AIS Chapter 13

Even with ERS, freight expenses require special consideration bc their complexity - provide training on transportation practices and terminology

"full freight allowed" supplier responsible for freight costs

process

- AOE uses an ERP system - any department can submit a request to purchase items - once the purchase request has been approved, the system searches the inventory master file to identify the preferred supplier for that item - the system then creates a purchase order that is sent to the supplier via EDI -receiving dep has access to the open purchase order file so that it can plan for and verify the validity of deliveries - A/P and dep that generate the purchase requisition also notified

Approving supplier invoices

- AP approves supplier invoices for payment - a legal obligation to pay suppliers arises at the time goods are received - when a suppliers invoice is received, the AP dept is responsible for matching it with a corresponding purchase order and receiving report - once the approver has verified that the company rec what it has ordered, the invoice is approved for payment

choosing between them depends on the types of products a company sells

- MRP more effectively used with products that have predictable patterns of demands, such as consumer staples - JIT useful for products that have relatively short life cycles and for which demand cannot be accurately predicted - imp that bus be able to quickly speed up production to meet unanticipated demand as well as to quickly stop production to avoid accumulating large inventories that must be marked down for clearance bc the product is no longer in demand

A blanket purchase order or blanket order

- a commitment to purchase specified items at designated prices from a particular suppliers for a set time period, often one year - reduce the buyers uncertainty about reliable sources of raw materials and help the supplier plan its capacity and operations more effectively

using EDI for purchase order requires additional control procedures

- access to system controlled and limited through passwords, user IDs, access control matrices, physical - protection against transmission problems provided by time-stamping and numbering all EDI transactions -encryption -digital signatures

noninventory purchases for supplies provide the biggest opp to improve the efficiency of AP and cash disbursements

- account for a large proportion of AP transactions but rep a small % of the total dollar value of all purchases -procurement cards provide one way to eliminate the need for AP to process many such small invoices

voucher system

- ad additional document called a disbursement voucher is also created when a supplier invoice is approved for payment - the disbursement voucher identifies the supplier, lists the outstanding invoices, and indicates the net amount to be paid after deducting any applicable discounts and allowances

Threats and Controls

- all expenditure cycle activities depend on the integrated database that contains info about suppliers, inventory, and purchasing activities

A just-in-time (JIT) inventory system

- attempts to minimize, if not totally eliminate, finished goods inventory by purchasing and producing goods only in response to actual, rather than forecasted, sales -characterized by frequent deliveries of small amounts of materials, parts, and supplies directly to the specific locations that require them when they are needed - a factory using will have multiple receiving docks, each assigned to accept deliveries of items needed at nearby work centers

in past, EDI was expensive

- bc it required the use of proprietary third party networks and software - the dev of standards for EDI over the internet (EDINT), such as AS2 protocol for secure electronic exchange of documents, has drastically cut the costs of EDI

errors in the inventory master data

- can result in production delays due to unanticipated shortages of key materials or unnecessary purchases and excess inventory - errors in the purchasing master data can result in unauthorized purchases and failure to take advantage of negotiated discounts

the activities in the expenditure cycle are mirror images of the basic activities performed in the revenue cycle

- close linkage between the two have implication for the design of both parties acc info systems - redesign a company rev cycle can create opp to modify expenditure cycle - the changes in company operations may necessitate corresponding changes in the operations of other companies with which it does business

A purchase order

- document or electronic form that formally requests a supplier to sell and deliver specified products at designated prices - also a promise to pay and becomes a contract once the supplier accepts it - incl name of the supplier and purchasing agent, the order and requested delivery dates, the delivery location and shipping method, and info about the items ordered - several purchase orders are generated to fill one purchase requisition, bc diff vendors may be the preferred suppliers for the various items requested

receiving report

- documents details about each delivery, incl the sate received, shipper, supplier, and purchase order number - for each item received, it shows the item number, description, unit of measure, and quantity - the receiving report also contains space to identity the persons who received and inspected the goods as well as for remarks concerning the quality of items

