CASE A: PureProducts Company (Purchasing and receiving processes)

The PureProducts Company sells medical supplies to hospitals, clinics, and doctor's offices.

PureProducts uses an ERP system for all of its business processes. These supplies are

maintained on a real-time basis in an inventory database in an enterprise system. The inventory

records include reorder points for all regularly used items and one or two preferred vendors for

each item. Vendors are researched and approved by the purchasing manager before being

added to the vendor database by a clerk designated to maintain the database. PureProducts

employs the following procedures for purchasing and receiving. Throughout the day, the

supplies clerk receives from the enterprise system an online report listing those items that have

reached their reorder point. The clerk reviews the report and creates a purchase requisition by

filling out a requisition form in the company's enterprise system. Each requisition has a unique

identifier, and after creation, the purchase requisition data and inventory master data are

updated to reflect the purchase requisition. lnventory manager approval is required for

purchases over $1,000 and not covered by a blanket order. The inventory manager can log on

to the enterprise system any time to look at open purchase requisitions that require approval

and to approve those requisitions by checking the acceptance box. The computer records these

approvals on the purchase requisition date. Throughout the day, buyers in the purchasing

department receive from the enterprise system online approved requisitions with a list of

appropriate vendors. They select a vendor and enter PO data. After the PO is saved, the

purchase requisition data and inventory master data are updated. The completed, pre-

numbered PO is then printed in the purchasing department and mailed to the vendor. The

receiving department inspects and counts the goods when they are received, compares the

count to the packing slip, pulls up the PO in the enterprise system, and enters the quantity

received. The PO and inventory master data are updated after the receiving record is saved.

The general ledger master data are also updated to reflect the increase in the inventory

balance.

P 12-1.

For the company assigned by your instructor, complete the following requirements:

a. Prepare a table of entities and activities.

b. Draw a context diagram.

c. Draw a physical data flow diagram (DFD).

d. Prepare an annotated table of entities and activities. Indicate on this table the

groupings, bubble numbers, and bubble titles to be used in preparing a level 0 logical

DFD.

e. Draw a level 0 logical DFD.

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Solution

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CASE A: PureProducts Company (Purchasing and receiving processes)

The PureProducts Company sells medical supplies to hospitals, clinics, and doctor's offices.

PureProducts uses an ERP system for all of its business processes. These supplies are

maintained on a real-time basis in an inventory database in an enterprise system. The inventory

records include reorder points for all regularly used items and one or two preferred vendors for

each item. Vendors are researched and approved by the purchasing manager before being

added to the vendor database by a clerk designated to maintain the database. PureProducts

employs the following procedures for purchasing and receiving. Throughout the day, the

supplies clerk receives from the enterprise system an online report listing those items that have

reached their reorder point. The clerk reviews the report and creates a purchase requisition by

filling out a requisition form in the company's enterprise system. Each requisition has a unique

identifier, and after creation, the purchase requisition data and inventory master data are

updated to reflect the purchase requisition. lnventory manager approval is required for

purchases over $1,000 and not covered by a blanket order. The inventory manager can log on

to the enterprise system any time to look at open purchase requisitions that require approval

and to approve those requisitions by checking the acceptance box. The computer records these

approvals on the purchase requisition date. Throughout the day, buyers in the purchasing

department receive from the enterprise system online approved requisitions with a list of

appropriate vendors. They select a vendor and enter PO data. After the PO is saved, the

purchase requisition data and inventory master data are updated. The completed, pre-

numbered PO is then printed in the purchasing department and mailed to the vendor. The

receiving department inspects and counts the goods when they are received, compares the

count to the packing slip, pulls up the PO in the enterprise system, and enters the quantity

received. The PO and inventory master data are updated after the receiving record is saved.

The general ledger master data are also updated to reflect the increase in the inventory

balance.

P 12-2.

For the company assigned by your instructor, complete the following requirements:

a. Draw a systems flowchart.

b. Prepare a control matrix, including explanations of how each recommended existing

control plan helps to accomplish or would accomplish in the case of missing plans,

each related control goal. Your choice of recommended control plans could come

from this chapter plus any controls from Chapters 9 through 11 that are germane to

your company's process.

c. Annotate the flowchart prepared in part (a) to indicate tl1e points where the control

plans are being applied (codes P-1, ..., P-11) or the points where they could be

applied but are not (codes M-1, ..., M-11).

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Solution

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P 12-4.

The following is a list of 12 control plans from this chapter or from Chapters 8, 9, 10,

and 11.

Control Plans

A. Compare PO data to input receipt data

B. Written code of conduct

C. Compare vendors for price, terms, quality, and availability

D. Monitor open POs

E. Independent authorization to record receipt

F. Count goods and compare to vendor packing slip

G. Independent vendor master data maintenance

H. Personnel management controls (supervision)

I. Perimeter and building controls

J. Segregate warehouse and receiving functions

K. Digital signature

L. Logical and physical access controls

The following are 10 system failures that have control implications.

System Failures

1. Warehouse managers at Broward, Inc. have been discovering inventory shortages.

When they investigate the paperwork transferring the goods from receiving to the

warehouse, the evidence indicates that the goods had arrived in the warehouse.

2. The accounts payable clerks at Grande Company have difficulty reconciling the

quantities recorded as received and the quantities on vendor invoices. Usually, the

vendors claim that they are billing for the amounts that they had shipped.

3. Carol, a buyer at Pilot Company, ordered unneeded inventory items from a vendor of

which she is an owner.

4. Donald worked in the receiving department at Altos, Inc. One day, goods were

received from Adams Company for which no open PO could be found. To get the

items received, Donald figured out a way to create a PO. Later, it was discovered

that the goods had never been ordered.

5. Katie, a buyer at Form, Inc. was in a hurry to buy a part needed to get the form

factory back in operation. She found Edger Company, a local vendor that could

supply the part that day but for a premium price. Because it was an emergency, she

created a vendor record for Edgar and issued the PO. Subsequently, other buyers

began to use Edgar for other purchases.

6. Steve, who works in the warehouse at Lakeshore, Inc. has gotten into some financial

difficulties and has figured out a way to make some extra cash by working with the

folks at Herman Company. He creates orders for purchases from Herman and

records a receipt, but no goods are ever received. Subsequently Herman sends a bill

to Lakeshore, which gets paid, and Steve gets paid 20 percent of the take.

7. At Walnut, Inc. there are often discrepancies between what is ordered and what is

recorded as received. Discrepancies include wrong items and wrong quantities.

8. Sand Lake Company is often running out of inventory of certain key items. When

research is conducted to find out tl1e reason for the stockouts, they find that a PO

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had been issued, but the goods had not yet been received. Typically, these delayed

deliveries are consistently from the same vendors whose poor performance has

been noted in the past.

9. Marina Company uses the Internet to send POs to its vendors. The vendors for Marina

have been receiving POs that seem to be from Marina but are actually bogus.

10. The internal audits at Deltona Company have found several discrepancies in the

inventory data; the inventory is on the shelf, but the records do not reflect those

balances. When they investigate further, they find that the goods were received but

never recorded.

Match the 10 system failures with a control plan that would best prevent the system

failure from occurring. Also, give a brief (one to two sentence) explanation of your

choice. A letter should be used only once, with two letters left over.