ACCT7209: BUSINESS

INFORMATION SYSTEMS
MODULE 9:
PURCHASING/ACCOUNTS
PAYABLE/CASH DISBURSEMENTS

Our Objectives in This Session

Discuss the nature of the P/AP/CD system
Describe the major functions
of the P/AP/CD system
Describe the components of and
processing that occurs in a P/AP/CD system
Describe some of the major decisions to be made
in relation to P/AP/CD
Identify the risks/exposures associated with the
P/AP/CD system and some appropriate rules and
controls

Nature of the P/AP/CD

System
The P/AP/CD system comprises those
components (resources, agents,
locations) that interact to achieve
the goal of acquiring needed goods and
services from authorized vendors

Functions of the P/AP/CD

System - I
Purchase goods and services

only those that are needed

only those that are authorized
from reliable vendors/suppliers
only those that are acceptable quality
only those that have acceptable prices
and terms

Functions of the P/AP/CD

System - II
Receive goods and services
only those ordered
only those that are of acceptable quality

Return of unacceptable goods

Exercise control over goods received
Pay for goods and services received

Major Events in the

Purchases/AP/CD System - I
The Real-World System

The Information System

Functional
employee/manager
recognizes need for
goods/services

Requisition
completed/entered in
information system (open
requisition)

Authorization given to
purchase
goods/services

Requisition authorized for

purchase (authorized
requisition)

Major Events in the

Purchases/AP/CD System - II
The Real-World System

The Information System

Goods/services
purchased

Purchase order
created/entered (open
purchase order)
Purchase order sent to
vendor/supplier

Major Events in the

Purchases/AP/CD System - III
The Real-World System

The Information System

Goods/services
received

Receiving report matched

against purchase order
Liability recognized
Purchase order marked
as closed
Update inventory,
payables, GL

Major Events in the

Purchases/AP/CD System - IV
The Real-World System

The Information System

Payment for
goods/services

Vendors invoice
received/entered
Cheque/EFT sent
Update payables, cash,
GL

Goods returned

Update inventory,
payables, GL

Flowchart of the Purchases/AP/CD

System - I

Requisition

Validate input
Create requisition

Requisitions/
Orders

Vendors
Ordering

Approve requisition
Generate purchase
order

Receiving

Compare receiving
against purchase order
Close purchase order
Update inventory
Update payables

Purchase
Order

To Supplier

Inventory

Payables

Subtypes
open requisition
approved requisition
open purchase order
closed purchase order

Flowchart of the Purchases/AP/CD

System - II
Invoice/
Statement

From Supplier

Invoice
entry

Validate input
Compare to receiving

Requisitions/
Orders

Vendors
Payables

Approve payment
Generate cheque

Receiving

Input return
Validate input
Update inventory
Update payables

Cheque

To Supplier

Inventory

Payables

Subtypes
open requisition
approved requisition
open purchase order
closed purchase order

Purchase Process Systems Flowchart

Purchase Process Systems

Flowchart Continued

BP Diagram Using BPMN

Purchasing Process

AP/CD Process Systems

Flowchart

Interactions between
Purchases/AP/CD and Other Systems
Purchases/AP/CD
Purchases/AP/CD

General
General Ledger
Ledger

Inventory
Inventory

Factoring of the P/AP/CD System

P/AP/CD System
Requisitioning

Purchasing

Receiving

Paying

Managing a System: Our Concerns

?
Representation

Is the real-world system

safeguarding assets and
operating effectively and
efficiently?

Is the information system

faithfully representing
the real-world system?

What Must We Manage?

The real-world system
is it effective and efficient?
does it safeguard assets?
does it comply with statute/regulation/
policy/procedures?

The information system

is it faithfully tracking the real-world system?
is it providing us with the information we need?

Levels of Decision Making and

Focus of Questions

Strategic

Systems

Management Control

Types/Subsystems

Operational Control

Types/Subsystems

Transactional

Components

Goals and Things/Entities

States
Goals:
Asset safeguarding
Effectiveness
Efficiency
Compliance

THINGS:
Components
Types
Subsystems
Systems
Events

Structuring Our Questions

First choose a level (transaction,
operational control, management control,
strategic)
Then choose a thing (component, type,
subsystem, system)
Next choose a goal (asset safeguarding,
effectiveness, efficiency)
Finally, choose a state or event of the
thing pertinent to the goal

Asking Questions
Remember!!
With components (the lowest
level)
our focus will be hereditary
variables

With types,subsystems, and

systems (higher levels)
our focus will be emergent variables

Some Typical Questions

States
How much? What value?
How satisfied? What quality?

Events
What happened? When did it happen?
Why did it happen? Where did it happen?
Who was involved? What resources were
involved? How long?