SOD

- employees who are responsible for controlling physical access to inventory should not be able to adjust inventoryrecords without review and approval - neither custody nor adjusting records should be responsible for the receiving or shipping functions

supplier audits

- entail having an internal auditor visit a suppliers office to check its records - objective is to identify likely to be associated with problems such as kickbacks

actual application of the EOQ approach caries depending on the type of item

- high cost items: all three types of costs are included in the formula - for low-cost or low-usage items: ordering and carrying costs are usually ignores, and the sole objective is to maintain sufficient inventory levels - the EOQ formula is used to calculate how much to order

debit memo

- in the case of damaged or poor-quality goods, a debit memo is prepared after the supplier agrees to take back the goods or to grant a price reduction - the debit memo records the adjustment being requested - one copy sent to the supplier, who creates and returns a credit memo in acknowledgement - AP dept is notified and adjusts the account balance owed to the supplier - copy of debit memo accompanies the goods to the shipping dept to authorize their return to the supplier

ordering materials, supplies, and services

- involves first identifying what,when, and how much to purchase, and then choosing from which supplier to purchase

the major cost driver in the purchasing function

- is the number of purchase orders processed - finding ways to reduce the number of orders processed and to streamline the steps involved can yield sig savings - EDI can improve - EDI reduces costs by eliminating the clerical work associated with printing and mailing paper documents -the time btwn recognizing the need to reorder an item and subsequently receiving it is also reduced

online banking transaction require constant monitoring

- keystroke-logging software could infect the computer used for online banking and provide criminals with the orgs banking credentials - 21.4 use of dedicated computer and browser for online banking - companies should also consider placing Automated Clearing House (ACH) blocks, which instruct banks to not allow ACH debits (outflows) from specific accounts - 21.5 ACH blocks on accounts not used for payments

there are 2 ways to process supplier invoices

- non voucher or voucher systems - non: each approved invoice (along with the supporting documentation) is posted to indiv supplier records in the AP file and is then stored in an open-invoice file - when a check is written to pay for an invoice, the voucher package is removed from the open-invoice file, the invoice is marked paid, and then the voucher package is stored in the paid invoice file

5.3 periodic physical counts of inventory -investigate any discrepancies btwn those counts and the perpetual inventory records

- one annual physical inventory count will not be sufficient to maintain accurate records - an ABC cost analysis should be used to classify items according to their importance: -the most critical (A items) should be counted most frequently, and the least critical (C items) can be counted less often - if interim counts reveal sig discrepancies w inventory records, a comprehensive count of all inventory should be immediately undertaken

21.3 access controls to EFT terminals

- passwords and user IDs should be used to specifically identify and monitor each employee authorized to initiate EFT transactions -location of OG terminal recorded -EFT above certain amount require supervisor -limit to dollar amount per day per person -time stamped and numbered - special programs, embedded audit modules, can be designed into the system to monitor all transactions and identify any that possess specific characteristics

major diff between MRP and JIT systems

- production scheduling - MRP schedule production to meet forecasted sales, thereby creating an "optimal" quantity of finished goods inventory - JIT schedule production in response to customer demands , eliminating finished goods inventory - both can reduce costs and improve efficiency

choosing suppliers

- purchasing agents (sometimes called buyers) usually perform this task

Receiving

- receiving department is responsible for accepting deliveries from suppliers - usually reports to the warehouse manager, who in turn reports to the VP of manufacturing - the inventory stores department, also reports to warehouse manager, is resp for storage of the goods - info about the receipt of ordered merchandise must be communicated to the inventory control function to update the inventory records

purchase requisition

- regardless of its source, the need to purchase goods or supplies often results in creation of a purchase requisition that identifies the requisitioner; specifies the delivery location and date needed; identifies the item numbers, descriptions, quantity, and price of each item requested; and may suggest a supplier - the person approving the purchase requisition indicates the department number and account number to which the purchase should be charged

eliminate supplier invoices "invoiceless" approach is called evaluated receipt settlement (ERS)

- replaces the 3 way matching process with a 2 way match of the purchase order and receiving report -reduces number of docs need to be matched = less mistakes

Major suppliers

- send electronic notification of coming deliveries, which enable AOE to plan to have adequate staffing to process incoming shipments at its warehouses

reverse auctions provide yet another technique to reduce purchasing-related expenses

