1. Accounting Information Systems: A Business Process Approach Chapter Nine: The Acquisition Cycle - Purchasing and Receiving

2. Learning Objective §Interpret activity diagrams UML class diagram, and record layouts §Identify execution and recording risks for the purchasing and receiving process §Analyze how workflow controls can be used to address execution and recording risks §Used a typical acquisition cycle application and control

3. Learning Objective (Continue) §Execution Risks §Recording Risks §Control over Purchasing and Receiving §Types of Workflow Control

4. Risks and Control in Purchasing and Receiving §Segregation of duties §Use of information from prior events to control activities §Required sequence of events § Follow-up on event §Sequence of prenumbered documents §Recording of internal agent(s) accountable for an event in a process §Limitation of access to assets and information §Reconciliation of records with evidence of assets

5. Workflow Controls After this chapter you should understand: §Typical events and processes In purchasing and receiving §Execution and recording risks in the acquisition cycle §How work flow and input controls improve data entry and processing

6. Exhibits: 9.3, 9.4, 9.5 Tables: 9.1 - 9.5

7. Exhibit 9.3 Execution and Recording Risks in an Acquisition Cycle—Purchasing and Receiving A.Execution risks for receiving goods and services. Execution risks are risks that are associated with the actual exchange of goods or services with the supplier.  Unauthorized goods or services received  Expected receipt of goods or services did not occur, occurred late, or was duplicated unintentionally  Wrong type of product or service received  Wrong quantity, quality, or price  Wrong supplier B.Recording risks. Recording risks represent the risk that event information is not captured accurately in an organization’s information system. As indicated earlier, for the purchasing and receiving function, events include creating requisitions, purchase orders, and receiving goods and services.  Event recorded (requisition, purchase order, or receipt) that never occurred  Event not recorded at all, recorded late, or unintended duplication of recording  Errors in recording data items such as the following:  Wrong type of product or service  Wrong quantity or price  Wrong external or internal agent  Wrong recording of other data items that are stored in event records such as dates, credit terms, general ledger accounts, etc.

8. Exhibit 9.4 Workflow Controls Workflow controls include the following (see Exhibit 4.10 on page 143): 1. Segregation of duties. 2. Use of information from prior events to control activities. 3. Required sequence of events. 4. Follow-up on events. 5. Sequence of prenumbered documents. 6. Recording of internal agent(s) accountable for an event in a process. 7. Limitation of access to assets and information. 8. Reconciliation of records with physical evidence of assets.

9. Exhibit 9.5 Input Controls Input controls are used to improve the accuracy and validity of data entry. In Exhibit 7.3 on page 329, the following input controls were identified:  Drop-down or look-up menus that provide a list of possible values to enter.  Scan data rather than entering it.  Record checking to determine whether data entered were consistent with data entered in a related table.  Confirmation of data that were entered by a user by displaying related data from another table.  Referential integrity controls to ensure that event records are related to the correct master file records.  Format checks to limit data entered to text, numbers, and date.  Validation rules to limit the data that can be entered to certain values.  Use of defaults from data entered in prior sessions.  Computer-generated values entered in records.  Prompt users to accept/reject data.  Batch control totals taken before data entry compared to printouts after data entry.  Review of edit report for errors before posting.  Exception reports that list cases where defaults were overridden or where unusual values were entered.

10. Table 9.1 Identification of Events in ELERBE’s Purchasing/Receiving Process Event NumberEventActivities E1Prepare requisitionRequestor prepares a paper purchase requisition form E2Approve requisitionSupervisor reviews requisition; checks that budget is available; approves requisition E3Record requisitionSecretary records requisition in computer E4Prepare purchase orderPurchasing officer reviews and approves requisition; records purchase order (PO); sends PO to supplier E5Receive goodsReceiving clerk receives goods; checks goods; records receipt

11. Table 9.2 Workflow Table AgentActivity Prepare requisition (E1) Requestor 1. Completes a paper purchase requisition form for the item or service. Approve requisition (E2) 2. Gives requisition to supervisor. Supervisor 3. Reviews requisition. 4. Approves requisition. Record requisition (E3) Supervisor 5. Gives requisition to secretary. Secretary 6. Enter requisition data. Computer 7. Checks employee information with Employee Table. 8. Checks supplier information with Supplier Table. 9. Checks inventory information with Inventory Table. 10. Checks that requisition is complete. 11. Creates a record in the Requisition Table. Prepare purchase order (E4) Purchasing12. Reviews new requisitions. officer13. Records approval. Computer14. Creates record in Purchase_Order Table. 15. Prints purchase order. Purchasing officer 16. Mails purchase order to supplier. Receive goods (E5) Supplier17. Sends goods. Receiving clerk18. Receives the goods. 19. Examines packing slip for Purchase_Order#. 20. Enters Purchase_Order# into computer. 21. Enters Quantity_Received. Computer22. Creates record in Receipt Table. 23. Updates Quantity_On_Hand in Inventory Table (if this was a purchase of materials inventory). Receiving clerk24. Delivers goods to requestor. Requestor25. Signs for goods.

