This Study Resource Was: ACC539: Expenditure Cycle Solutions Problem 8.4

ACC539: Expenditure Cycle Solutions
Problem 8.4
The ABC Company performs its expenditure cycle activities using its integrated ERP
system as follows:
• Employees in any department can enter purchase requests for items they note as
either out of stock or in small quantity.
• The company maintains a perpetual inventory system.
• Each day, employees in the purchasing department process all purchase requests
from the prior day. To the extent possible, requests for items available from the
same supplier are combined into one larger purchase order to obtain volume
discounts. Purchasing agents use the internet to compare prices in order to select
suppliers. If an internet search discovers a potential new supplier, the purchasing
agent enters the relevant data in the system, thereby adding the supplier to the
approved supplier list. Purchase orders above $10 000 must be approved by the
purchasing department manager. EDI is used to transmit purchase orders to most
suppliers, but paper purchase orders are printed and mailed to suppliers who are not
EDI capable.
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• Receiving department employees have read-only access to outstanding purchase
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orders. Usually, they check the system to verify existence of a purchase order prior
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to accepting delivery, but sometimes during rush periods they unload trucks and
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place items in a corner of the warehouse where they sit until there is time to use the
system to retrieve the relevant purchase order. In such cases, if no purchase order
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is found, the receiving employee contacts the supplier to arrange for goods to be
returned.
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• Receiving department employees compare the quantity delivered to the quantity
indicated on the purchase order. Whenever a discrepancy is greater than 5%, the
receiving employee sends an email to the purchasing department manager. The
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receiving employee uses an online terminal to enter the quantity received before
moving the material to the inventory stores department.
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• Inventory is stored in a locked room. During normal business hours, an inventory

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employee allows any employee wearing an identification badge to enter the

storeroom and remove needed items. The inventory storeroom employee counts the
quantity removed and enters that information in an online terminal located in the
storeroom.
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• Occasionally, special items are ordered that are not regularly kept as part of
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inventory, from a specialty supplier who will not be used for any regular purchases.
In these cases, an accounts payable clerk creates a one-time supplier record.
• All supplier invoices (both regular and one-time) are routed to accounts payable for
review and approval. The system is configured to perform an automatic three-way
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match of the supplier invoice with the corresponding purchase order and receiving
report.
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• Each Friday, approved supplier invoices that are due within the next week are routed
to the treasurer’s department for payment. The cashier and treasurer are the only
employees authorised to pay funds, either by EFT or by printing a cheque. Cheques
are printed on a dedicated printer located in the treasurer’s department, using
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special stock paper that is stored in a locked cabinet accessible only to the treasurer
and cashier. The paper cheques are sent to accounts payable to be mailed to
suppliers.
• Monthly, the treasurer reconciles the bank statements and investigates any
discrepancies with recorded cash balances.
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Required
a. Prepare level 0 dataflow diagrams for ABC’s current system for each of the
following:
i. Ordering
ii. Receiving
iii. Approval
iv. Cash payments.
b. Recommend how the system could be changed to overcome some of the
inefficiencies you identified by completing part a.
c. Describe how you would reengineer the company’s expenditure cycle activities
for recommendations made in part b.
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Solution Problem 8.4 a
i) Ordering
Departments
Purchase request
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1.0
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Collate purchase orders
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Order
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Suppliers
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3.0
Prepare order
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Accounts payable
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2.0
Add new supplier Purchase order
Order
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Orders
4.0 Outstanding order

Orders
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Approve order
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Supplier Receiving
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ii) Receiving goods
Purchasing
1.0
Check outstanding
Orders orders
Orders
Orders
Discrepancies
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2.0
Supplier Bill of lading Check receipts with
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order
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Receiving report
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Receiving report
3.0
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Enter goods received
Inventory
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Receiving report
Various
Inventory removed
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departments
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Inventory requisition
4.0
Enter removed items
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iii) Approval
Treasuary
Departments Voucher packet
Cheques &
EFT voucher
5.0
Special purchase Update accounts
request payable
4.0
Approve invoices for
payment
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Invoice
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Accounts payable
1.0 subsidiary ledger
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Add new supplier
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INvoice
Suppliers
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3.0
2.0 Match PO, RR
Prepare special & invoice
purchase order Orders Purchasing
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Orders Order Invoice Receiving report