- suppliers compete with one another to meet demand at the lowest price - bet suited to the purchase of commodity items rather than critical components for which quality, vendor reliability, and delivery perf are imp

a request to purchase goods or supplies is triggered either by the inventory control function or when employees notice a shortage of materials

- the advanced inventory control systems used in large manufacturing companies automatically generate purchase requests when the quantity of an item on hand falls below its reorder point - in small companies, the employer who use the items note when stock is running low and request that it be reordered

cash disbursements

- the cashier, who reports to the treasurer, is responsible for paying suppliers - payments are made when AP sends the cashier a voucher package

the traditional EOQ approach to inventory control often results in carrying significant amounts of inventory

- the money invested in carrying inventory earns nothing -in recent years many large US manufacturing companies have minimized or even eliminated the amount of inventory on hand by adopting either materials requirements planning or just-in-time inventory management systems

once a supplier has been selected for a product

- the suppliers identity should become part of the product inventory master record to avoid repeating the supplier selection process for every subsequent order - a list of potential alt suppliers for each item should also be maintained, in case the primary supplier is out of stock of a needed item

When an electronic funds transfer (EFT) payment is authorized or check is printed

- the system updates the accounts payable, open-invoice, and general ledger files -for each supplier, the totals of all vouchers are summed, and that amount is subtracted from the balance filed in that suppliers master file record - invoice paid and then deleted from open invoice file

process

- the traditional approach to managing inventory is to maintain sufficient stock so that production can continue without interruption even if inventory use is greater than expected or if suppliers are late in making deliveries - this is called economic order quantity (EOQ) bc it is based on calculating an optimal order size to minimize the sum of ordering, carrying, and stockout costs

counting and recording inventory deliveries is a labor intensive task

- to improve efficiency of process, require suppliers bar code or affix RFID tags to their products -EDI and satellite tech improve efficiency of inbound logistics -EDI advance shipping notices inform companies when products have been shipped - trucks linked to satellites allows bus to track exact location of all incoming shipments and ensure staff be there to unload

reduce purchasing related costs by conducting a pre-award audit

- typically used for large purchases that involve formal bids by suppliers - internal auditor visits each potential supplier who has made the final cut in the contracting process to verify the accuracy of its bid - identify simple math errors in complex pricing formulas and other discrepancies that, when corrected, can provide considerable savings

AOE

- uses batch processing to pay its suppliers - each day treasurer uses the inquiry processing system to review the invoices that are due and approves them for payment - makes payment to larger suppliers using financial electronic data interchange (FEDI) but still prints paper checks for many of its smaller suppliers

Purchase may even cause legal problems

- various gov agencies, such as the office of foreign assets control and the bureau of industry and security in the sept of commerce, maintain lists of individuals and companies with whom it is illegal to transact business - payments to entities on lists can result in substantial fines and sometime prison

process

- when delivery arrives, a receiving clerk compare the purchase order number referenced on the suppliers packing slip with the open purchase order file to verify that the goods were ordered -receiving clerk counts the quantity of goods delivered

A remittance advice is prepared for each supplier

- which lists each invoice being paid and the amounts of any discounts or allowances taken - payments made by EFT, the remittance data accompnay the EFT payment as part of the FEDI package - made by check, the printed remittance advice accompanies the signed check - after all disbursement trans have been processed, the system generates a summary journal entry, debiting AP and crediting Cash, post entry to GL

accountants need to understand how business activities are performed in order to design other reports that can help management better manage inventory

-EX useful to monitor the % of requisitions that are filled from inventory on hand - for critical items this should be close to 100% to avoid stockouts and delays in filling customer orders

Vendor-managed inventory (VMI)

-another means of reducing purchase and inventory costs -VMI program essentially outsources much of the inventory control and purchasing function: suppliers are given access to sales and inventory data and are authorized to automatically replenish inventory when stocks fall to predetermined reorder points - cuts carrying costs by reducing the amt of inv on hand and lowers processing costs by eliminating the need to generate and exchange formal purchase orders

voucher package

-combo of the supplier invoice and associated supporting documentation creates voucher package

bar coding

-errors can still occur if employee attempt to save time by scanning one item and then manually entering the quantity -records will be wrong bc number of flavors purchased will be incorrectly recorded