12. Table 9.3 Events and Tables Used Transaction Tables EventNeededMaster Tables UsedComments PrepareNoneNoneEvent data are not entered requisition (E1)in computer. ApproveNoneNoneEvent data are not entered requisition (E2)in computer. Record requisition (E3)RequisitionInventoryWe assume that the requestor Employee (requestor)and supervisor are identified, Employeebut the secretary is not (supervisor)identified in the requisition. Supplier Prepare purchasePurchase OrderEmployee order (E4)(purchasing officer) Supplier Receive goods (E5)ReceiptEmployee (receiving clerk) Supplier

13. Table 9.4 Record Layouts for Purchasing and Receiving Supplier Table Sup-ContactTele-G/L_Dis-DiscountBalanceYTD_Pur- plier# NameAddress_Personphone#AccountDuecount_Rate_Duechases 349 SmithFall RiverJon508-555-11003010.02$0 $0 Employee Table Employee#NameJob Title 122-22-3333Mike MorganInventory clerk 613-20-7891Deborah ParkerSupervisor 074-31-2525Stephen LarsonPurchasing officer 131-31-3131Kevin SmithReceiving clerk Inventory Table Descrip-U_ofRe- G/L_ G/L_Sup-Quantity_Quantity_Recent Item#tion_Morder Inventory COGSMethodplier#On_OrderOn_Hand_Cost 402Blank CDCase10 1100 5200FIFO34900 Requisition Table (E3) Requisition#Requisition_DateEmployee# (Requestor)Employee# (Supervisor)Supplier# 107705/15/03122-22-3333613-20-7891349 Requisition__Detail Table (E3) Requisition#Supplier_Product#Item#QuantityPrice 1077C-73140212$13 1077M-1992419 5$18

14. Table 9.4 Record Layouts for Purchasing and Receiving (Concluded) Purchase_Order Table (E4) PurchasePurchase_Employee#Shipping_ _Order#Requisition#Order_Date(purchasing officer) Supplier#Method 599107705/17/03074-31-2525349UPS Purchase_Order_Detail Table (E4) PurchaseSupplier_Quantity_Quantity_Quantity_ _Order#Product#Item#OrderedReceivedCanceledPrice 599C-1724021200$11 599M-1992419 500$18 Receipt_Detail Table (E5) Receipt#Item#Quantity 140540210 1405419 5 Receipt Table (E5) Receipt#Purchase_Order#Receiving_DateEmployee# (Receiving Clerk) 140559905/26/03131-31-3131

15. Table 9.5 Controlling Recording Risks for Requisitions: Input Controls Data Item from Requisition FormInput Controls Requisition#A unique Requisition# can be generated by the computer. Employee#Employee could be selected from a drop-down list of employees (requestor)from Employee Table. Referential integrity could be enforced between Employee and Requisition tables to ensure that the Employee# in the Requisition Table corresponds to an actual department in the Employee Table. When a data item is entered, the system can confirm the data entry by displaying the employee’s name, once the Employee# is entered. Employee#Employee# could be selected from a drop-down list of employees (supervisor)from the Employee Table. Referential integrity could be enforced between Employee and Requisition tables to ensure that the Employee# in the Requisition Table corresponds to an actual department in the Employee Table. Confirmation could be employed here, in the same way as it was done for the Employee#. DepartmentA Department Table could be set up with Department#, Name, and other details. Department# could be selected from a drop-down list of departments from the Department Table. Referential integrity could be enforced between Department and Requisition tables to ensure that the Department# being recorded corresponds to an actual department in the Department Table. Requisition_Display current date as default. Use format checks to ensure entry Dateof valid dates.

16. Table 9.5 Controlling Recording Risks for Requisitions: Input Controls (Concluded) Data Item from Requisition FormInput Controls Supplier#Supplier# could be selected from a drop-down list of suppliers from Supplier Table. Referential integrity could be enforced between Supplier and Requisition tables to ensure that Supplier# in the Requisition Table corresponds to an actual department in the Supplier Table. Confirmation could be used if the system is programmed to display the supplier’s name once the Supplier# is entered. Item#For inventory requisitions, Item# could be selected from a drop-down list of items from the Inventory Table. Referential integrity could be enforced between Inventory and Requisition tables to ensure that the Item# in the Requisition Table corresponds to an actual part in the Inventory Table. Again, there is an opportunity for confirmation. QuantityFormat checks can be used to ensure that a numeric value is entered. Validation rules (limits) can be used to ensure that large amounts of inventory are not ordered by mistake. PriceFormat checks can be used to ensure that a numeric value is entered. Defaults can be set up so that the system shows the price of the item from the Inventory File.