SOLUTIONS For CHAPTER 12 Discussion Questions - Learnline

Accounting Information Systems, 8e
SOLUTIONS FOR CHAPTER 12

Discussion Questions
DQ12-1
Refer to operations process (effectiveness) goals shown in the control matrix

(goals A and B in Figure 12.13). For the two activities (purchasing and receiving)
describe a goal other than the one discussed in the chapter.
ANS.
Purchasing operations goals (sample):

(Contained in Figure 12.13.) Select a vendor who will provide the best quality
at the lowest price by the promised delivery date.
Support other organizational units through a prompt purchasing process and
through the timely notice of purchases placed.
Maintain an adequate stock of vendors to provide a continuous, reliable source
of supply.
Minimize purchase returns and allowances.
Facilitate cash planning.
Facilitate logistical (e.g., warehouse, receiving) planning.
Insure timely receipt of ordered goods and services.
Minimize ordering costs and the costs of the goods purchased.
Receiving operations goals (sample):
(Contained in Figure 12.13.) Ensure that the right goods in the correct amount
are received in acceptable condition in a timely manner.
Process only authorized receipts.
Promptly notify other organizational units of receipts.
Forward goods to the warehouse or other requester in a timely manner.
Minimize material handling costs.
Promptly return or otherwise dispose of defective goods or goods not in
conformity with purchasing specifications.
DQ12-2
Explain why ambiguities and conflicts exist among operations process goals, and
discuss some potential ambiguities and conflicts relative to the effectiveness goals
you described in Discussion Question 12-1.
Solutions for Chapter 12
ANS.
Conflicts exist because each organizational unit wants to do its best (or at least be
seen as doing its best). However, many (perhaps any) individual units cannot
perform at their best because trade-offs must be made so that the organization as a
whole can do its best.
Ambiguities may exist when it is not clear when a goal has been reached, which
could happen, for example, when goals have subgoals. For example, which
vendor is the best may not be clear. It may be that the purchasing office cannot
find a vendor that can offer price, quality, and delivery date. In addition, some
effectiveness goals may conflict with the other operation process goals: efficient
employment of resources and security of resources.
Conflicts that may exist relative to the processes goals in DQ 12-1 include the
following:
Adequate research may not precede a quickly prepared purchase order.
To insure authorized receipts, we may provide the receiving department with
complete copies of the purchase order. Without a blind copy of the purchase
order, receiving clerks may not pay attention to counting the goods.
To have adequate cash to make timely disbursements, we may sacrifice
interest earned on the cash.
To maintain an adequate stock of vendors, we may purchase goods with
varying degrees of quality.
By promptly forwarding goods to the warehouse, we may skimp on inspection
and counting.
To acquire the best goods at the best price, the purchasing office may spend
too much time researching the purchase.
To minimize ordering costs and to obtain quantity discounts, the purchasing
office may purchase large quantities in each order. The size of these orders
makes it difficult for the receiving department to adequately count and inspect
the goods and forward them in a timely manner to the warehouse.
To minimize purchase returns and allowances, the purchasing office might
select vendors that rate highly for quality of product and for accuracy of
filling orders but have low ratings for price of products and/or meeting
delivery deadlines.
DQ12-3
In designing vendor records, what specific data elements would you include to
help you select the best vendor for a particular purchase? Be specific as to the
nature of the data to be stored, where it would come from, and how it would be
used in the selection process.
ANS.
Accumulate purchase amounts into a year-to-date purchases field to do the

following:
Confirm the good relations that have existed with a vendor.

Distribute purchases among vendors (to maintain an adequate stock of
vendors).
Accumulate data about number of on-time deliveries, number of deliveries for
which quantities were over or short, and number of deliveries that failed quality
inspections to do the following:
Select vendors that will deliver on time with acceptable quality.
Eliminate vendors that fail consistently to meet quality, quantity, and
timeliness standards.
Use geographic location (entered at time vendor record is created) to do the
following:
Select a vendor for which we can minimize transportation time.
Use shipping terms (known internationally as Incoterms) and payment terms
(entered at time vendor record is created) to do the following:
Select a vendor that will pay for the freight.
Select a vendor that will allow delayed payments.
DQ12-4
Without redrawing the figures, discuss how Figures 12.3, 12.4, 12.6, 12.7, and
12.9 would change as a result of purchasing a technical product that could not be
inspected in the receiving department, but rather had to undergo quality control
testing before being accepted.
ANS.
Figure 12.9, bubble 3.1, and the related portions of Figure 12.4 would be affected.
A copy of the purchase order (including the technical specifications), the packing
slip, and the goods must be sent to a quality control department or other
department. While the goods are in the inspection process, they should be
recorded on the inventory master data as on site but not available for use or sale.
After the goods are approved for use, the receiving process can proceed as
depicted in Figures 12.4 and 12.9, including a change in status on the inventory
master data from on site but not available to available for sale or use.
DQ12-5
Figure 12.9 (the DFD depicting the receipt of goods and services) shows an
update to the vendor master data from bubble 3.1 and another update to that
same data from bubble 3.2. Discuss the difference(s) between these two updates.
Be specific as to the nature of the data being updated in each case. How would
your answer to this question be affected by your assumption as to whether the PO
receiving notification entering bubble 3.1 was blind as to quantities? Explain.
ANS.
The update at Figure 12.9, bubble 3.1, will be for the Product Rejection Rate
field. The update at Figure 12.9, bubble 3.2, will be for the Vendor Lead Time and
Product Fill Rate fields. The latter update cannot be performed in bubble 3.1
because current Open Purchase Order master data must be obtained to determine
expected delivery dates and partial shipments-to-date on this purchase order.
If the purchase order receiving notification is not blind, and the quantities on
the receiving notification reflected previous partial receipts, the fill rate field
could be updated at bubble 3.1.
Finally, we could argue that both updates to the vendor master data might better
be accomplished at bubble 3.2 where both the Completed Receiving report and
the Purchase Order master data are available. Also, if we look beyond the logical
description of the logical DFD, we might assume that bubble 3.2 will be
automated and therefore a more efficient place to undertake the Vendor master
data updates.
DQ12-6
In terms of effectiveness and efficiency of operations, as well as of meeting the

generic information system control goals of validity, completeness and accuracy,
what are the arguments for and against each of the following?
a. Sending a copy of the PO from the purchasing department to the receiving
department
ANS.
The receiving department can establish a tickler file to insure complete and
timely processing of receipts. Timely processing should also lead to greater
opportunity to take cash discounts.
By comparing receipts to the purchase order copy, Receiving personnel can
verify that the goods were actually ordered and that they are authorized to
receive the goods.
By establishing validity of receipts before input, we preclude the inefficient
process of backing-out unauthorized receipts.
Note: We could accomplish the same by using the Purchase Order master data that
contains a record for each open purchase order.
b. Having the quantity ordered field blinded on the receiving department copy
of the PO
ANS.
If the purchase order copy is blind as to quantities, Receiving personnel must

count every item received, thus ensuring that the right amounts are received.
However, if the Receiving personnel knew the quantities ordered, they could
double-check their work. This could be more efficient and more accurate than
if they did not know the quantities ordered.
With a blind copy of the purchase order, Receiving personnel will not know
what was ordered and cannot make decisions about whether to accept the
goods.
Note: In answering this question, you might want to distinguish between the
person responsible for counting the goods and the person responsible for
recording that quantity or entering the quantity received into a computer. The
person counting need not know the quantity ordered, whereas the person entering
the quantity counted and resolving discrepancies may want to know the quantity
ordered. The person recording might insist on a recount to resolve discrepancies,
and so on.
DQ12-7
Auditors will never allow an organization to adopt a paperless system, so why

do we waste our time bothering to study them? Discuss fully.
ANS.
Several points could be made regarding this statement. Some points relate to the
issues of exposures and controls, whereas others relate to the behavioral issues of
the relationship of the auditor and the organization. The following points, in no
particular order, some in the form of questions, might be discussed:
Which auditor are we talking about, the internal auditor or the external?
Should an auditor have veto power over business process and information
systems features?
An auditor may be required to audit a previously developed paperless process.
In such a case, the auditor must understand the process sufficiently to conduct
the audit or must decline the engagement. Understanding the technology may
allow an auditor to conduct a greater variety of audits.
Do we, as auditors, want to be perceived as a group opposed to the adoption
of modern technology?
Although the development of controls often lags the development of
technology (and abuse of that technology), controls exist to cope with most
aspects of modern technology. So, rather than resist a paperless process, the
auditor should insure that the process will be implemented with sufficient
controls and that the process be auditable.
Problems
Problems 1 and 2
Note: In the pages that follow, we provide solutions for problems 1 and 2 for both of the Case
Studies (Cases A and B) as applicable. Although the solution for each case study comprises
several pages, it is not necessarily comprehensive, nor does it represent the only acceptable
answers. Your or your students answers easily may vary in two areas. First, the grouping on the
annotated table of entities and activities determines the configuration of the current logical DFD.
Second, the analysis of controls may vary as to the effectiveness goals for the operations process
and the control plans included in the control matrix. For example, to simplify the control
matrices, we have intentionally omitted the effectiveness goal comply with the corporate code
of conduct. Further, we have included in the formal controls analysis only a sample of the
possible present and missing controls. At the end of the descriptions of the controls for each case,
we include a list of other controls that you or your students might want to include in a solution.
Stockbridge Company (Purchasing and receiving) Solutions (see Note on pg. 12-5)
P12-1 ANS.
a. Table of Entities and Activities for Stockbridge (Purchasing and

Receiving)
Entities
Para
Activities
Computer
1.
Read inventory database and prepare online report for items that have
reached reorder point.
Supplies clerk
2.
Review online report and prepare purchase requisitions.
Computer
3.
Update purchase requisition and inventory databases.
Inventory manager
4.
Log on to enterprise system to check pending purchase requisitions.
5.
Approve purchases over $1000 that are not covered under the blanket
purchase order.
6.
View approved purchase requisitions.
7.
Select vendor from the vendor database.
8.
Prepare purchase order.
9.
Save purchase order and update purchase requisition and inventory

databases.
10. Print purchase order.
Buyers
11. Mail purchase order to vendor.
Vendor
Receiving
12. Inspect and count goods received from vendor.
13. Compare count to the packing slip.
Buyers
Computer
14. Call up open PO.

Computer
15. Retrieve purchase order from the purchasing database.
Receiving
16. Enter quantities received.
Computer
17. Update purchase order and inventory database with quantity received.
18. Update general ledger for inventory received.
Purchase
order
Vendor
Purchasing
process
Packing
slip
FIGURE SM-12.1
Problem 1, part b solutioncontext diagram for Stockbridge Company

(Purchasing and Receiving)
Enterprise
database
Approved
purchase
requisition
4.0
Purchasing
Department
Online
report
Request
vendors
Purchase
requisition
Approved
vendors
1.0
Computer
Purchase
order data
Purchase
order
2.0
Supplies
Clerk
Purchase
order
Pending
requisition
Approve
requisition
3.0
Inventory
M anager
Purchase
order data
Quantity
PO
received
number
Vendor
NOTE: Only one flow into and out

of the enterprise database are
shown to represent all interactions.
FIGURE SM-12.2
Packing slip
5.0
Receiving
Department
Problem 1, part c solutionphysical DFD for Stockbridge Company

P12-1 ANS.
d. Table of Entities and Activities (Annotated) for Stockbridge Company

Entities
Para
Activities
Computer
1.
Read inventory database and prepare

online report for items that have reached
the reorder point.
Supplies clerk
2.
Review online report and prepare

purchase requisition.
Computer
3.
Update purchase requisition and

inventory databases.
Inventory manager
4.
Log on to enterprise system to check

pending purchase requisitions.
5.
Approve purchases over $1000 that are

not covered under the blanket
purchase order.
6.
View approved purchase requisition

order.
7.
Select vendor from the vendor database.
8.
Prepare prenumbered purchase order.
9.
Save purchase order and update purchase

requisition and inventory databases.
10. Print purchase order.
13. Compare count to the packing slip.
Buyers
Computer
Receiving
Process
1.0 Prepare Purchase

Requisition
2.0 Prepare Purchase

Order
14. Call up open PO.