Process several factors should be considered when selecting suppliers:

-price -quality of materials -dependability in making deliveries

Materials requirements planning (MRP) reduce uncertainties about when raw materials are needed and therefore enable companies to carry less inventory

-seeks to reduce required inventory levels by improving the accuracy of forecasting techniques to better schedule purchases to satisfy production needs -EX the production planning department of a company using MRP would use sales forecasts to prep a detailed schedule specifying the quantities of each finished product to manufacture in a specified time period - schedule and engineering specifications for each product identify the quantities of raw materials, parts, and supplies needed in production and the point in time when they will be needed

positive pay

-sending a daily list of all legit checks to the bank, which will then clear only checks appearing on that list

upon transfer of the goods to the warehouse

-the inventory clerk verifies the count of the items and enters that data in the system - suppliers who dont send invoices- system auto schedules a payment according to the terms agreed upon -AP clerk enter info from supplier who send EDI - system compares invoice with the info contained in the purchase order and receiving report - if dont use, sent to supervisor - supplier invoice checked for math

3 possible exceptions to this process

1) receiving a quantity of goods diff from the amount ordered 2) receiving damaged goods 3) receiving goods of inferior quality that fail inspection - purchasing dept must resolve w supplier

voucher systems offer 3 advantages over nonvoucher systems

1) reduce the number of checks that need to be written 2) bc the disbursement voucher is an internally generated doc, it can be pre numbered to simplify tracking all payable 3) bc the voucher provides an explicit record that a supplier invoice has been approved for payment, it facilitates separating the time of invoice approval from the time of invoice payment

red flags that indicate potential problems include:

1. a large % of the suppliers gross sales was to the company conducting the supplier audit 2. the suppliers pricing methods differ from standard industry practice 3. the supplier does not own the equipment it rents but is itself renting that equipment from a third party 4. entertainment expenses are high in terms of % of the suppliers gross sales 5. the supplier submits altered or fictitious third party invoices 6. the suppliers address on its invoices is fictitious

the four basic expenditure cycle activities

1. ordering materials, supplies, and services 2. receiving materials, supplies, and services 3. approving supplier invoices 4. cash disbursements

1. inaccurate or invalid master data

1.1 Data processing integrity controls 1.2 Restriction of access to master data -configure the system so that only authorized employees can make changes to master data -requires changing the default configurations of employee roles in ERP systems to appropriately segregate incompatible duties 1.3 review of all changes to master data - regularly produce a report of all changes and review them to verify that the database remains accurate

10. purchasing from unauthorized suppliers - items may be of interior quality or overpriced

10.1 maintainging a list of approved suppliers and configuring the system to permit purchase order only to approved suppliers 10.2 review and approval of purchases from new suppliers 10.3 EDI - specific controls (access, review of orders, encryption, policy) - restrict access to list and periodically review the list for any unauthorized changes

11. kickbacks

11.1 prohibit acceptance of gifts from suppliers - trinkets that are clearly of inconsequential value may be allowed -tangible goods and services 11.2 job rotation and mandatory vacations - purchasing agents should not deal with the same suppliers indefinitely, doing so increases the risk that they may succumb to the constant temptations offered by an unethical supplier 11.3 requiring purchasing agents to disclose financial and personal interests in suppliers 11.4 supplier audits

12 accepting unordered items

12.1 requiring existence of approved purchase order prior to accepting any delivery

13. mistakes in counting items received

13.1 do not inform receiving employees about quantity ordered 13.2 require receiving employees to sign receiving report -assumption of responsibility 13.3 incentives -for catching discrepancies btwn packing slip and actual 13.4 use of bar codes and RFID tags 13.5 configuration of the ERP system to flag discrepancies between received and ordered quantities that exceed tolerance threshold for investigation

14. not verifying receipt of services - services were actually performed

14.1 budgetary controls - hold the appropriate supervisor accountable for all such costs incurred by that department -acknowledge receipt of services 14.2 audits - detailed reviews of contracts for services