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Receiving
Supplier department
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iv) Cash Payment
Accounts payable
Voucher packet
Cheques & EFT voucher
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1.0
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Approve and prepare
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payment
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General ledger
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2.0
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Reconcile
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bank account
and cash balances
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Bank
statement
Bank
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Page 6 of 9
Solution Problem 8.4 b and c
b c
Purchase requests are not reviewed Purchase requisitions should be reviewed
and approved prior to submission. This and approved by the originating
can result in ordering unnecessary department’s manager prior to being
items. processed.
A formal inventory control system A formal inventory control system should
(EOQ, MRP, or JIT) is not used. This is be used to plan purchases to minimise the
likely to result in both shortages and combined costs of stock outs, excess
excess inventory. inventory, and ordering costs.
There is no mention of periodic physical Regular physical counts of inventory need
counts of inventory. Thus, the to be conducted.
perpetual inventory records are likely Discrepancies with the perpetual inventory
to become inaccurate over time. It will records need to be promptly investigated.
also not be possible to detect theft of
inventory in a timely manner.
Any purchasing agent can add new Restrict the number of employees who can
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suppliers to the approved supplier make changes to the approved supplier list.
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master file without approval. As a Periodically print a report of all changes and
result, the approved supplier master review them to ensure that they have all
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file may contain unreliable or non- been approved.
existent suppliers.
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Selection of suppliers is based solely on
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price. As a result, inferior quality include information on supplier reliability
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products could be purchased, resulting and product quality.
in increased costs due to warranty The system should be configured to track
repairs, scrap, or rework. actual supplier performance against
promised delivery dates.
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Receiving department employees have Reconfigure the system and do not permit
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access to the quantities ordered on receiving department employees’ to access

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purchase orders. This may lead them quantity ordered information.

to not actually count every delivery,
especially during busy times, but
instead simply visually compare the
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quantity delivered to the quantity

ordered.
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Receiving department employees Create a policy requiring receiving

sometimes unload deliveries without department employees to always verify the
verifying the existence of an approved existence of a valid purchase order before
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purchase order. This wastes time in accepting delivery.

unloading and then subsequently Publish and enforce sanctions for violating
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contacting the supplier to return the this policy.

unordered items. Schedule additional help during busy
periods.
Receiving department employees Configure the system to compare quantities
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inform purchasing of discrepancies received to quantities ordered. The system

between quantities received and should send discrepancies exceeding a
ordered greater than 5%. They may tolerable deviation directly to the
fail to do this during busy periods, purchasing manager.
resulting in failure to timely resolve
problems.
Page 7 of 9
Solution Problem 8.4 b and c
b c
The identity of employees removing The identity of employees removing
inventory from the storeroom is not inventory should be recorded. This can be
recorded. This makes it difficult to done either by swiping an ID badge or by
investigate the cause of any entering a user ID in an online terminal.
discrepancies between recorded and
actual counts of inventory.
Accounts payable clerks can create The system should be configured to print a
one-time supplier records without list of all one-time suppliers. Management
review and subsequently approve should review that list regularly. Accounts
payments to those suppliers. This payable should not be able to create any
creates the possibility of fraudulent new supplier records – that task should
disbursements. only be done by the purchasing manager.
There is no indication that supporting The system should be configured to mark

documents in the voucher package are supporting documents in a voucher
marked “cancelled” or “paid” after package as PAID when used to generate a
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being used to issue a cheque. This can cheque or EFT payment.
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result in duplicate payments.
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Cheques are returned to accounts Cheques should be mailed by the cashier or
payable to be mailed to suppliers. This the cashier’s assistant.
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provides an opportunity to intercept
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and alter a cheque.
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The treasurer, who has the ability to Someone other than the cashier or
write cheques and authorise EFT treasurer should reconcile the bank account
payments, also reconciles the bank statement.
account. This provides an opportunity
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to commit fraud and cover up the