Computer
15. Display purchase order from the system.
Receiving
16. Enter quantities received.
Computer
17. Update purchase order and inventory

database with quantity received.
18. Update general ledger for inventory

received.
3.0 Record Receipt
10
Purchase
requisition data
Vendor
data
1.0
Prepare
purchase
requisition
2.0
Prepare
purchase
order
Purchase
order
Purchase
order data
Vendor
Inventory
data
Packing
slip
3.0
Record
receipt
FIGURE SM-12.3
General
ledger data
Problem 1, part e solutionlogical DFD for Stockbridge Company

FIGURE SM-12.4
Problem 2 part a solutionsystems flowchart for Stockbridge Company (Purchasing and Receiving)
11
12
Control Goals of the Stockbridge Company Purchasing and Receiving Business Process
Control Goals of the Operations Process
Ensure
effectiveness
of
operations:
Recommended control
plans
Ensure
efficient
employment of
resources
(people,
computers)
Ensure
security of
resources
(inventory,
PO master
data)
Control Goals of the Information Process

For purchase
requisition inputs,
ensure:
IV
IC
Present Controls
P-1: Automatic notice of
items reaching
reorder point
P-1
P-2: Approve purchase

requisition
P-2
P-3: Approve purchase

requisition
P-3
P-4: Automatic notice of

open purchase
requisitions
P-4
P-5: Authorized vendor

data
P-5
P-6: Compare vendors

for prices, terms,
quality, availability
P-6
P-7: Requisition
confirmation
(update inventory
data)
P-5
P-4
P-5
P-7
IA
For purchase
order master
data, ensure:
UC
UA
For vendor packing

slip inputs, ensure:
IV
IC
IA
For purchase
order master
data, ensure:
UC
UA
13
Control Goals of the Stockbridge Company Purchasing and Receiving Business Process
Ensure
effectiveness
of
operations:
Recommended control
plans
P-8: Inspect and count

goods and match
with packing slip
Ensure
efficient
employment of
resources
(people,
computers)
For purchase
requisition inputs,
ensure:
IV
P-8
P-9: Populate input

screens with
master data
Ensure
security of
resources
(inventory,
PO master
data)
IC
IA
P-8
P-9
For purchase
order master
data, ensure:
UC
UA
For vendor packing

IV
IC
IA
P-8
P-8
P-9
P-9
M-2
M-2
Missing Controls
M-1: Approve purchase
order
M-2 Compare inputs
with master data
M-1
M-1
M-2
Possible effectiveness goals include the following:

A -- Select a vendor who will provide the best quality at the lowest price by the promised delivery date
B -- Ensure that the right goods are received in acceptable condition
IV = input validity
IC = input completeness
IA = input accuracy
UC = update completeness
UA = update accuracy
See Exhibit SM-12-1 for a complete explanation of control plans and cell entries.
FIGURE SM-12.5
Problem 2, part b (partial)control matrix for Stockbridge Company (Purchasing and Receiving)
For purchase
order master
data, ensure:
UC
UA
14
Exhibit SM-12.1
Problem 2 part b solution (partial)explanation of cell entries for control

matrix in Figure SM-12.5
Note: Purchase requisition and packing slip inputs result in immediate updates to purchase order
and inventory master data. Therefore, we do not show entries for UC or UA.
P-1:
Automatic notice of items reaching reorder point.

Efficient employment of resources: This process relieves individuals of manually
reviewing inventory item status to ensure timely preparation of requisitions for
stock replenishment.
P-2:
Approve purchase requisition.

Purchase requisition input validity: Supply clerks review and approve suggested
inventory replenishment purchases to ensure that the purchase should be made.
This authorization ensures validity of the purchase requisition.
P-3:
Approve purchase requisition.

Purchase requisition input validity: The production manager reviews and
approves purchase requisitions. This authorization ensures validity of the
purchase requisition.
P-4:
Automatic notice of open purchase requisitions.

Efficient employment of resources and purchase requisition input completeness:
This process relieves individuals of manually reviewing open purchase
requisitions to ensure timely preparation and input of purchase orders.
P-5:
Authorized vendor data.

Effectiveness goal A: Buyers in the Purchasing department select vendors by
consulting a database of vendors that contains only those vendors with whom the
company is authorized to do business. The screening of vendors that preceded
their being added to the authorized file should help ensure the achievement of
goal A: to select a vendor who will provide the best quality at the lowest price by
the promised delivery date.
Ensure efficient employment of resources: People resources (buyers time) are
used efficiently because time is not wasted in searching for vendors that might not
even supply the required goods or services.
Purchase requisition input validity: The blanket approval accorded to vendors
who are placed on the authorized vendor file also helps ensure the validity of
purchase orders issued.
P-6:
15
Compare vendors for prices, terms, quality, and availability.

Effectiveness goal A: Buyers in the Purchasing department select vendors that are
best for this purchase at this time, thus ensuring the achievement of goal A: to
select a vendor who will provide the best quality at the lowest price by the
promised delivery date.
P-7:
Requisition confirmation (update inventory data).

Purchase requisition input completeness: After the purchase order has been
entered, the purchase requisition and inventory data are updated. This serves as
confirmation of the requisition back to the requester, which is the automated
process that produced the original online report of items below reorder point.
Confirming the requisition helps to achieve the information control goal of input
completeness.
P-8:
Inspect and count goods, and match with packing slip.

Effectiveness goal B: Inspection by the receiving clerk ensures that the goods are
in acceptable condition.
Security of resources: This comparison will ensure that goods that were shipped
by the vendor have been received and will be processed into the warehouse and
not lost or otherwise diverted.
Packing slip input validity and input accuracy: This comparison should ensure
that only goods that are actually received (validity) will be entered into the system
and will be entered correctly (accuracy).
P-9:
Populate input screens with master data.

Efficient employment of resources: Automatic population of inputs from master
data results in fewer keystrokes, which should improve the speed and productivity
of the Receiving personnel.
Packing slip input validity: The code entered by the user calls up data from
existing PO records and those data establish authorization for the receipt.
Packing slip input accuracy: Fewer keystrokes and the use of data called up from
existing records reduce the possibility of input errors.
M-1:
Approve purchase order.

Effectiveness goal A: Approval by a purchasing manager would ensure that the
vendor selection rules had been followed.
Purchase requisition input validity: Approval by a purchasing manager
authorizing the purchase would support the validity of the requisition.
M-2:
Compare inputs with master data.
16
Efficient employment of resources: The computer would be better able to compare

the quantity on order on the PO data to the quantities entered than would the
Receiving personnel who must do it manually.
Packing slip input validity and input accuracy: The computer comparison should
ensure entry only of items on order, and any differences would be flagged for
correction and re-input.
Solution Note: Several controls not described in the preceding could be included
in the solution to this problem, as present or missing, depending on assumptions
made. For example:
At each data entry location, we could include automated data entry,
preformatted screens, online prompting, and confirm input acceptance.
As data is entered into the system, we might find programmed edit checks,
populate input screens with master data, and compare input data with master
data
When there are programmed edit checks, manual comparisons, and
reconciliation of batch totals, we might find procedures for rejected inputs.
Where paper documents are employed, we might find document design,
written approvals, and turnaround documents.
The packing slips are entered in receiving (i.e., close to the location where the
receipt takes place).
FIGURE SM-12.6
17
Problem 2, part c solutionannotated systems flowchart for Stockbridge Company (Purchasing and Receiving)
18
Internet Payment Platform (Purchasing and Receiving Processes) Solutions (see the Note
on pg. 12-4)
P12-1 ANS.
a. Table of Entities and Activities for Internet Payment Platform

(Purchasing and Receiving Processes)
Entities
Para
Activities
Contracting officer (CO)
1.
Receive request for purchase from various departments (assumed).
2.
Enter purchase order.
3.
Store PO in database.
4.
Print PO.
5.
Sign PO.
6.
Mail PO to supplier.
7.
Extract and format POs.
8.
Send formatted POs to enterprise adapter.
9.
Convert PO into XML.
10. Translate and encrypt POs.
11. Send POs to IPP.
12. Store POs on database.
13. Notify supplier via e-mail.
14. Log on to IPP and read PO.
15. Decide if can respond to electronic PO (or wait for paper PO).
16. Provide goods and services.
17. Send goods and packing slip (assumed).
18. Receive goods.
19. Enter receipt data (assumed).
20. Send goods to warehouse (assumed).
21. Record receipt.
Various departments
BEPMIS
CO
BEPMIS
Enterprise adapter
IPP server
Supplier employee
BEP Receiving
department
Warehouse
BEPMIS
Purchase
request
Various
departments
FIGURE SM-12.7
Purchasing
process
Warehouse
Stock
notice
Problem 1, part b solutioncontext diagram for Internet Payment

Platform (Purchasing and Receiving Processes)
19
20
Purchase
request
Various
departments
PO data
1.0
Contracting
officer
2.0
BEPM IS
Printed
PO
M ailed PO
Extracted
and formatted POs
4.0
Enterprise
adapter
Encrypted
POs in XM L
BEPM IS/IDM S
database
Appreciating
database
3.0
Supplier
5.0
IPP
server
E-mail notice
Receipt
data
Logon
Packing slip
PO data
6.0
BEP
Receiving
Warehouse
of the BEPM IS/IDM S database are
FIGURE SM-12.8
Stock
notice
Problem 1, part c solutionphysical DFD for Internet Payment Platform

P12-1 ANS.
21
d. Table of Entities and Activities (Annotated) for Internet Payment

Platform (Purchasing and Receiving Processes)
Entities
Para
Activities
2.
Enter purchase order.
BEPMIS
3.
Store PO in database.
4.
Print PO.
Contracting officer
5.
Sign PO.
BEPMIS
7.
Extract and format PO.
Enterprise adapter
9.
Convert PO into XML.
10. Translate and encrypt PO.
IPP server
12. Store POs on database.
Supplier
14. Log on to IPP and read PO.
15. Decide if can respond to electronic PO

(or wait for paper PO).
16. Provide goods and services.
BEP Receiving
19. Enter receipt data (assumed).
BEPMIS
21. Record receipt.
Process
1.0 Prepare and record

PO in BEPMIS
2.0 Extract, format, and

record PO in IPP
database
3.0 Provide goods and

services
4.0 Record Receipt
22
Various
departments
Purchase
request
1.0
Prepare and
record PO in
BEPM IS
BEPM IS
database
PO data
2.0
Extract,
format, and
record PO in
IPP database
PO
IPP appreciating
database
3.0
Provide goods
and services
Packing
slip
4.0
Record
receipt
Warehouse
Stock notice
FIGURE SM-12.9
Problem 1, part e solutionlogical DFD for Internet Payment Platform

Bureau of Engraving and Printing (BEP)

Office of
Procurement
BEPM IS/CAS
(IBM M ainframe)
Start
Enterprise Adapter
(Intel Server)
IPP Server at Xign
Supplier
Receiving
A
Record PO and
e-mail supplier
Research and
approval process
not show n
Read e-mail
Signed PO
(with FAR text)
Record PO
IPP
Appreciating
database
Key PO data
PO
acceptance
PO (with FAR
text)
Sign and
mail PO
Signed PO
(with FAR text)
IDM S
database
Log onto IPP,

request PO
display
Print PO
Extract and format

PO data, transmit
to IPP
Record
receipt data
Manually
initiated daily
batch job
Translate PO data
to XM L, transmit to
IPP server
Packing slip
E-mail notice
from IPP
Retrieve and
display PO
PO display
Receive
goods
Key receipt
data
Decide if can respond

to electronic PO (or
wait for paper PO)
Details not
show n
Provide
goods (or
services)
Signed by
contracting officer
IDM S
database
Packing slip
FIGURE SM-12.10 Problem 2, part a solutionsystems flowchart for Internet Payment Platform
23
24
Control goals of the IPP purchasing and receiving processes

Ensure effectiveness
of operations:
Recommended
control plans
Ensure
efficient
employment
of resources
(people,
com-puters)
Ensure
security of
resources
(inventory,
PO master
data)

For purchase
order inputs,
ensure:
IV
IC
For PO
master
data,
ensure:
IA
UC
For vendor
packing slip
inputs, ensure:
UA
IV
IC
For PO
master
data,
ensure:
IA
UC
UA
Present Controls
P-1: Research and
approve POs
P-1
P-1
P-2: Print PO with

FAR text
P-3: Sign PO
P-3
P-4: Send e-mail to

supplier
P-4
P-5: Count and inspect

goods
P-5
P-5
P-2
P-2
P-3
P-3
P-5
P-6: Enter receipt data

in receiving
P-6
P-7: Compare input

receipt data to PO
data
P-8: Monitor open POs
P-7
P-8
P-5
P-5
P-6
P-6
P-5
P-6
P-7
P-8
P-6
P-5
P-6
P-7
P-8
P-6
P-7
P-8
25
Control goals of the IPP purchasing and receiving processes

Ensure effectiveness
of operations:
Recommended
control plans
Ensure
efficient
employment
of resources
(people,
com-puters)
Ensure
security of
resources
(inventory,
PO master
data)

For purchase
order inputs,
ensure:
For PO
master
data,
ensure:
For vendor
packing slip
inputs, ensure:
IV
IC
IA
UC
UA
M-1
M-1
M-1
M-1
M-1
M-1
IV
IC
For PO
master
data,
ensure:
IA
UC
UA
Missing Controls
M-1: Reconcile batch
totals for
extracted POs
M-1
M-2: Programmed
edits for
formatted and
translated PO
data
M-2
M-3: Match PO and

receipt
M-4: Monitor open
POs
M-3
M-4
M-2
M-3
M-4

A = Select a vendor that will provide the best quality at the lowest price by the required delivery date.
B = Ensure that the right goods in the correct amount are received in acceptable condition.
C = Comply with Federal Acquisition Regulation (FAR)
See Exhibit SM 12.2 for a complete explanation of control plans and cell entries.
FIGURE SM-12.11 Problem 2, part b (partial)control matrix for Internet Payment Platform
M-3
M-4
IV = input validity
IA = input accuracy
M-3
M-4
26
Exhibit SM-12.2
P-1:
Problem 2, part b solution (partial)explanation of cell entries for control

Research and approve POs.