15. theft of inventory

15.1 restriction of physical access to inventory 15.2 documentation of all transfers of inventory between receiving and inventory employees - rec dept and inventory stores dept should acknowledge the transfer of goods from rec dock into inventory 15.3 periodic physical counts of inventory and reconciliation to recorded quantities 15.4 segregation of duties: custody of inventory versus receiving

16. errors in supplier invoices

16.1 verification of invoice accuracy 16.2 requiring detailed receipts for procurement card purchases 16.3 ERS 16.4 restriction of access to supplier master data 16.5 verification of freight bill and use of approved delivery channels

17. mistakes in posting to accounts payable

17.1 data entry edit controls - compare the diff in supplier acc balances with the total amount of invoices processed - before and after processing checks -total of all supplier account balances (or unpaid vouchers) also should be reconciled periodically with the amount of the accounts payable control account in the general ledger 17.2 reconciliation of detailed accounts payable records with the general ledger control account

18. failure to take advantage of discounts for prompt payment -EX a 1% discount for paying within 10 days instead of 30 days reps a savings of 18% annually

18.1 filing of invoices by due date for discounts 18.2 cash flow budgets - that indicated expected cash inflows and outstanding commitments also can help companies plan to utilize available purchase discounts - the info comes from a number of sources -AR provides projections of future cash collections -AP and open purchase order files indicate the amount of current and pending commitments to suppliers -HR provides info about payroll

19. paying for items not received

19.1 requiring that all supplier invoices be matched to supporting documents that are acknowledged by both receiving and inventory control 19.2 budgets (for services) 19.3 requiring receipts for travel expenses 19.4 use of corporate credit cards for travel - audit trail of all charges and credits to the account

imprest fund

2 characteristics: - it is a set fixed amount -it required vouchers for every disbursement - at all times, the sum of cash plus vouchers should equal the preset fund balance

2. unauthorized disclosure of sensitive info such as banking info about suppliers and special pricing discounts offered by preferred suppliers

2.1 access controls -limit who can view such info - configure the system to limit employees ability to use the systems built in query capabilities to specific tables and fields 2.2 encryption - in storage to prevent IT employees from using operating system utilities to view -info exchanged w suppliers over the internet should by encrypted during transmission

20. duplicate payments

20.1 requiring a complete voucher package for all payments 20.2 policy to pay only from original copies of supplier invoices 20.3 canceling all supporting documents when payment is made

21. theft of cash most serious threat associated with cash disbursement

21.1 physical security of blank checks and check-signing machine 21.2 periodic accounting of all sequentially numbered checks by cashier

fraudulent disbursements, particularly the issuance of checks to fictitious suppliers, are common type

21.6 separation of check writing function from AP -only treasurer or cashier should sign checks -cashier should mail signed checks - cashier also should cancel all documents in the voucher package to prevent their being resubmitted to support another disbursement - 21.7 requiring dual signatures on checks greater than a specific amount

21.8 regular reconciliation of bank account with recorded amounts by someone independent of cash disbursements procedures

21.9 restriction of access to supplier master file 21.10 limiting the number of employees with ability to create one-time suppliers and to process invoices from one-time suppliers 21.11 running petty cash as an imprest fund - managed by employee who has no other cash handling or acc responsibilities 21.12 surprise audits of petty cash fund

22. check alteration

22.1 check-protection machines - imprinting the amount in distinctive colors 22.2 use of special inks and papers that change if altered 22.3 "positive pay" arrangements with banks

23. cash flow problems

23.1 cash flow budget

3. loss or destruction of data

3.1 back up and disaster recovery procedures - implement the ERP system as 3 separate instances: 1. production, used to process daily activity 2. used for testing and development 3. should be maintained as an online backup to the production system to provide near real-time recovery

4. poor performance

4.1 managerial reports - bc inventory reps a sizable investment of working capital, reports that help manage inventory are especially valuable - key measure of inv management is inv turnover

5. stockouts and excess inventory

5.1 perpetual inventory system 5.2 bar coding or RFID tags -to eliminate the need for manual data entry can improve the accuracy of perpetual inventory records

6. purchasing items not needed

6.1 perpetual inventory system 6.2 review and approval of purchase requisitions by supervisors 6.3 centralized purchasing function - mitigates threat of multiple purchases of the same item by diff subunits of the org resulting in carrying more inv than desired