Some Types of Things/Components

Things

Resources

Internal Agents

Agents

Locations

External Agents

Components in P/AP/CD System

Resources
Products/Services

External Agents
Vendor/Supplier

Internal Agents
Functional Mgr
Purchasing Clerk

Receiving Clerk
Payables Clerk

Locations
Functional area
Receiving
Suppliers premises

Questions about Components - I

Resources
State Question: What is the current
purchase cost of a specific instance of
Product X? (effectiveness)
Event Question: Over the last reporting
period, when was a specific instance of
Part Y ordered from Supplier A?
(efficiency)

Questions about Components - II

External Agents
State Question: What value of products
did we purchase from Supplier A at the
end of last year? (effectiveness)
Event Question: Over the last reporting
period, how did the number of times
Supplier A delivered raw materials late
change? (efficiency)

Questions about Components - III

Internal Agents
State Question: At the end of last
month, how many requisitions had been
submitted by Manager X?
(effectiveness/efficiency)
Event Question: Over the last reporting
period, how long did Manager Y take to
approve the last requisition? (efficiency)

Questions about Components - IV

Locations

State Question: What value of goods had

been received at Receiving Dock A at the
end of last year?
(effectiveness/efficiency)
Event Question: Over the last reporting
period, how did the number of times
Receiving Dock A accepted goods that did
not meet quality standards change?
(effectiveness/efficiency)

Questions about Types - I

Resources
State Question: What was the average
purchase cost of all instances of Product
X at the end of the last month?
(effectiveness)
Over the last reporting period, when was
a decline in the quality of Product X
first noticed? (effectiveness)

Questions about Types - II

External Agents
State Question: Which Suppliers do not
give a discount on Product X purchases as
at the end of last month? (effectiveness)
Event Question: Over the last reporting
period, on average, how long did Suppliers
take to fill orders? (efficiency)

Questions about Types - III

Internal Agents
State Question: As at the end of last
month, on average, how many Receiving
Clerks are needed to staff a receiving
dock? (efficiency)
Event Question: In the last year, how
many times did Purchasing Clerks wrongly
approve purchase orders? (efficiency)

Questions about Types - IV

Locations
State Question: At the end of last
week, what dollar value of goods was
received at Head Office Receiving
Docks? (effectivness/efficiency)
Event Question: Why did Receiving Docks
have more goods stolen last year relative
to the previous year? (asset
safeguarding)

Questions about Subsystems - I

Requisitioning

At the end of last month, what was the average

cost of requisitioning products? (state)
How many requisitions were processed as at the end
of last year? (state)

Purchasing

Over the last reporting period, how has the average

cost of processing a purchase order changed? (event)
As at the end of the last reporting period, what was
the average time to process a purchase order?
(state)

Questions about Subsystems - II

Receiving
At the end of last month, on average, how long did
it take to receive and store a product? (state)
As at the end of last month, what is the average
cost of receiving and storing a product? (state)
Paying
What is the average cost of processing the payment
on a bill as at the end of last month? (state)
Over the last reporting period, how has the average
float time on payments changed? (event)

Questions about the P/AP/CD System

In addition to the purchase price, what is the
average cost of acquiring a product (requisitioning,
purchasing, receiving, paying) as at the end of last
month? (state)
Over the last reporting period, on average, how
long did it take from the time a requisition is
prepared until the time inventory is stored in a
warehouse? (event)
Over the last reporting period, how has the
average number of errors made each month in the
P/AP/CD system changed? (event)

What Can Go Wrong?

An exposure arises/eventuates in the
RWS and we
dont focus on the right CSFs
dont have the relevant information

Our IS does not faithfully track the

RWS

Our Concerns

?
Representation

Is the real-world system

safeguarding assets and
operating effectively and
efficiently?

Is the information system

faithfully representing
the real-world system?

RWS Exposure 1: Errors and

Irregularities with Requisitioning
Excessive goods/services requisitioned
Insufficient goods/services requisitioned
Goods/services not requisitioned on a timely
basis
Wrong goods/services requisitioned
Goods/services requisitioned by an
unauthorized person

RWS Exposure 1: Rules/Controls

Inventory/services control system to
ensure accurate, complete, and timely
requisitioning of goods/services
Accurate perpetual inventory
Only high-quality personnel authorized
to requisition goods/services

RWS Exposure 2: Errors and

Irregularities with Ordering
Goods/services ordered do not match
requisitioned needs
Goods/services not ordered on a timely basis
Goods/services ordered
by an unauthorized person
Good/services not ordered on
most favourable prices/terms
Quality of goods/services ordered
inadequate

RWS Exposure 2: Rules/ Controls

Supplier performance analyses
Approved supplier lists
Matching orders against requisitions
Prenumbered orders
Only high-quality personnel authorized to
order goods/services
Prohibition of supplier gifts
Requirement for purchasing agent to disclose
financial interests in suppliers