Effectiveness goal A: The PO is researched by buyers, contract specialists, and
contracting officers in the Office of Procurement to locate vendors who will
provide the best quality at the lowest price and by the required delivery date.
Purchase order input validity: Approval by the contracting officer helps to ensure
validity of the purchase order by reducing the possibility that invalid
(unauthorized) POs will be entered into BEPMIS.
P-2:
Print PO with FAR text.

Effectiveness goal C: POs with the required FAR text are printed and sent to the
suppliers.
Purchase order input validity: POs are not valid, for purposes of FAR, unless they
include the required FAR text.
P-3:
Sign PO.
Effectiveness goals A and C and purchase order input validity: The contracting
officers signature ensures that the PO indicates approval of the chosen vendor
(goal A), that the PO complies with FAR (goal C), and that only valid (authorized)
POs have been entered into BEPMIS.
P-4:
Send e-mail to supplier.

Effectiveness goal A: By sending an e-mail to the supplier to alert them that a PO
has been posted to the IPP, we improve the possibility that goods (or services)
will be provided in a timely manner.
P-5:
Count and inspect goods.

Effectiveness goals A, B, and C: By counting and inspecting the goods, Receiving
personnel can determine the quality of the goods (goal A), that we have received
the right goods in the correct amount and in acceptable condition (goal B), and
that the supplier has met the requirements of FAR specified on the PO (goal C).
Security of resources: By counting and inspecting goods, we ensure that receipts
are correctly entered into BEPMIS, thus precluding obligating the government for
inappropriate payments. Accurate inventory records can reduce inventory
shrinkage and other forms of asset losses.
Vendor packing slip input validity and input accuracy, and PO master data update
accuracy: By counting and inspecting the goods, we ensure that only actual
receipts are recorded (input validity) and are recorded for the correct amounts
27
(input accuracy). We assume that the PO master data is updated simultaneously

with the input of the receipt data.
P-6:
Entr receipt data in receiving.

Efficient employment of resources: The direct entry of input data by receiving
personnel eliminates the cost associated with the handling of the event data by
additional entities.
Ensure security of resources: The direct entry establishes the accurate recording
of what was received before there is time for shrinkage. If inventory has already
been entered, it is easier to detect that a theft has occurred. Easy detection should
reduce the likelihood that theft will happen.
Vendor packing slip input validity: Because the receipts are captured in the
Receiving department, they are more likely to reflect actual product receipts.
Vendor packing slip input completeness and PO master data update
completeness: Because the receipts are captured at the Receiving department, they
are less likely to be lost as they are transported to a data entry location. We
assume that the PO master data is updated simultaneously with the input of the
receipt data.
Vendor packing slip input accuracy and PO master data update accuracy:
Because Receiving personnel are familiar with the data being entered, they are
less likely to make input errors and can more readily correct these errors if they
occur. We assume that the PO master data is updated simultaneously with the
input of the receipt data.
P-7:
Compare input receipt data to PO data.

Effectiveness goal B and vendor packing slip input validity: By comparing the
open purchase order data to received goods, we can ensure that we have received
the goods that were ordered.
Vendor packing slip input accuracy and PO master data update accuracy. The
comparison identifies erroneous or suspect data and reduces input errors. We
receipt data.
P-8:
Monitor open POs.

Effectiveness goals A and C, vendor packing slip input completeness, and PO
master data update completeness. By monitoring and following up on open POs,
we can ensure that goods are received in a timely manner (goal A), are in
compliance with FAR (goal C), and are input in a timely manner (input
completeness). We assume that the PO master data is updated simultaneously with
the input of the receipt data.
M-1:
Reconcile batch totals for extracted POs.
28
Purchase order input validity, input completeness, input accuracy, and purchase
order master data update completeness and update accuracy: Agreement of the
batch totals at these points would ensure that only valid POs comprising the
original batch of extracted POs have been input to IPP (input validity), that all
POs were input (input completeness), and that data elements appearing on the POs
have been input correctly (input accuracy). We assume that the PO master data is
updated simultaneously with the input of the receipt data.
Effectiveness goals A and C: By ensuring that POs are recorded on IPP, we can
ensure timely receipt of the goods in compliance with FAR.
M-2:
Programmed edits for formatted and translated PO data.

Purchase order input accuracy and purchase order master data update accuracy:
Edits at BEPMIS and the Enterprise Adapter would identify erroneous or suspect
data and reduce input errors at the IPP server. We assume that the PO master data
is updated simultaneously with the input of the receipt data.
M-3:
Match PO and receipt.

Effectiveness goal B and vendor packing slip input validity: By comparing the
open purchase order data in IPP to received goods, we could ensure that we have
received the goods that were ordered.
Vendor packing slip input accuracy and PO master data update accuracy. The
comparison could identify erroneous or suspect data and reduce input errors. We
receipt data.
M-4:
Monitor open POs.

Effectiveness goals A and C, vendor packing slip input completeness, and PO
master data update completeness. By monitoring and following up on open POs
in IPP, we could ensure that goods are received in a timely manner (goal A), are in
compliance with FAR (goal C), and are input in a timely manner (input
made. For example:
data

29
30
Bureau of Engraving and Printing (BEP)

Office of
Procurement
BEPM IS/CAS
(IBM M ainframe)
Start
Enterprise Adapter
(Intel Server)
IPP Server at Xign

Re ceiving
Re cord PO
M-1, P-4, M-3
Re cord PO and
e-mail supplier
Research and
approval process
not show n
Re ad e-mail
Signed PO
(with FAR text)
M-4
P-1
IPP
Appreciating
database
Ke y PO data
IDM S
database
PO
acceptance
Supplier
E-mail notice
from IPP
Log onto IPP,

request PO
display
B
P-2
PO (with FAR
text)
P-3
Sign and
mail PO
Signed PO
(with FAR text)
Signed by
contracting officer
Print PO
Manually
initiated daily
batch job
Packing slip
Re trieve and
display PO
PO display
P-5
M-1, M-2
Extract and format

PO data, transmit
to IPP
M-1, M-2
Translate PO data
to XM L, transmit to
IPP server
Re ceive
goods
P-6
P-7
Re cord
receipt data
P-8
IDM S
database
De cide if can respond

to electronic PO (or
wait for paper PO)
Ke y receipt
data
Details not
show n
Provide
goods (or
services)
Packing slip
FIGURE SM-12.12 Problem 2, part c solutionannotated systems flowchart for Internet Payment Platform
P12-3
31
a. ANS. Comments on the efficiency and effectiveness of the purchasing process

at Mountain Bay might include the following:
Paper requisitions are not efficient and are prone to error. Automated
processes would get POs to the purchasing office in a timelier manner.
No priority assigned to parts needed immediately.
No record of purchase requisitions maintained at the maintenance office
(so additional orders might be made).
No planning for required levels of inventory.
Approved vendor file is paper-based and may not be complete (need a
card file of local vendors).
No consolidation of orders to each vendor (not practical without
computerized purchase requisitions).
Do all POs need to be signed? The approval process seems pro-forma.
Paper POs are filed by vendor. Is there any way to track an order by part
number?
No record of receipts until after the complete QC (but they are listed as
on hold).
b. ANS. Automation of the purchasing and receiving processes at Mountain Bay
to solve the problems noted in the preceding list might include the following
features (see the systems flowchart in Figure SM-12.13):
Mountain Bay Company uses an enterprise system for these purchasing
and receiving processes.
The maintenance manager enters purchase requisitions online.
The number of requisitions has been minimized by automatically
replenishing many items when they reach reorder points.
Purchasing uses a database of approved vendors.
When an existing vendor will not satisfy a need, the buyer conducts
research for other vendors on the Internet.
Whenever possible, purchases to vendors are consolidated.
The Purchasing manager approves POs online but only those that exceed a
certain dollar limit.
POs are not printed; they are stored in the Purchasing database and sent to
the vendors electronically.
32
When goods are received, they are immediately entered into the enterprise
system. Goods that require QC are designated as such and are
automatically assigned a status as awaiting QC. These goods are moved
to the QC area.
When QC members have completed their inspection, they change the
status of the items from on hold to available, and the goods are moved
into inventory or to the requester.
A database of purchase requisitions and POs is available for research by
interested parties.
Maintenance Manager
Com puter
Purchasing Departm ent
Start
Display requisition
and vendor
candidates
Enter
requisition
data
Edit input and
record requisition
33
Enterprise
database
Requisition
screen w ith
vendor
candidates
Convert requisition
to PO, enter selected
vendor, price, term s
Requisition
input screen
Requisitions and
forecasts m ay
be com bined
Internet m ay be used to
find appropriate vendors.
In w hich case a new vendor
record w ould be created.
Edit input and

record PO
PO input screen
Approve PO
Requisition
confirm ation
Record approval, release

PO, update inventory
m aster data, and confirm
to requester
PO approval
screen
Purchasing m anager
approves only those
POs over X dollars
Translate to EDI
form at and transm it
to vendor (via VAN)
VAN
FIGURE SM-12.13 Problem 3, part b solution (partial)systems flowchart for the purchasing process at Mountain Bay
34
Quality Control
Com puter
Receiving Departm ent
A
Enter PO
num ber
Shipping
docum ents
Vendor
Stock notice
Shipping
docum ents
Receiving
report screen
Attach stock
notice to goods
and forw ard
Stock notice
Inspect
goods
Com pare input quantities w ith
PO quantities, update inventory
and PO data, print stock notice.
Send to QC as appropriate
Enterprise
database
Enter status
change
Change status from

on hold to available,
print stock notice.
Stock notice
Stock notice
Stock notice
Warehouse or
requester
Attach stock
notice to goods
and forw ard
Stock notice
A
Warehouse or
requester
35
FIGURE SM-12.13 Problem 3, part b solution (partial)systems flowchart for the receiving
process at Mountain BayP12-4 ANS. 1.
I: A manager in the
Purchasing department should review and approve POs to prevent Meyer
Company from ordering unneeded inventory.
Note: We would also like to see a process to review and approve vendors to
determine that there is no conflict of interest between the proposed vendor and
Meyer Company (e.g., ownership by a buyer such as George), before purchases
are made from that vendor.
2. L: Logical and physical access controls over the PO master data should
prevent Marc from creating the bogus PO record.
3. C: A process is needed to review and approve vendors to determine that they
can deliver goods with prices that Winsted, Inc. is willing to pay on an
ongoing basis. Then, the vendor record should be created by someone who
will not be executing purchases from that vendor (i.e., independent vendor
master data maintenance).
Note: We could also argue for a process to create vendors for one-time purchases.
4. F: Emily, who works in the warehouse, should not also work in receiving and
be able to execute a goods receipt.
Note: We could also argue for a segregation of logistics (warehouse and
receiving) from purchasing so that logistics personnel cannot create POs.
5. H: Receiving clerks at Gentry, Inc. should match the goods received with
open POs to determine that the only goods ordered are received.
6. J: Before a PO is issued, buyers should research vendors to determine that
they can provide goods in a timely manner (i.e. review for availability).
7. E: Apparently, goods have gone missing after arriving in the warehouse.
Controls over access to the warehouse should prevent these losses.
8. A: We presume that vendors will send invoices for the goods that they believe
they have shipped (i.e., goods on their packing slips). By matching goods
received to the vendor packing slip, Portland Company can detect and correct
shipping errors as the goods are received.
9. G: Whitneys vendors can use Whitneys public key to open the PO and to
verify that Whitneys purchasing agents have signed the PO with the Whitney
private key. This will verify that the PO is valid.
10. K: Framingham Company should review open POs to determine if the goods
have been received. Goods that have been received and are on the shelf should
be recorded as received. This will close the PO.
Note: This follow-up may find that goods that are not on the shelf and have not
been received. In those cases, a follow-up to the vendor would be in order.
36
Control Goals of the Purchasing Business Process