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discrepancy by altering the

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reconciliation.
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Discussion Question 8.4

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Should every company switch from the traditional three-way matching process (purchase
orders, receiving reports, and supplier invoices) to the two-way match (purchase orders
and receiving reports) used in ERS? Why or why not?
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Solution:
Switching to ERS simplifies accounts payable and eliminates a major source of problems:
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inconsistency between supplier invoices and prices quoted when placing the order.
However, ERS requires firm commitments to prices by suppliers – which may not be
feasible for certain types of products like commodities.
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ERS also requires that receiving dock employees exercise great care in counting
merchandise received.
It also requires configuring the information system to automatically calculate and track
payment due dates without the benefit of a reminder provided by receiving a supplier
invoice.
Page 8 of 9
Problem 8.1
P8.1 Match the term in the left column with their appropriate definition in the right column. Note
there are more definitions in the right column than terms in the left column.
Terms Definitions
1. _n__ economic order quantity a. A document that creates a legal obligation to buy
and pay for goods or services.
2. __f_ materials requirements b. The method used to maintain the cash balance in
planning (MRP) the petty cash account.
3. _e__ Just-in-time (JIT) inventory c. The time to reorder inventory based on the quantity
system on hand falling to predetermined level.
4. __g_ purchase requisition d. A document used to authorise a reduction in
accounts payable when merchandise is returned to a
supplier.
5. __b_imprest fund e. An inventory control system that triggers production
based upon actual sales.
6. __a_ purchase order f. An inventory control system that triggers production
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based on forecasted sales.
7. _s__ kickbacks g. A document only used internally to initiate the
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purchase of materials, supplies, or services.
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8. __r_ procurement card h. A process for approving supplier invoices based on a
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two-way match of the receiving report and purchase
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9. __p_ blanket purchase order i. A process for approving supplier invoices based on a
three-way match of the purchase order, receiving
report, and supplier invoice.
10. _h__ evaluated receipts j. A method of maintaining accounts payable in which
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settlement (ERS) each supplier invoice is tracked and paid for

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separately.
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11. __m_ disbursement voucher k. A method of maintaining accounts payable, which

generates one cheque to pay for a set of invoices
from the same supplier.
12. _q_ receiving report l. Combination of a purchase order, receiving report,
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and supplier invoice that all relate to the same

transaction.
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13. __d_ debit memo m. A document used to list each invoice being paid by a
cheque.
14. _o__ vendor managed inventory n. An inventory control system that seeks to minimise
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the sum of ordering, carrying, and stockout costs.

15. __l_ voucher package o. A system whereby suppliers are granted access to
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point-of-sale (POS) and inventory data in order to

automatically replenish inventory levels.
16. _j__ non-voucher system p. An agreement to purchase set quantities at specified
intervals from a specific supplier.
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17. _k__ voucher system q. A document used to record the quantities and
condition of items delivered by a supplier.
r. A special purpose credit card used to purchase
supplies.
s. A fraud in which a supplier pays a buyer or
purchasing agent in order to sell its products or
services.
Page 9 of 9
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ACC539: Expenditure Cycle Solutions

• Inventory is stored in a locked room. During normal business hours, an inventory

employee allows any employee wearing an identification badge to enter the

4.0 Outstanding order

Enter goods received

Departments Voucher packet

Orders Order Invoice Receiving report

Cheques & EFT voucher

access to the quantities ordered on receiving department employees’ to access

purchase orders. This may lead them quantity ordered information.

quantity delivered to the quantity

Receiving department employees Create a policy requiring receiving

purchase order. This wastes time in accepting delivery.

contacting the supplier to return the this policy.

inform purchasing of discrepancies received to quantities ordered. The system

There is no indication that supporting The system should be configured to mark

to commit fraud and cover up the

discrepancy by altering the

Discussion Question 8.4

settlement (ERS) each supplier invoice is tracked and paid for

11. __m_ disbursement voucher k. A method of maintaining accounts payable, which

and supplier invoice that all relate to the same

the sum of ordering, carrying, and stockout costs.

point-of-sale (POS) and inventory data in order to

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