RWS Exposure 3: Errors and

Irregularities with Receiving
Goods/services received that were not
ordered
Goods/services received that do not match
order in terms of type, amount, or quality
Damaged goods received
Goods stolen/damaged/misplaced upon
receipt
Goods transferred to wrong person/location

RWS Exposure 3: Rules/Controls

Match goods/services received against
approved purchase order
Quantity ordered not disclosed to receiving
(Receiving must count/inspect)
Physical control over goods received
Only high-quality personnel authorized to
receive goods/services
Documentation for all internal transfers of
goods

RWS Exposure 4: Errors and

Irregularities with Paying
Payment made for goods/services not ordered
Payment made for goods/services not
received
Discounts lost without justification
Late payment/failure to make payment
Payment for wrong amount
Payment to wrong vendor
Duplicate payments

RWS Exposure 4: Rules/ Controls

Recheck supplier invoice accuracy
Compare invoice against purchase order and
receiving report
Procedures to evaluate discounts and track
due dates
Only high-quality personnel authorized to
pay for goods/services
Funds transfer separated from authorization
to pay

IS Exposure 1: Errors and

Irregularities in Standing Data
Nature
inaccurate, incomplete, untimely,
redundant data representing the states of
things in the P/AP/CD system
data representing unauthorized or fictitious
states of things in the P/AP/CD system

Losses
losses through untimely or wrong decisions
losses through misappropriation of assets

IS Exposure 1: Rules/Controls
Rules
criteria/procedures for capturing, establishing,
and maintaining standing data

Controls

access controls
input validation controls
well-trained personnel
independent review of secure
log/exceptions/personnel

IS Exposure 2: Errors and

Irregularities in Event Data
Nature
inaccurate, incomplete, untimely,
redundant data representing events
that occur in the P/AP/CD system
data representing unauthorized or fictitious events
that occur to things in the P/AP/CD system

Losses
losses through untimely or wrong decisions
losses through misappropriation of assets

IS Exposure 2: Rules/Controls
Rules
criteria/procedures for capturing and reporting
events

Controls

access controls
input validation controls
well-trained personnel
independent review of secure
log/exceptions/personnel

IS Exposure 3: Errors and

Irregularities in Reported Data

Nature

inaccurate, incomplete, untimely, redundant

reporting about the states of or events that have
occurred to things in the P/AP/CD system
unauthorized reporting about the states of or events
that have occurred to things in the P/AP/CD system

Losses
losses through wrong decisions
losses through misappropriation of assets
losses through privacy violations

IS Exposure 3: Rules/Controls
Rules
criteria/procedures for generating reports

Controls
access controls
input validation controls for
report parameters
well-trained personnel
independent review of secure
log/exceptions/personnel

Some Critical Success Factors - I

Adequacy of cash to pay
suppliers
Timeliness of payments
to suppliers
Cash Flow
Statement

Aged Paid
Invoices
Report

Aged Paid Invoices Report

Cycle Date

Total Cycle

0- 30 Days

31- 60 Days

61- 90 Days

Over 90 Days

01/07/20XX

113197

73474

33211

5298

1214

04/07/20XX

87379

62984

20134

3011

1250

08/07/20XX

119674

92345

20111

6231

987

11/07/20XX

73482

55827

14003

3045

607

15/07/20XX

85415

59012

20982

4106

1315

18/07/20XX

96115

77989

11459

5548

1119

22/07/20XX

76072

63544

8290

3254

984

25/07/20XX

115557

81237

30815

2846

659

29/07/20XX

92046

77223

12838

1157

828

858937

643635

171843

34496

8963

643635

815478

849974

858937

74. 93

20. 01

4. 02

1. 04

74. 93

94. 94

98. 96

100. 00

Total
Cumulative Total
Percent Paid
Cumulative Percent

100. 00

Some Critical Success Factors - II

Identifying suppliers who offer the
most favourable prices and terms
Payment of suppliers at latest
possible date without
losing discounts
undermining relationships with suppliers

When to Take Discounts

Take a discount when the cost of not taking the
discount exceeds the organizations cost of shortterm borrowing.
Example: 2/10, n/30 (2 percent discount if paid
within 10 days; payment due within 30 days)
What is the companys effective interest rate on
the 20-day loan if it does not pay within 10 days?
Answer: 36.5% (2 % X 365/20)
Calculating Discount Interest Rates

Review
Nature of and functions of P/AP/CD system
Components of and processing that occurs
in a P/AP/CD system
Major decisions to be made in relation to a
P/AP/CD system
Rules and controls within the P/AP/CD
system
Some CSFs in the P/AP/CD system