Ensure
effectiveness of
operations:
Recommended
control plans
Ensure
efficient
employment
of resources
(people,
computers)
Ensure
security of
resources
(inventory,
purchase
order
master
data)

For purchase
requisition inputs,
ensure:
IV
IC
IA
For
purchase
order
master
data,
ensure:
UC
UA
For vendor packing

IV
IC
IA
P-7
P-7
P-7
Present controls
P-1: Preformatted
screens
P-1
P-1
P-2: Online prompting
P-2
P-2
P-3: Programmed edit

checks
P-3
P-3
P-4: Procedures for

rejected inputs
P-5: Populate input
screens with
master data
P-4
P-5
P-6: Digital signature

P-7: Enter receipt data
in receiving
P-8: Confirm input
acceptance
P-6
P-7
P-7
P-4
P-5
P-5
P-6
P-6
P-8
For
purchase
order
master
data,
ensure:
UC
UA
37
Control Goals of the Purchasing Business Process

Ensure
effectiveness of
operations:
Recommended
control plans
Ensure
efficient
employment
of resources
(people,
computers)
Ensure
security of
resources
(inventory,
purchase
order
master
data)

For purchase
requisition inputs,
ensure:
IV
IC
IA
For
purchase
order
master
data,
ensure:
UC
For vendor packing

UA
IV
IC
IA
Missing controls
None noted
ASelect a vendor who will provide the best quality at the lowest price by the required delivery date
BEnsure that the right goods in the correct amount are received in acceptable condition
CComply with corporate code of conduct
FIGURE SM-12.14 Problem 5 solution (partial)control matrix
IV = input validity
IA = input accuracy
For
purchase
order
master
data,
ensure:
UC
UA
38
Exhibit SM-12.3
P-1:
Problem 5 solution (partial)explanation of cell entries for control matrix

in Figure SM-12.14
Preformatted screens.
Efficient employment of resources: By structuring the data entry process,
automatically populating fields, and preventing errors, preformatted screens
simplify data input and save time, allowing a user to input more data over a period
of time.
Purchase requisition input accuracy: As each data field is completed on a
preformatted screen, the cursor moves to the next field on the screen, thus
preventing the user from omitting any required data set. The data for fields that
are automatically populated need not be manually entered, thus reducing input
errors. Incorrectly formatted fields are rejected.
P-2:
Online prompting.
Efficient employment of resources: By asking questions and providing online
guidance, this plan ensures a quicker data entry process and allows the user to
input more data over a period of time.
Purchase requisition input accuracy: The online guidance should reduce input
errors.
P-3:
Programmed edit checks.

Efficient employment of resources: Purchase requisition data can be processed on
a timelier basis and at a lower cost if errors are detected and prevented from
entering the system early in the process.
Purchase requisition input accuracy: The edits identify erroneous or suspect data
(e.g., unreasonable purchase quantity) and reduce input errors.
P-4:
Procedures for rejected inputs.

Purchase requisition input completeness and input accuracy: The rejection
procedures (i.e., Error routine not shown annotations) are designed to ensure
that erroneous data not accepted for processing are corrected (accuracy) and
resubmitted for processing (completeness).
P-5:
Populate input screens with master data.

Efficient employment of resources: Automatic population of inputs with vendor
master data results in fewer keystrokes, which should improve the speed and
productivity of the purchasing personnel.
Purchase requisition input validity: Data from existing, approved purchase
requisition data, as well as existing, approved vendor records are used for the PO.
39
Purchase requisition input accuracy: Fewer keystrokes and the use of data called
up from existing records reduce the possibility of input errors.
P-6:
Digital signatures.
Security of resources and purchase requisition input validity: Digital signatures
will allow the vendor to determine that the sender of the message has authority to
send it and thus prevents an unauthorized purchase and diversion of resources.
This also determines that the message itself is genuine.
Purchase requisition input accuracy: Detects messages that have been altered in
transit, thus preventing the use of data by the vendor that is not reflected in the
purchase requisition input.
P-7:
Enter receipt data in receiving.

Security of resources: Because the receipt data is captured in receiving, there is
less opportunity to divert the receipts because there is a record that the inventory
exists and is on the premises.
Efficient employment of resources: Because Receiving personnel are familiar with
the data being entered, they can more readily correct these errors if they occur.
Vendor packing slip input validity: Because the receipts are captured in the
Receiving department, they are more likely to reflect actual product receipts.
Vendor packing slip input completeness: Because the receipts are captured in the
Receiving department, they are less likely to be lost as they are transported to a
data entry location.
Vendor packing slip input accuracy: Because Receiving personnel are familiar
with the data being entered, they are less likely to make input errors and can more
readily correct these errors if they occur.
P-8:
Confirm input acceptance.

Packing slip input completeness: By advising receiving personnel that input has
been accepted, this confirmation helps ensure input completeness.
40
Cost Center/
Requisitioning Department
Established
needs
P-1
P-2
Enter
requisition
data
Computer
Purchasing
Department
Edit input and

record requisition
Display requisition
and vendor
candidates
Requisition
input screen
Exception routine
not show n
Approve
requisition
Requisition
screen w ith
vendor
candidates
P-5
P-1
P-2
Enterprise
database
P-1
P-2
Requisitions and
forecasts m ay
be com bined
P-3
Convert requisition
to PO, enter selected
vendor, price, term s
P-3
P-3
May require
contact w ith
vendor
Edit input and

record PO
Record approvals
and update
requisition data
PO input screen
Requisition
approval screen
P-4
Approve PO
P-3
Record approval, release
PO, update inventory
m aster data, and confirm
to requester
Requisition
confirm ation
P-4
PO approval
screen
P-6
Translate to EDI form at,

encrypt, digitally sign, and
transm it to vendor (via
VAN)
VAN
FIGURE SM-12.15 Problem 5 solution (partial)annotated systems flowchart
P-1
P-2
Error routine
not show n
Receiving
Department
Computer
P-7
Vendor
Enter PO
num ber
Shipping
docum ents
Enterprise
database
Shipping
docum ents
Read data
from RFID
chips in
shipm ent
Com pare RFID quantities w ith PO

quantities, update inventory and
PO data, print stock notice,
display receiving report num ber
P-8
Shipping
docum ents
Receiving
report screen
Exception
routine not
show n
Attach the Stock Notice

to the goods and record
receiving report num ber
on shipping docum ents
Stock notice
Warehouse
P-4
Stock notice
Shipping docum ents

(w ith receiving
report num ber)
Shipping
docum ents
FIGURE SM-12.15 Problem 5 solution (partial)annotated systems flowchart (continued)
41
42
P12-6 ANS.
Function
Logistics
Risks
Controls and Technology
Poor supply chain planning:

o
Wrong, poor vendors
Poor quality of goods
Too much inventory, not

enough inventory
Preapprove vendors.
Inadequate receiving capacity

and security
Purchasing
Establish collaborative relationships with

suppliers, such as VMI and CPFR.
Unauthorized POs
Audit vendors for process quality (e.g.,

ISO).
Secure receiving area (locks, cameras,
etc.).
Use purchase requisitions to authorize
purchases.
Wrong/unapproved vendor
Create purchasing budgets.
Approve vendor selection.
Goods never ordered
Match receipt to open POs.
Inventory (debit)
Wrong/damaged goods
Inspect and count goods.
??? (credit)
Invalid entry (goods not received)
Receiving
Enter receipts in receiving.

Use bar codes or electronic tags (RFID).
Incomplete entry
Monitor open purchase orders for overdue

receipts.
Inaccurate entry (quantity, cost)
Match receipt to PO and inventory data.

Match receipt to advanced shipping notice
(ASN) from vendor.
Use standard costs.
Use bar codes and RFID to identify
goods.
Note: During the receipt of inventory, a clearing account is credited to balance the debit to
inventory. When the vendor invoice is received, the same clearing account will be debited to
balance the credit to accounts payable. In the SAP system this account is called Goods
Received/Invoice Received (GR/IR).

Purchasing process -- Level 0 diagram
With changes for receiving a technical product.
Inventory's
purchase
requisition
Inventory
m anagem ent
process
Inventory
m aster data
1.0
Determ ine
requirem ents
Purchase requisitionsupplies and services
Purchase
requisition data
PO
inventory
notification
Requirem ents
PO
departm ent
notification
2.0
Order goods
and services
Vendor
m aster data
Inventory
m aster data
Accounts
payable
process
PO
accounts
payable
notification
PO
receiving
notification
Purchase
receipts data
Purchase
order
Vendor
packing
slip
Stock
notice
3.0
Receive
goods and
services
PO, Packing
slip, goods
Vendor
Purchase order
m aster data
Receiving
report
Vendor
m aster data
Various
departm ents
GL inventory
received update
PO, Packing
slip, inspected
goods
Inventory
m aster data
Quality
control
FIGURE SM-12.16 Problem 7 solution
NOTE: The technical product

is sent to quality control
for testing.
Warehouse
General
ledger
process
43
44
Purchasing process -- Diagram 3

With changes for receiving a technical product
NOTE: The change is here

where the technical product
is sent to quality control
for testing. We have included
that entity here for clarity.
Normally, entities are not
included on diagrams below
level 0.
Vendor
master data
Vendor
packing slip
PO, packing
slip, goods
3.1
Inspect
and count
goods
PO receiving
notification
Quality
control
Reject
PO, packing slip,
inspected goods
Purchase order
master data
Receiving
report
Reject
Purchase
receipts data
3.2
Compare
receiving
report and
purchase order
GL
Inventory
received
update
Stock
notice
Receiving
report
FIGURE SM-12.16 Problem 7 solution (continued)
Vendor
master data
Inventory
master data
Purchasing process -- context diagram

w ith changes for drop shipm ent. Changes are:
-- No packing slip is received from the vendor
--The custom er sends a receipt notification (this could
com e from the carrier that delivered the goods to
the custom er).
--There is no stock notice going to the w arehouse.
Inventory
m anagem ent
process
Inventory's
purchase
requisition
Purchase
order
Vendor
PO
inventory
notification
GL inventory
received update
Purchasing
process
Receipt
notification
Various
departm ents
PO
departm ent
notification
Receiving
report
PO
accounts
payable
notification
Custom er
Accounts
payable
process
FIGURE SM-12.17 Problem 8 solution
General
ledger
process
45
46
Purchasing process -- level 0 diagram

With changes for drop shipm ent. Changes are:
-- No packing slip is received from the vendor
--The custom er sends a receipt notification (this could
com e from the carrier that delivered the goods to
the custom er).
--There is no stock notice going to the w arehouse.
Inventory's
purchase
requisition
Inventory
m anagem ent
process
Inventory
m aster data
1.0
Determ ine
requirem ents
Purchase
requisition data
PO
inventory
notification
Requirem ents
2.0
Order goods
and services
Vendor
m aster data
Inventory
m aster data
PO
accounts
payable
notification
Accounts
payable
process
Various
departm ents
PO
departm ent
notification
Purchase
order
PO
receiving
notification
Vendor
Purchase order
m aster data
Receiving
report
3.0
Receive
goods and
services
Custom er
Receipt
notification
Vendor
m aster data
GL inventory
received update
Purchase
receipts data
Inventory
m aster data
General
ledger
process
Purchasing process -- Diagram 3