7. purchasing at inflated prices

7.1 price lists -for frequently purchased items should be stored in the comp and consulted when orders are made 7.2 competitive bidding -for high-cost and specialized products 7.3 review of purchase orders 7.4 budgets - purchases should be charged to an account that is the responsibility of the person or department approving the requisition

8. purchasing goods or inferior quality - can result in costly production delays -costs of scrap and rework often result in higher total production costs than if higher-quality initially purchased

8.1 purchasing only from approved suppliers 8.2 review and approval of purchases from new suppliers 8.3 tracking and monitoring product quality by supplier - tracking how often its items fail to pass inspection in the receiving dept and the amount of production that has to be reworked or scrapped bc of substandard materials 8.4 holding purchasing managers responsible for rework and scrap costs

9. unreliable suppliers

9.1 requiring suppliers to possess quality certification (ISO, 9000) 9.2 collecting and monitoring supplier delivery performance data - track actual delivery dates versus those promised

other reports can help management identify the relative importance of various inventory items

EX it may be useful to classify items along several dimensions, such as frequency of purchase, frequency of use or resale, and contribution to profitability - items that are frequently purchased and used and that make a sig contribution to profitability are of high importance and should be managed so as to maintain high fill rates

New IT developments can also change how companies account for their inventory

RFID provides the capability to track indiv inventory items - can more accurately account for actual inventory-related costs by switching to the specific identification method for acc for inventories

a procurement card

a corporate credit card that employees can use only at designated suppliers to purchase specific kinds of items - spending limits can be set for each card - account numbers on each procurement card can be mapped to specifiv general ledger accounts

expenditure cycle

a recurring set of business activities and related information processing operations associated with the purchase of and payment for goods and services

RFID

affixing tags to indiv products eliminates the problems bc the reader automatically records each item -more efficient than bar codes - more expensive than bar and cannot be used for every type of product

expense data

also flow from the expenditure cycle to the general ledger and reporting function for inclusion in financial statements and various management reports

^ simplifies AP bc

company receives one monthly statement that summarizes non inventory purchases by account category - improve efficiency of cash disbursement process bc the company only has to make one payment for all non inventory purchases during a given time period, instead of making separate payments to various suppliers

easy access up to date accurate info

enables managers to closely monitor performance - however the quality of decisions depends upon the accuracy of the info in the database

kickbacks

gifts from suppliers to purchasing agents for the purpose of influencing their choice of suppliers - for the kickback to make economic sense, the supplier must find some way to recover the money spent on the bribe - usually inflating prices of sub purchases or sub with inferior quality

first general threat

inaccurate or invalid master data - errors in the supplier master data could result in ordering from unapproved suppliers, purchasing materials of inferior quality, untimely deliveries, sending payments to the wrong address, and fraudulent disbursements to fictitious suppliers

within the organization

information about the need to purchase goods and materials flows to the expenditure cycle from the revenue and production cycles, inventory control, and various departments

the primary objective in the expenditure cycle

is to minimize the total cost of acquiring and maintaining inventories, supplies, and the various services the organization needs to function

once the goods and materials arrive

notification of their receipt flows back to those sources from the expenditure cycle

ordering costs , carrying costs, stockout costs

ordering: all expenses associated with processing purchase transactions carrying: those associated with holding inventory stockout: those that result from inventory shortages, such as lost sales or production delays

The cashier

reviews checks against supporting documents and then signs them - checks above a certain amount require a 2nd by the treasurer or authorized manager - mails the signed checks and remittance advices to the suppliers - EFT trans are also performed by the cashier and reviewed by the treasurer

reorder point

specifies when to order - companies typically set the reorder point based on delivery time and desired levels of safety stock to handle unexpected fluctuations in demand

in the expenditure cycle

the primary external exchange of info is with suppliers (vendors)

inventory turnover

the ratio of COGS / inventory on hand

when a shipment arrives

the receiving dock workers use the inquiry processing system to verify that an order is expected from that supplier - most suppliers bar-code or RFID (radio frequency identification) tag their products - counting - inspect the goods and condition of items received - system checks data against the open purchase order - exact time of the delivery also is recorded to help evaluate supplier performance