
Context Diagram
IS 530 : Lecture 7
16
Purchasing Process
Level - 0 DFD
IS 530 : Lecture 7
17
Triggering the Purchasing Process
 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.
IS 530 : Lecture 7
18
Purchasing Process
Level-1 DFD for 1.0
IS 530 : Lecture 7
19
Determining 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.
IS 530 : Lecture 7
20
Inventory 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.
IS 530 : Lecture 7
21
Purchasing Process
Level-1 DFD for 2.0
IS 530 : Lecture 7
22
Purchasing Process
Level-1 DFD for 3.0
IS 530 : Lecture 7
23
Purchasing 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.
IS 530 : Lecture 7
24
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.
IS 530 : Lecture 7
25
Purchasing Process Data Stores
 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.
IS 530 : Lecture 7
26
ERD for the Purchasing Process
IS 530 : Lecture 7
27
Selected Relational Tables (Partial)
for the Purchasing Process
IS 530 : Lecture 7
28
Selected Relational Tables (Partial)
for the Purchasing Process . . .
IS 530 : Lecture 7
29
Technology and the Purchasing Process
 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.
IS 530 : Lecture 7
30
Technology and the Purchasing 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
IS 530 : Lecture 7
31
Purchasing Process
Systems Flowchart
IS 530 : Lecture 7
32
Purchasing Process
Systems Flowchart . . .
IS 530 : Lecture 7
33
Fraud and the Purchasing Function
 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.
IS 530 : Lecture 7
34
Control Matrix for the Purchasing Process ..
IS 530 : Lecture 7
35
Control Matrix for the Purchasing Process
IS 530 : Lecture 7
36
Validity 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.
IS 530 : Lecture 7
37
Validity of Vendor Packing Slip Inputs
 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.
IS 530 : Lecture 7
38
Key Controls for the Purchasing 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.
IS 530 : Lecture 7
39
Key Controls for the 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.
IS 530 : Lecture 7
40
Key Controls for the Purchasing Process . . .
 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.
IS 530 : Lecture 7
41
Key Controls for the Purchasing Process . . .
 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.
IS 530 : Lecture 7
42
Key Controls for the Purchasing Process . . .
 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.
IS 530 : Lecture 7
43
Accounts Payable /
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
IS 530 : Lecture 7
44
Process Definitions and Functions
 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.
IS 530 : Lecture 7
45
Horizontal Perspective
of the AP/CD Process
IS 530 : Lecture 7
46
Description of Information Flows
IS 530 : Lecture 7
47
Vertical Perspective
of the Purchasing and AP/CD Processes
IS 530 : Lecture 7
48
AP/CD Process
Level-0 DFD
IS 530 : Lecture 7
49
AP/CD Process
Level-1 DFD for 1.0
IS 530 : Lecture 7
50
Process 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.
IS 530 : Lecture 7
51
AP/CD Process
Level-1 DFD for 2.0
IS 530 : Lecture 7
52
Non-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.
IS 530 : Lecture 7
53
Processing Non-invoiced Disbursements
IS 530 : Lecture 7
54
Logical Data Descriptions for the AP/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.
IS 530 : Lecture 7
55
ERD for AP/CD Process
IS 530 : Lecture 7
56
Selected Relational Tables (Partial)
for the AP/CD Process
IS 530 : Lecture 7
57
Selected Relational Tables (Partial)
for the AP/CD Process . . .
IS 530 : Lecture 7
58
Selected Relational Tables (Partial)
for the AP/CD Process . . .
IS 530 : Lecture 7
59
Technology Trends and Developments


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.
•
•
•
•
•
IS 530 : Lecture 7
60
Technology Trends and 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.
IS 530 : Lecture 7
61
Technology Trends and 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 thirdparty 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.
IS 530 : Lecture 7
62
AP/CD Process
Systems Flowchart
IS 530 : Lecture 7
63
Purchase Returns and Allowances
 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.
IS 530 : Lecture 7
64
AP 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.
IS 530 : Lecture 7
65
CD 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.
IS 530 : Lecture 7
66
Exposure to Loss and Destruction of 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.
IS 530 : Lecture 7
67
Control Matrix for the AP/CD Process
IS 530 : Lecture 7
68
Validity 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.
IS 530 : Lecture 7
69
Key Controls for the AP/CD Process
 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.
IS 530 : Lecture 7
70
Key Controls for the AP/CD 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 : Lecture 7
71