With changes for drop shipment. Changes include:
--The packing slip from the vendor has been replaced by the
receipt notification from the customer (or carrier).
--There is no stock notice coming from bubble 3.2 because the
goods do not go to the warehouse.
Vendor
master data
Reject
Receipt
notification
3.1
Compare
PO receiving
notification
Purchase order
master data
Receiving
report
Reject
3.2
Compare
receiving
report and
purchase
order
Purchase
receipts data
Vendor
master data
Inventory
master data
GL
Inventory
received
update
Receiving
report
47
48
P12-9 ANS.
1. Approve purchase order: The purchasing agents selected vendor should be

approved by the purchasing manager.
2. Independent authorization to record receipt: This prevents accepting goods
that were not ordered.
3. File completed receiving report in receiving: This will provide an audit trail
for goods received and forwarded to the storeroom.
4. Reorder points and automatic generation of alerts: The alerts can take the
form of notices on the screens of supply clerks, purchase requisitions sent to
buyers, or purchase orders sent directly to the vendor. Alternatively, the
organization might assign the responsibility for stock replenishment to the
vendor (i.e., vendor-managed inventory [VMI]).
5. Select vendors who can provide goods with appropriate quality: Either in
advance, when authorized vendors are selected, or at the time of each
purchase, vendors must be examined to determine that they can provide goods
with appropriate quality.
Process
Subsidiary Functions
Inputs
Outputs
1.0 Determine requirements
1.1 Accumulate requests
Inventorys purchase requisition
Purchase requisition data
Purchase requisitionsupplies and

services
1.2 Calculate requirements
Purchase requisition data
Requirements
Inventory master data

2.0 Order goods and services
2.1 Select vendor
Requirements
Purchase requisition
Vendor master data

2.2 Prepare purchase order
Purchase requisition
PO department notification
PO inventory notification
PO accounts payable notification
PO receiving notification
Purchase order
Purchase order master data
3.0 Receive goods and services
3.1 Inspect and count goods
PO receiving notification
Receiving report
Vendor packing slip
Vendor master data
Vendor master data
Reject
49
50
Process
Inputs
Outputs
3.2 Compare receiving report

and purchase order
Receiving report
Receiving report
Stock notice
Vendor master data
Vendor master data

Purchase receipts data
GL Inventory received update
Reject
Table SM-12.1
Problem 10 SolutionSummary of Purchasing Processs Processes, Inputs, Outputs, and Data
SOLUTIONS FOR CHAPTER 13

Discussion Questions
DQ13-1
Refer to effectiveness goals A and B shown in the control matrix in Figure 13.11. For each activity (accounts payable
and cash disbursements), describe goals other than the one discussed in the chapter.
ANS.
Possible accounts payable effectiveness goals:

(Contained in Figure 13.11.) Optimize cash discounts.
Preclude duplicate payments.
Prevent unauthorized payments.
Provide timely general ledger updates.
Furnish timely notice of cost of goods received.
Facilitate cash planning.
Process purchase returns and allowances in accordance with company policy.
Possible cash disbursements effectiveness goals:
(Contained in Figure 13.11.) Ensure that the amount of cash maintained in demand deposit accounts is sufficient
(but not excessive) to satisfy expected cash disbursements.
Maintain good vendor relations.
Minimize check preparation and processing costs.
Provide accurate and complete information for general ledger cut-off procedures.
Preserve the organizations credit standing.
51
52
DQ13-2
Explain why ambiguities and conflicts exist among operations process (effectiveness) goals, and discuss some potential
ambiguities and conflicts relative to the goals you described in Discussion Question 13-1.
ANS.
Conflicts exist because each organizational unit wants to do its best (or at least be seen as doing its best). However,
many (perhaps any) individual units cannot possibly perform at their best because trade-offs must be made so that the
organization as a whole can do its best.
Ambiguities may exist when it is not clear when a goal has been reached, which could happen, for example, when goals
have subgoals. For example, can the cash disbursements process provide both complete and accurate information for
cut-off procedures? In addition, some effectiveness goals may conflict with the other operation process goals in the
efficient employment of resources and security of resources categories.
Conflicts that may exist relative to the processes goals in DQ 13-1 include the following:
To ensure good vendor relations, excessive cash may be kept on hand to be able to pay vendors more quickly than
is required by the terms offered.
To pay invoices quickly to obtain cash discounts, important controls in the receiving and invoice verification
processes may be sacrificed.
DQ13-3
Without redrawing the figures, discuss how Figures 13.3, 13.4, and 13.6 would change as a result of the following
independent situations (be specific in describing the changes):
a. Employing a voucher system that involved, among other things, establishing vouchers payable that covered several
vendor invoices.
ANS.
In Figure 13.4, bubble 1.2, individual invoices would not be received from bubble 1.1 and would not update the
accounts payable master data for individual invoices. Rather, batches of invoices would be accumulated, sorted by
vendor identification code, and would update the accounts payable master data.
Alternatively, individual invoices would be input and would update the accounts payable master data. However, bubble
2.2 in Figure 13.6 would sort the invoices to be paid into vendor identification sequence before forwarding the
approved payments to bubble 2.3. This method accomplishes the same objective as does creating vouchers that cover
many invoices by creating checks that cover many invoices.
Figure 13.3 would not be visibly affected by either of these. The changes are within bubbles 1.0 and 2.0 of that figure.
53
b. Making payments twice per month, on the 5th and 25th of the month, and taking advantage of all cash discounts
offered.
ANS.
Figure 13.6, bubble 2.1 is triggered on the 5th and the 25th of each month. All discount dates reached between the last
payment date and the current payment date are considered available.
Alternatively, Figure 13.4, bubble 1.2 records the payment date for each invoice and that payment date is either the 5th
or the 25th.
Figure 13.3 is not visibly affected by either of these. The changes are within bubbles 1.0 and 2.0 of that figure.
DQ13-4
In terms of effectiveness and efficiency of operations, as well as of meeting the generic information system control
goals of validity, completeness and accuracy, what are the arguments for and against each of the following?
a. Sending a copy of the vendor invoice to the purchasing department for approval of payment
ANS.
Purchasing personnel can review the invoice to insure validity of the receipt (i.e., the items were ordered, etc.).
The purchasing department review will delay establishing the payable and may cause the organization to lose a
discount.
Sending a copy of the purchase order to the accounts payable office may be more efficient. While accounts payable
personnel are examining the invoice, they can compare it to the purchase order.
b. Sending a copy of the vendor invoice to the requisitioning department for approval of payment
ANS.
Same as the preceding part b.
DQ13-5
An electronic data interchange (EDI) system may present an organization with opportunities and risks:
a. What opportunities might an EDI system present? Discuss your answer.
ANS.
EDI facilitates the timely and efficient flow of data between trading partners. For example, by enabling a just-in-time
process, EDI can reduce the carrying costs of inventory and reduce the time to manufacture a product, thus improving
customer service. The rapid EDI communications actually can prevent a production line from stopping due to a lack of
raw materials.
54
EDI precludes the reentry of data at the receiving organization; this is more efficient, effective (i.e., timely), and
reduces data entry errors.
b. What risks might an EDI system present? What controls other responses might an organization choose to address
these risks?
ANS.
Failure of the communications link threatens the ongoing operation of EDI. To prevent this, the contract with the VAN
should address the availability of the communications link. An organization may contract with alternative VANs to be
used in the event of one VANs failure. Communication via the Internet might also be used in lieu of VANs. Finally,
alternative, non-EDI communications options may be used in the event of communications failures.
Unauthorized incoming or outgoing transactions may be processed. To prevent such occurrences, encryption/digital
signatures may be used along with physical security and logical access controls (passwords, biometrics, and so on) to
prevent unauthorized access to EDI applications.
DQ13-6
In the physical implementation depicted in Figure 13.10, the computer updated the accounts payable data upon receipt
of a vendor invoice (a clerk handled any exceptions). Describe the procedures that you believe should control that
process.
ANS.
We can discuss two categories of procedures and controls, business process/application controls, and entitylevel/pervasive/IT general controls:
Business process/application controls:
The VAN or EDI translator should determine that the invoice was received from a legitimate vendor, and not from
an unauthorized source. A secure mailbox at the VAN and digital signatures might be used for this purpose. The
accounts payable application should also match the incoming invoices to the vendor master data to further validate
that the vendor is real.
The accounts payable program matches the invoice to the receiving report and purchase order. Should there be
significant variation (tolerances should be assigned by management and applied by the program) or should either
the purchase order or receiving report be missing, the computer should reject the invoice.
Entity-level/pervasive/IT general controls:
55
Physical and logical access controls should prevent unauthorized alteration of the vendor, purchase order, and
receiving report datathe data used to validate the invoice.
Program change controls must prevent unauthorized alteration of the program that performs the invoice validation.
Personnel controls, such as selection and hiring, training and education, and supervision, should ensure that AP
clerks handling the exceptions can and do perform their duties in accordance with company policies.
Logical access controls should ensure that only authorized personnel can handle exceptions.
DQ13-7
In the physical implementation depicted in Figure 13.10, the payment order and the remittance advice were either sent
together through the banking system, or the remittance advice was sent directly to the vendor. Which is better? Discuss.
ANS.
Each approach may have advantages. If the two items are sent together, identification and validation of the payment
may be more efficient. However, if the RA is received independent of the payment, we can use the RAs as a tickler to
ensure receipt of the payment.
DQ13-8
With an EDI system, a customers order may be entered directly into the OE/S without human intervention. Discuss
your control concerns under these circumstances.
ANS.
We can discuss two categories of procedures and controls, business process/application controls and entitylevel/pervasive/IT general controls:
Business process/application controls:
The VAN or EDI translator should determine that the order was received from a legitimate customer and not from
an unauthorized source. A secure mailbox at the VAN and digital signatures might be used for this purpose. The
OE/S application should also match the incoming order to the customer master data to further validate that the
customer is real.
In addition to validating the existence of the customer, the order entry/sales program should perform a credit check.
Should there be significant credit shortfall (tolerances should be assigned by management and applied by the
program), the computer should reject the order. The program should also perform an inventory availability check.
Either a credit or availability failure might be displayed to a customer service representative for review and
correction.
Entity-level/pervasive/IT general controls:
56
Physical and logical access controls should prevent unauthorized alteration of the customer, sales order, and
accounts receivable datathe data used to validate the customer and perform the credit check.
Program change controls must prevent unauthorized alteration of the program that performs the validation and
credit check.
Personnel controls, such as selection and hiring, training and education, and supervision, should ensure that
customer service representatives handling the exceptions can and do perform their duties in accordance with
company policies.
Logical access controls should ensure that only authorized personnel can handle exceptions.
DQ13-9
In the section Fraud and the Accounts Payable Function, we described a fraud committed by Stanley and Phoebe
and another by Veronica. For each fraud describe controls and technology that could reduce the risk of those frauds
occurring.
ANS.
Controls and technology that might have reduced the risk of the fraud perpetrated by Stanley and Phoebe include the
following:
Before opening the business account, the bank might have asked for documentation regarding SRJ Enterprises.
Personnel in the Accounting department should not be authorized to create vendor records. This function should be
reserved for the Purchasing department.
Before the vendor record is created the vendor address, telephone number, etc. should be compared to such data on
the organizations personnel file to determine if the vendor and an employee might be related.
Vendor invoices should be matchedmanually or by the computerto open purchase orders and receiving reports
before an accounts payable record is created and the invoice paid.
Controls and technology that might have reduced the risk of the fraud perpetrated by Veronica include the following:
When the vendor invoice is entered, the invoice number should also be entered, and the computer should be
programmed to detect and preclude entry of duplicate invoice numbers.
When the vendor invoice is entered, it should be matched against an open purchase order and a receiving report.
When a second, duplicate, invoice is entered, there would no longer be a PO or receiving report for matching, and
the second invoice would be rejected.
57
Veronicas employer should request that vendors apply overpayments as credits rather than returning the checks.
Problems
Problems 1 and 2
Note: In the pages that follow, we provide solutions for problems 1 and 2 for both of the Case Studies (Cases A and B) as applicable.
Although the solution for each case study comprises several pages, it is not necessarily comprehensive, nor does it represent the only
acceptable answers. Your or your students answers easily may vary in two areas. First, the grouping on the annotated table of entities
and activities determines the configuration of the current logical DFD. Second, we have included in the formal controls analysis only a
sample of the possible present and missing controls. At the end of the descriptions of the controls for each case, we include a list of
other controls that you or your students might want to include in a solution.
58
Stockbridge Company (Accounts Payable and Cash Disbursements Processes) Solutions (see the Note on pg. 13-5)
P13-1 ANS.
a. Table of Entities and Activities for Stockbridge Company (Accounts Payable and Cash Disbursements
Processes)
Entities
Para
Activities
Accounts payable (AP)
1.
Receive invoice from vendor.
2.
Key PO number into computer.
Vendor
Computer
3.
Display PO data.
AP
4.
Key invoice data.
Computer
5.
Match invoice with PO data.
6.
If price or quantity variances exist, route to purchasing.
Purchasing
7.
Approve variances.
Computer
8.
Record the invoice, and update the PO and general ledger databases.
9.
Read and display open invoices.
10. Review open invoices.
11. Select invoices that should be paid.
Computer
12. Print checks, and update AP and general ledger databases.
Accounts payable
13. Mail checks to vendor.
Accounts payable
Invoice
Accounts
payable/ cash
disbursements
process
Vendor
Payment
FIGURE SM-13.1
Problem 1, part b solution

Disbursements Processes)
context diagram for Stockbridge Company (Accounts Payable and Cash
PO
number
PO data
Invoice
1.0
Accounts
payable
department
Invoice data
Open invoices
Payment selections
Check
Vendor
Checks
of the enterprise database are
2.0
Computer
Enterprise
database
59
60
FIGURE SM-13.2
P13-1 ANS.
Problem 1, part c solutionphysical DFD for Stockbridge Company (Accounts Payable and Cash
d. Table of Entities and Activities (annotated) for Stockbridge Company (Accounts Payable and Cash
Entities
Para
Activities
Accounts payable (AP)
2.
Key PO number into computer.
Computer
3.
Display PO data.
AP
4.
Key invoice data.
Computer
5.
Match the invoice with PO data.
Computer
8.
Record the invoice, and update the

PO and general ledger databases.
Computer
9.
Read and display open invoices.
Accounts payable
10. Review open invoices.
11. Select invoices that should be paid.
12. Print checks, and update account

payable and general ledger
databases.
Computer
Process
1.0 Record Accounts

Payable
2.0 Make Payment
FIGURE SM-13.3
61
Problem 1, part e solutionlogical DFD for Stockbridge Company (Accounts Payable and Cash Disbursements
Processes)
62
Accounts payable
department
Accounts payable
department
Computer
Vendor
Retrieve and
display open
invoices
Open
invoices
Invoice
Each
morning
Select invoices
Key PO number
Retrieve and
display PO data
Enterprise
database
Print checks,
update AP and
general ledger
databases
PO data
Key invoice data
Checks
Record invoice,
update PO and
general ledger
databases
Vendor
Invoice
data
If necessary,
purchasing must
approve price and
quantity variances
FIGURE SM-13.4
Problem 2, part a solutionsystems flowchart for Stockbridge Company

(Accounts Payable and Cash Disbursements Processes)
63
Control Goals of the Stockbridge Company Accounts Payable and Cash Disbursements Business Processes
Ensure
effectiveness
of
operations:
Recommended control
plans
Ensure
efficient
employment
of resources
(people,
computers)
Ensure
security of
resources
(cash,
accounts
payable
master
data)

For vendor invoice
inputs, ensure:
IV
IC
IA
For accounts
payable
master data,
ensure:
UC
UA
For payment
voucher inputs,
ensure:
IV
IC
Present Controls
P-1: Independent
validation of
vendor invoice
P-2: Match invoice to
PO and receiving
report
P-1
P-2
P-3: Authorize
variances
P-4: Computer
generated list of
vouchers due
(monitor open
invoices)
P-5: Independent
authorization to
make payment
P-1
P-2
P-2
P-3
P-3
P-4
P-4
P-5
P-5
For accounts
payable
master data,
ensure:
IA
UC
UA
64
Control Goals of the Stockbridge Company Accounts Payable and Cash Disbursements Business Processes
Ensure
effectiveness
of
operations:
Recommended control
plans
Ensure
efficient
employment
of resources
(people,
computers)
Ensure
security of
resources
(cash,
accounts
payable
master
data)

For vendor invoice
inputs, ensure:
IV
IC
IA
For accounts
payable
master data,
ensure:
UC
For payment
voucher inputs,
ensure:
UA
IV
For accounts
payable
master data,
ensure:
IC
IA
M-2
M-2
Missing Controls
M-1: Monitor open POs
and receiving
reports
M-1
M-2: Reconcile bank

account
M-2
M-3: Treasurer
authorizes
disbursements
M-1
M-2
M-3

A - Optimize cash discounts
B - Ensure that the amount of cash maintained in demand deposit accounts is sufficient (but not
excessive) to satisfy expected cash disbursements
M-3
IV = input validity
IA = input accuracy
FIGURE SM-13.5
M-3
Problem 2, part b solution (partial)control matrix for Stockbridge Company

UC
UA
Exhibit SM-13.1
65

Note: Vendor invoice and payment voucher inputs result in immediate updates to accounts
payable master data. Therefore, we do not show entries for UC or UA.
P-1:
Independent validation of vendor invoice.

Ensure security of resources, vendor invoice input validity: The Accounts Payable
department reviews and approves the vendor invoice. This department is
separated from Purchasing, the department that created the purchase order. This
provides independent assurance of the validity of the vendor invoice. Because
cash will not be expended with an invalid vendor invoice, the security of the cash
is ensured.
P-2:
Match invoice with PO and receiving report.

Effectiveness goal A, vendor invoice input validity, and input accuracy: The
computer matches the input invoice to the PO and receipt data to ensure that the
goods were ordered and received (validity) and the items and quantities on the
invoice are accurate. By recording the terms accurately we can ensure that
appropriate discounts are taken.
P-3:
Authorize variances.
Vendor invoice input validity, and input accuracy: Purchasing reviews the input
quantities and prices to determine that they are valid and accurate (within limits
prescribed by management).
P-4:
Computer-generated list of vouchers due (monitor open invoices).

Effectiveness goal A: Action on this list should ensure that payments are made in
a timely manner, not too early and not too late (i.e., to optimize cash discounts).
Payment voucher input completeness: Action on this list should ensure that all
payments are input.
P-5:
Independent authorization to make payment.

Ensure security of resources: Because cash cannot be expended in the absence of
a validated vendor invoice, the security of the cash is ensured.
Payment voucher input validity: The open invoice record is used to authorize
execution of a payment.
M-1:
Monitor open POs and receiving reports.

Effectiveness goal A and vendor invoice input completeness: The database of open
POs and receiving reports should be periodically reviewed to ensure that all
invoices are received and input (completeness) in a timely manner to ensure that
discounts can be taken when appropriate (i.e., to optimize cash discounts).
66
M-2:
Reconcile bank account.

Effectiveness goal A, security of resources, payment voucher input completeness,
and input accuracy: Someone other than the disbursing agent should reconcile the
bank account to determine that the bank balance agrees with the amount of cash
recorded in the database (goal A, security), that all disbursements were recorded
(completeness), and that they were recorded accurately (accuracy).
M-3:
Treasurer authorizes disbursements.

Security of resources, payment voucher input validity, and input accuracy:
Someone other than accounts payable, such as the treasurer, should authorize the
disbursements by comparing the disbursement to the invoice, PO, and receiving
report so that only authorized disbursements are made (security, validity), and that
all disbursements are accurate (accuracy).
made. For example:
data.
We might propose several typical AP/CD controls that we did not include in
our analysis, including vendor invoice mathematical accuracy check and
electronic payments with digital signatures.
FIGURE SM-13.6
Problem 2, part c solutionannotated systems flowchart for Stockbridge Company

67
68
Internet Payment Platform (Accounts Payable and Cash Disbursements Processes)

Solutions (see the Note on pg. 13-5)
P13-1 ANS.
a. Table of Entities and Activities for Internet Payment Platform (Accounts

Payable and Cash Disbursements Processes)
Entities
Para
Activities
Supplier
1. Log on to IPP.
2. Flip PO to invoice.
3. Post invoice to appreciating database.
4. Send invoices to the enterprise adapter.
5. Translate invoices into XML.
6. Send translated invoices to BEPMIS (assumed).
7. Post invoices to accounts payable database.
8. Perform three-way match of invoice, PO, receipt.
9. Extract and format invoice changes.
10. Send invoice changes to enterprise adapter.
11. Convert changes from IDMS to XML.
12. Transmit invoice changes to IPP server.
IPP Server
13. Post invoice changes to appreciating database.
Accounts payable accountant
14. Trigger payment process.
BEPMIS
15. Read and display invoices due for payment (assumed).
Accounts payable accountant
16. Review invoices.
17. Select invoices for payment.
18. Extract and format payments.
19. Generate and digitally sign PIF file.
20. Transmit PIF to enterprise adapter.
21. Notify AP accountant of number and dollar amount of

payments.
22. E-mail CO, DO, and Boston Fed with PIF totals.
23. Convert PIF from IDMS to XML.
24. Transmit PIF to IPP server.
IPP Server
25. Post PIF to appreciating database.
26. Log on to IPP.
IPP server
Enterprise adapter
BEPMIS
Enterprise adapter
BEPMIS
Enterprise adapter
Entities
Para
Activities
27. Approve PIF.
28. Log on to IPP.
29. Approve PIF.
30. Generate ACH-formatted file from PIF.
31. Send ACH-formatted file to Boston Fed.
32. E-mail AP accountant, CO, DO, and Boston Fed with ACH
totals (number and dollar amount of payments).
33. E-mail supplier that a payment is coming.
Boston Fed
34. Transfer ACH file to FedACH system.
FedACH system
35. Settle payment (debit Treasurys account and credit suppliers

banks account).
36. Notify suppliers bank of credits.
37. Send Bulk Data Acknowledgement (number and dollar amount

of payments) to AP accountant, CO, DO, Boston Fed.
38. Credit suppliers account.
Disbursing officer (DO)
IPP server
Suppliers bank
Payment
notice
Supplier
Total of
payments
made
IPP accounts
payable/ cash
disbursements
process
ACH
totals
Total of
payments
made
ACH
totals
Accounts
payable
accountant
FIGURE SM-13.7
ACH
totals
Total of
payments
made
ACH
Total of totals
payments
made
Disbursing
officer
Boston Fed
Contracting
officer
Problem 1, part b solutioncontext diagram for Internet Payment

Platform (Accounts Payable and Cash Disbursements Processes)
69
70
Appreciating
database
Extracted and formatted

invoice changes
Invoice changes
in XML
Logon
PO data
1.0
Supplier
PIF file
in XML
Payment
notice
PIF file
4.0
BEPMIS
PIF
totals
PIF
approval
PO flip
Invoices
in XML
3.0
Enterprise
adapter
Invoices
2.0
IPP
server
PIF in
ACH format
PIF
approval
BEPMIS/IDMS
database
PIF
totals
7.0
Disbursing
officer
Open
invoices
ACH ACH
totals totals
ACH
totals
8.0
Boston
Fed
PIF in
ACH format
6.0
Contracting
officer
PIF totals
Total of
payments
made
Invoices
to be
paid
PIF
totals
Supplier
ACH
totals
Trigger
payment
process
5.0
Accounts
payable
accountant
9.0
FedACH
System
Treasury and
bank accounts
Boston Fed
Accounts
payable
accountant
Contracting
officer
Disbursing
officer
Total of
payments
made
Total of
payments
made
Total of payments made
FIGURE SM-13.8
Credit
notice
10.0
Supplier's
Bank

of the appreciating and IDMS databases
are shown to represent all interactions.
Problem 1, part c solutionphysical DFD for Internet Payment Platform

Supplier
accounts
P13-1 ANS.
71
d. Table of Entities and Activities (Annotated) for Internet Payment

Platform (Accounts Payable and Cash Disbursements Processes)
Entities
Para
Activities
Supplier
1. Log on to IPP.
2. Flip PO to invoice.
IPP server
3. Post invoice to appreciating database.
Enterprise adapter
5. Translate invoices into XML.
BEPMIS
7. Post invoices to accounts payable database.
8. Perform three-way match of invoice, PO, receipt.
9. Extract and format invoice changes.
11. Convert changes from IDMS to XML.
12. Transmit invoice changes to IPP server.
IPP Server
13. Post invoice changes to appreciating database.
AP accountant
14. Trigger payment process.
BEPMIS
15. Read and display invoices due for payment

(assumed).
AP accountant
16. Review invoices.
17. Select invoices for payment.
18. Extract and format payments.
19. Generate and digitally sign PIF file.
Enterprise adapter
23. Convert PIF from IDMS to XML.
IPP Server
25. Post PIF to appreciating database.
Contracting officer
(CO)
26. Log on to IPP.
27. Approve PIF.
Disbursing officer
(DO)
28. Log on to IPP.
29. Approve PIF.
IPP server
30. Generate ACH-formatted file from PIF.
Boston Fed
34. Transfer ACH file to FedACH system.
FedACH system
35. Settle payment (debit Treasurys account and

credit suppliers banks account).
Suppliers bank
38. Credit suppliers account.
Enterprise adapter
BEPMIS
Process
1.0 Record Invoices

and invoice changes
2.0 Select and

approve payments
3.0 Settle payments
72
Supplier
Payment
notice
Treasury and
bank accounts
ACH totals
Total of
payments made
Appreciating
database
1.0
Record
invoices and
invoice
changes
Accounts
payable
accountant
ACH total
3.0
Settle
payments
Total of
payments made
Boston Fed
ACH total
Total of
payments made
Accounts payable
database
2.0
Select and
approve
payments
ACH total
Total of
payments made
Supplier
accounts
FIGURE SM-13.9
Disbursing
officer
Problem 1, part e solutionlogical DFD for Internet Payment Platform

Contracting
officer
FIGURE SM-13.10 Problem 2, part a solutionsystems flowchart for Internet Payment Platform
73
74
FIGURE SM-13.10 Problem 2, part a solutionsystems flowchart (continued)
Federal Reserve Bank
Supplier's Bank
FedACH System
Federal Reserve Bank of Boston
P. 1,
A
P. 1,
C
Read e-mail
Read e-mail
P. 1,
B
ACH-Form atted
file
Number of
payments
and dollars
in PIF
Number of
payments
and dollars
in ACH file
Initiate
transfer of
ACH file
Transfer
ACH-formatted
file to FedACH
Credit
supplier's
account
Settle the
payment
Send Bulk Data

Acknowledgement to
AP, CO, DO, Boston
Fed
Manual intervention is
needed to send ACH file
through several servers
and links to FedACH
Bulk Data
Acknow ledgem ent
includes num ber of
paym ents and dollars
paid
Number of
payments
and dollars
paid
AP
FIGURE SM-13.10 Problem 2, part a solutionsystems flowchart (continued)
CO
DO
75
76
Control Goals of the IPP Accounts Payable and Cash Disbursements Processes
Ensure
effectiveness
of
operations:
Recommended
control plans
Ensure
efficient
employment
of resources
(people,
computers)
Ensure
security of
resources
(cash, AP
master
data)

For vendor invoice
inputs, ensure:
IV
IC
IA
For AP master
data, ensure:
UC
UA
Present Controls
P-1: Match PO and
invoice
(independent
validation of
vendor invoice)
at IPP
P-1
P-2: Cancel PO when

invoice recorded
at IPP
P-3: Record invoice
due dates and
payment terms
P-4: Match PO and
receiving report
to invoice
(independent
validation of
vendor invoice)
at BEPMIS
P-2
P-3
P-1
P-1
P-4
P-4
P-2
P-3
P-4
For payment inputs,

ensure:
IV
IC
IA
For AP
master data,
ensure:
UC
UA
77
Ensure
effectiveness
of
operations:
Recommended
control plans
P-5: Cancel PO and

receiving report
when invoice
recorded at
BEPMIS
Ensure
efficient
employment
of resources
(people,
computers)
Ensure
security of
resources
(cash, AP
master
data)

For vendor invoice
inputs, ensure:
IV
P-5
IC
IA
For AP master
data, ensure:
UC
P-6
P-6
P-6
P-7: Follow up on
open POs and
receiving reports
at BEPMIS
P-7
P-7
P-7
P-8: Select invoices

for payment
based on due
dates
P-8
P-9
IV
P-5
P-6: Follow-up on
open POs at IPP
P-9: Pay only open

invoices and
close invoices on
payment
(independent
authorization to
make payment)
at BEPMIS
UA
For payment inputs,

ensure:
P-9
IC
IA
For AP
master data,
ensure:
UC
UA
78
Ensure
effectiveness
of
operations:
Recommended
control plans
P- 10: Follow-up on
open invoices at
BEPMIS
P-13: CO and DO
approval
required for
payment
Ensure
security of
resources
(cash, AP
master
data)
For vendor invoice

inputs, ensure:
IV
IC
IA
For AP master
data, ensure:
UC
UA
IV
IC
IA
P-10
P-11
P-11
P-12
P-11
P-13
P-13
M-1
M-1
M-1
For AP
master data,
ensure:
UC
UA
P-10
P-11
P-12
Missing Controls
M-1: Independent
validation of
vendor invoice
at IPP does not
include a match
to receiving
report
For payment inputs,

ensure:
P-10
P-11: Digitally sign

electronic
payments
P-12: Follow-up on
open invoices
(at IPP)
Ensure
efficient
employment
of resources
(people,
computers)
P-11
P-12
P-13
P-11
79
Ensure
effectiveness
of
operations:
Recommended
control plans
M-2: Reconcile batch
totals for
invoices and
changes
Ensure
efficient
employment
of resources
(people,
computers)
Ensure
security of
resources
(cash, AP
master
data)
B
M-2
M-2
M-3: Programmed
edits for
translated and
formatted
invoice (and
invoice change)
data

For vendor invoice
inputs, ensure:
For AP master
data, ensure:
IV
IC
IA
UC
UA
M-2
M-2
M-2
M-2
M-2
M-3
For payment inputs,

ensure:
IV
IC
IA
For AP
master data,
ensure:
UC
UA
M-3
M-4: Programmed
edits for
formatted and
translated
payment data
M-4
M-4
M-5: Reconcile
payments made
by BEPMIS to
PIF totals
M-5
M-5
M-5
M-5
M-5
M-5
M-5
M-6: Reconcile
approved
payments to PIF
totals
M-6
M-6
M-6
M-6
M-6
M-6
M-6
80
Ensure
effectiveness
of
operations:
Recommended
control plans
Ensure
efficient
employment
of resources
(people,
computers)
Ensure
security of
resources
(cash, AP
master
data)

For vendor invoice
inputs, ensure:
IV
IC
IA
For AP master
data, ensure:
UC
UA
For payment inputs,

ensure:
For AP
master data,
ensure:
IV
IC
IA
UC
UA
M-7: Reconcile ACH

totals to PIF
totals and
approved PIF
totals
M-7
M-7
M-7
M-7
M-7
M-7
M-7
M-8: Reconcile
payments made
by ACH to
ACH file (and
PIF totals and
BEPMIS
payment totals)
M-8
M-8
M-8
M-8
M-8
M-8
M-8

A = Optimize cash discounts.
B = Ensure that the amount of cash maintained in demand deposit accounts is sufficient
(but not excessive) to satisfy expected cash disbursements).
IV = input validity
IA = input accuracy
FIGURE SM-13.11 Problem 2, part b solution (partial)control matrix for Internet Payment Platform
Exhibit SM-13.2
P-1:
81

Match PO and invoice (independent validation of vendor invoice) at IPP.

Vendor invoice input validity, vendor invoice input accuracy, and vendor invoice
update accuracy: By comparing the invoice to the PO, we ensure that the
recorded invoice reflects goods actually ordered (validity) and that items,
quantities, prices, and terms are comparable to data on the PO. We assume that the
AP master data is updated simultaneously with the input of the invoice data.
P-2:
Cancel PO when invoice recorded at IPP.

Security of resources and vendor invoice input validity. The PO flip feature
prevents the matching of more than one invoice for each PO, thus ensuring that
funds are not expended inappropriately (security of cash) and that invalid invoices
are not recorded.
P-3:
Record invoice due dates and payment terms.

Effectiveness goals A and B: Recording of terms and due dates allows cash
discounts as appropriate (goal A) and ensures that there is sufficient cash on hand
to make those payments (goal B).
P-4:
Match PO and receiving report to invoice (independent validation of vendor

invoice) at BEPMIS.
update accuracy: By comparing the invoice to the PO and receiving report, we
ensure that the recorded invoice reflects goods actually ordered and received
(validity) and that items, quantities, prices, and terms are comparable to data on
the PO and receiving report. We assume that the AP master data is updated
simultaneously with the input of the invoice data.
P-5:
Cancel PO and receiving report when invoice is recorded at BEPMIS.

Security of resources and vendor invoice input validity: The PO and receiving
report are canceled upon performing the three-way match, thus preventing the
matching of more than one invoice for each PO and receiving report. This ensures
that funds are not expended inappropriately (security of cash) and that invalid
invoices are not recorded.
P-6:
Follow up on open POs at IPP.

Effectiveness goal A, vendor invoice input completeness, and vendor invoice
update completeness: By following up on open POs (i.e., those with no matching
invoice), we can ensure that invoices are received in time to take advantage of
discounts (goal A) and are input in a timely manner (input completeness). We
receipt data.
82
P-7:
Follow up on open POs and receiving reports at BEPMIS.

Effectiveness goal A, vendor invoice input completeness, and vendor invoice
update completeness: By following up on open POs and receiving reports (i.e.,
those with no matching invoice), we can ensure that invoices are received in time
to take advantage of discounts (goal A) and are input in a timely manner (input
P-8:
Select invoices for payment based on due dates.

Effectiveness goal A: Ensures that payments are made in a timely manner, not too
early and not too late (i.e., to optimize cash discounts).
P-9:
Pay only open invoices and close invoices upon payment (independent
authorization to make payment) at BEPMIS.
Security of resources: Because cash cannot be expended in the absence of a
validated, open vendor invoice (and this invoice was recorded after matching it to
the PO and receiving report), security over the cash asset is also enhanced.
Payment input validity: The accounts payable computer program approves vendor
invoices for payment. Because the invoice was recorded after matching it to the
PO and receiving report, the validity of the payment input is ensured.
P-10:
Follow up on open invoices at BEPMIS.

Effectiveness goal A, payment input completeness, and payment update
completeness: By following up on open invoices (i.e., those due for payment), we
can ensure that payments are made in time to take advantage of discounts (goal A)
and are input in a timely manner (input completeness). We assume that the AP
master data is updated simultaneously with the input of the payment data.
P-11:
Digitally sign electronic payments.

Security of resources, payment input validity, payment input completeness,
payment input accuracy, payment update completeness, and payment update
accuracy: When the digital signatures are authenticated at IPP, they will know that
the sender has the authority to send the PIF, which prevents the unauthorized
diversion of resources (security of resources). This also determines that the PIF
itself is genuine (validity), has not been altered in transit, and thus is complete and
accurate. We assume that the AP master data is updated simultaneously with the
input of the payment data.
P-12:
83
Follow up on open invoices (at IPP).

Effectiveness goal A, payment input completeness, and payment update
completeness: By following up on open invoices (i.e., those due for payment), we
can ensure that payments are made in time to take advantage of discounts (goal A)
and are input in a timely manner (input completeness). We assume that the AP
master data is updated simultaneously with the input of the payment data.
P-13:
CO and DO approval required for payment.

Security of resources, payment input validity, and payment input accuracy: A
contracting officer and a disbursing officer reviews each PIF to ensure that each
payment is authorized (validity), accurate, and is not a misuse of resources.
M-1:
Independent validation of vendor invoices at IPP does not include a match to the
receiving report.
update accuracy: By comparing the invoice to the receiving report (in addition to
the PO), we could ensure that the recorded invoice reflects goods actually
received and ordered (validity) and that items, quantities, prices, and terms are
comparable to data on the PO and receiving report. We assume that the AP master
data is updated simultaneously with the input of the invoice data.
M-2:
Reconcile batch totals for invoices and invoice changes.

Efficient employment of resources: Using batch totals to reconcile the invoice data
is more efficient than reviewing each invoice.
Security of resources and vendor invoice input validity: Determining that invoice
inputs (and changes) reflect only those sent from IPP (or BEPMIS) ensures that
cash will not subsequently be disbursed inappropriately (security of resources)
and ensures the validity of the vendor invoice inputs (and changes).
Vendor invoice input completeness, vendor invoice input accuracy, vendor invoice
update completeness, and vendor invoice update accuracy: By comparing totals
received from IPP (or BEPMIS) to those produced after the update, we ensure that
all vendor invoices (or changes) were input (input completeness) and that all
vendor invoices (or changes) were input correctly (input accuracy). We assume
that the AP master data is updated simultaneously with the input of the invoice
data.
M-3:
Programmed edits for formatted and translated invoice data.

Vendor invoice input accuracy and vendor invoice update accuracy: Edits at
BEPMIS and the Enterprise Adapter would identify erroneous or suspect data and
reduce input errors at the IPP server. We assume that the AP master data is
updated simultaneously with the input of the receipt data.
M-4:
Programmed edits for formatted and translated payment data.
84
Payment input accuracy and payment update accuracy: Edits at BEPMIS and the
Enterprise Adapter would identify erroneous or suspect data and reduce input
errors at the IPP Server. We assume that the AP master data is updated
simultaneously with the input of the payment data.
M-5:
Reconcile payments made by BEPMIS to PIF totals.

Efficient employment of resources: Using batch totals to reconcile the payment
data is more efficient than reviewing each payment.
accuracy: By reconciling batch totals, the AP accountant can ensure that
payments sent to IPP reflect only those authorized, that cash is not disbursed
inappropriately (security of resources), that only legitimate payments are sent to
the IPP (input validity), that all data are sent (input completeness), and that all
data are input accurately. We assume that the AP master data is updated
M-6:
Reconcile approved payments to PIF totals.

accuracy: By reconciling batch totals, the CO and DO can ensure that payments
approved at IPP reflect only those authorized, that cash is not disbursed
inappropriately (security of resources), that only legitimate payments are
approved at IPP (input validity), that all data are input (input completeness), and
that all data are input accurately. We assume that the AP master data is updated
M-7:
Reconcile ACH totals to PIF totals and approved PIF totals.

accuracy: By reconciling batch totals, the AP accountant, DO, CO, and Fed can
ensure that payments sent to the Fed reflect only those authorized, that cash is not
disbursed inappropriately (security of resources), that only legitimate payments
are sent to the Fed (input validity), that all data are sent (input completeness), and
that all data are input accurately. We assume that the AP master data is updated
M-8:
Reconcile payment made by ACH to ACH file (and PIF totals and BEPMIS
payment totals).
85

accuracy: By reconciling batch totals, the AP accountant, DO, CO, and the Fed
can ensure that settled payments reflect only those authorized, that cash is not
disbursed inappropriately (security of resources), that only legitimate payments
are made (input validity), that all payments are made (input completeness), and
that all payments are made accurately. We assume that the AP master data is
updated simultaneously with the input of the payment data.
Solution Note: Several controls not described in the previous list could be
included in the solution to this problem, as present or missing, depending on
assumptions made. For example:
data.
86
FIGURE SM-13.12 Problem 2, part c solutionannotated systems flowchart for Internet Payment Platform
FIGURE SM-13.12 Problem 2, part c solutionannotated systems flowchart (continued)
87
88
Federal Reserve Bank
Supplier's Bank
FedACH System
Federal Reserve Bank of Boston
P. 1,
A
P. 1,
C
Read e-mail
Read e-mail
P. 1,
B
ACH-Form atted
file
Number of
payments
and dollars
in PIF
Number of
payments
and dollars
in ACH file
M-7
Transfer
ACH-formatted
file to FedACH
Initiate
transfer of
ACH file
Send Bulk Data

Acknowledgement to
AP, CO, DO, Boston
Fed
Manual intervention is
needed to send ACH file
through several servers
and links to FedACH
M-8
Credit
supplier's
account
Settle the
payment
Number of
payments
and dollars
paid
Bulk Data
Acknow ledgem ent
includes num ber of
paym ents and dollars
paid
M-8
AP
M-8
CO
FIGURE SM-13.12 Problem 2, part c solutionannotated systems flowchart (continued)
M-8
DO
P13-3 ANS.
89
1. K: Before invoices are accepted and recorded, Otis Company must validate
the invoice by comparing it to the related purchase order and a receiving
report to ensure that the invoice is for items that were ordered and received.
2. D: Durham Company should compare incoming invoices to vendor master
data to determine that the invoices are from authorized vendors. The invoices
should also be compared to the related purchase order and receiving report to
reduce the possibility that the invoice is fraudulent.
3. F: Albany, Inc. should follow up on open POs and receiving reportsthose
for which there is no invoiceto ensure that invoices are received and
recorded in a timely manner.
4. C: Because the invoices are entered in batches, there is an opportunity for
personnel in the AP department to reconcile batch totals to ensure that all of
the invoices are recorded correctly.
5. I: LaFond must have procedures in place to ensure that invoices identified as
in error are corrected and re-input to ensure input completeness.
6. J: The duties of Janice, the AP clerk, should be segregated from those of
programmers so that only authorized changes to programs are made by
programmers. Program change controls will ensure that this segregation is
effective.
7. E: By matching the PO, invoice, and receiving report, Kennedy Company can
ensure that invoices are accurately recorded. The matching would, for
example, determine that only 10 widgets were received and that the invoice
for 15 is incorrect.
8. A: Smithfield Company should perform a bank reconciliation. By matching
authorized payments (e.g., the cash disbursements journal) to checks cleared
by the bank (e.g., the bank statement), they would detect the unauthorized
checks written by Sue Granville.
9. B: Gary should not be able to get access to, and makes unauthorized changes
to, the vendor master data. Access control software can restrict data
maintenance activities to authorized personnel.
10. L: Disbursements should be only for invoices that have been recorded by
accounts payable. John should not be able to prepare disbursements unless
there is an invoice that was independently authorized and recorded (e.g., by
accounts payable).
90
So
P13-4 ANS.
Part a. Solution: There are no changes to Figure 13.3. See Figure SM 13.13 for
changes to Figures 13.4 and 13.6.
AP/CD process -- diagram 1

Changes for situations in DQ13-3 and P13-4
PO accounts
payable notification
Reject
Receiving
report
Vendor
invoice
1.1
Validate
invoice
Vendor
master data
Validated
vendor
invoices
Inventory
master data
Part a. solution: The data flow v alidated

vendor invoice has been changed to
a data store to emphasize that
invoices are accumulated and
processed in batches. Alternatively,
the invoice could be batched prior to
entry and validation.
Accounts payable
master data
Purchase
events data
Part b. solution: Record

payment date of 5th or 25th
1.2
Record
payable
GL payable
update
FIGURE SM-13.13 Problem 4 Solution
91
P13-4 Part b. solution: Process 2.1 would be triggered on the 5th and 25th of each month. No
changes to the figures is required.
FIGURE SM-13.13 Problem 4 Solution (continued)
P13-5 ANS.
1. Check digit (a programmed edit): This control will detect most keying errors
(such as transpositions) as the number is input. It is best suited to numbers
such as credit card numbers, customer numbers, and vendor numbers where
the check digit is calculated, appended to the account numbers, and used each
time the account number is entered to ensure that the number has been
accurately entered.
2. Reconcile batch totals: Because the documents were scanned, we can assume
that they were entered into the computer. However, we are told that they were
not recorded. Batch totals for the input documents prior to scanning should be
compared to totals for documents that are recorded to ensure that all
documents are scanned and accurately recorded.
3. Reasonableness test: Either the disbursement amount, the ending balance, or
both, must not have conformed to normal (i.e., reasonable) trends and would
have been detected before the update was completed.
4. Check the mathematical accuracy of vendor invoices (dollar totals): The
accuracy of the invoice should be checked prior to recording the payable.
92
So
Note: We could also match the invoice, PO, and receiving report. However, the
invoice may be for an open PO and receipt and simply be incorrect in its totals.
5. One-for-one checking of the receiving report and the invoice: This prevents
paying for goods that were not received.
6. One-for-one checking of the purchase order and the vendor invoice: This
prevents paying for goods that were not ordered or that were ordered at prices
and terms other than those on the purchase order.
7. Match invoice with PO: Accounts payable should not create a payable without
an open PO. When the PO is used to validate the invoice, it should then be
marked as closed (or linked to the invoice) so that it cannot be used again. If
this process is followed, the second or duplicate invoice would have been
discovered because no PO would match to the invoice.
8. Reconcile run-to-run totals: If the GL is updated as a batch, then a
reconciliation of batch totals, or run-to-run totals, would detect any errors.
Note: We could also argue that the subsidiary and controls accounts should be
updated simultaneously so that they remain in balance.
9. Match invoice with PO and receiving report: At the time that the vendor
invoice is input, the accounts payable process should match the invoice to an
existing vendor record, an open PO, and a receiving report, and should not
create a payable if this match fails.
10. Tickler file of open purchase orders and/or receiving reports: A periodic
review of open purchase orders and/or open receiving reports (i.e., those for
which no invoice has been received) will find and input the missing invoices
in a timely manner.
P13-6 ANS.
A. GL inventory received update

NOTE : Situations 3-5 do not apply to this flow.
1.Merchandise is purchased, and a periodic inventory process is used.
No entry is made (Note A)
2.Merchandise is purchased, and a perpetual inventory process is used.
Dr.
Inventory
Cr.
Clearing account (Note A)
B. GL payable update
1.Merchandise is purchased, and a periodic inventory process is used.
Dr.
Purchases
Cr.
Accounts payable
93
2.Merchandise is purchased, and a perpetual inventory process is used.

Dr.
Clearing account (Note A)

Cr.
Accounts payable
3. Office supplies are purchased.

Dr.
Office supplies on hand

Cr.
Accounts payable
4. Plant assets are purchased.

Dr.
Land or buildings or equipment

Cr.
Accounts payable
5. Legal services are purchased.

Dr.
Legal fees expense (Note B)

Cr.
Accounts payable
C. GL cash disbursement update

NOTE: The same entry applies to all five situations
Dr.
Accounts payable
Cr.
Cash (Note C)
NOTES: A. In a periodic inventory system, inventory balances are only calculated

and recorded at the end of each accounting period. However, under a perpetual
system, inventory is recorded as received. Because the vendor invoice is often
received and input at a different time and in a different location, a clearing
account must be used to record the credit when the inventory is received and the
debit when the invoice is received and input.
B. Assumes that the services are not connected with the acquisition of an asset. If
they were, the debit would be to an account such as Patents or Organization
Costs.
C. Assumes either that the payable for merchandise purchased (see entry a or b
previously) was first recorded net of the allowable discount or that no discount
was offered by the vendor. If the original purchase in a or b had been recorded
gross and the invoice was then paid within the discount period, the payment
entry would record the discount taken as a credit to either Purchase Discounts
(periodic system) or to Inventory (perpetual system).
94
So
P13-7 ANS.
Function
Risks
Finance
Nonoptimal cash balances (too

much, too little).
Controls and Technology

Cash planning (from before or at the same time
that POs are issued). Requires that POs be
recorded so that we can plan for eventual
payments.
Purchasing budgets.
Cash is lost.
Electronic payments.
Segregate controller and treasurer.
Accounts payable
Opportunity to take discounts is

lost.
??? (debit)
Follow up on open POs and receiving reports to

ensure timely input of invoices.
Record due dates and payment terms when
entering invoices.
AP (credit)
Invalid invoice (bogus [goods
not ordered and/or not received],
unauthorized, or duplicate
invoices are recorded).
Inaccurate invoice (e.g.,
incorrect vendor, invoice
number, amount).
Match invoices to PO and receiving report and

cancel PO and receiving report (or link them
together).
Edit on input.
Compare to vendor record, PO, and receiving
report.
Incomplete invoices.
Periodically examine open POs and open receiving

reports for invoices not received and/or not recorded
(tickler file).
Discounts are lost.
Automatic selection of invoices for payment based

on due dates.
Cash (credit)
Invalid payment (unauthorized

or duplicate payment is made).
Pay only for actual, unpaid invoices and close those

invoices when paid.
Discounts
taken (credit)
Inaccurate payment (e.g., wrong

vendor, wrong amount is paid).
Electronic payments with digital signatures.
Cash disbursements
AP (debit)
Populate payment with vendor and invoice data.

Match each payment with unpaid invoice.
Match payment batch totals to total of invoices
being paid.
Incomplete payments.
Periodically examine unpaid invoices (tickler file).
Note: During the receipt of inventory, a clearing account is debited. When the vendor invoice is received, the
same clearing account will be debited. In the SAP R/3 system, this account is called Goods Received/Invoice
Received (GR/IR).
TABLE SM-13.1
Process
1.0 Establish payable
Problem 8 SolutionSummary of AP/CD Processs Processes, Inputs, Outputs, and Data

Inputs
Outputs
1.1 Validate invoice
PO accounts payable notification
Validated vendor invoice
Receiving report
Vendor master data
Vendor invoice
Vendor master data
1.2 Record payable
Validated vendor invoice
Accounts payable master data
GL payable update
Purchase events data
2.0 Make payment
2.1 Prepare proposed payments
Accounts payable master data (Note a)
Proposed payments
2.2 Select and record payments
Proposed payments
Approved payments
Approved payments
Vendor payment
Cash disbursements event data
2.3 Issue and record

disbursements
GL cash disbursements update

Note a: Process 2.1 is triggered by a temporal eventnamely, payment due dates as reflected by the accounts payable master data.
95

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