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13.11 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
being 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 in 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 information 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.
• Receiving department employees have read-only access to outstanding purchase
orders. Usually, they check the system to verify existence of a purchase order
prior to accepting delivery, but sometimes during rush periods they unload
trucks and place the 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 is found, the receiving employee contacts the supplier to
arrange for the goods to be returned.
• 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 receiving employee uses an online terminal to enter the quantity received
before moving the material to the inventory stores department.
• Inventory is stored in a locked room. During normal business hours an
inventory 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.
• Occasionally, special items are ordered that are not regularly kept as part of
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 3-
way match of the supplier invoice with the corresponding purchase order and
receiving report.
• 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 authorized to disburse funds, either by EFT or by printing a
check. Checks are printed on dedicated printer located in the treasurer’s
department, using special stock paper that is stored in a locked cabinet
accessible only to the treasurer and cashier. The paper checks 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.
Required:
a. Identify weaknesses in ABC’s existing expenditure cycle procedures, explain the
resulting problems, and suggest as solution.
Weakness/Problem
Applicable Control
Purchase requests are not reviewed and
approved prior to submission. This can
result in ordering unnecessary items.
Purchase requisitions should be reviewed and
approved by the originating department’s
manager prior to being processed.
A formal inventory control system (EOQ,
MRP, or JIT) is not used. This is likely to
result in both shortages and excess
inventory.
A formal inventory control system should be
used to plan purchases to minimize the
combined costs of stock outs, excess
inventory, and ordering costs.
There is no mention of periodic physical
counts of inventory. Thus, the perpetual
inventory records are likely to become
inaccurate over time. It will also not be
possible to detect theft of inventory in a
timely manner.
Regular physical counts of inventory need to
be conducted.
Discrepancies with the perpetual inventory
records need to be promptly investigated.
Any purchasing agent can add new
suppliers to the approved supplier master
file without approval. As a result, the
approved supplier master file may
contain unreliable or non-existent
suppliers.
Restrict the number of employees who can
make changes to the approved supplier list.
Periodically print a report of all changes and
review them to ensure that they have all been
approved.
Selection of suppliers is based solely on
price. As a result, inferior quality
products could be purchased, resulting in
increased costs due to warranty repairs,
scrap, or rework.
Criteria for selecting suppliers should include
information on supplier reliability and
product quality.
The system should be configured to track
actual supplier performance against promised
delivery dates.
Receiving department employees have
access to the quantities ordered on
purchase orders. This may lead them to
not actually count every delivery,
especially during busy times, but instead
simply visually compare the quantity
delivered to the quantity ordered.
Reconfigure the system and do not permit
receiving department employees’ to access
quantity ordered information.
Receiving department employees
sometimes unload deliveries without
verifying the existence of an approved
purchase order. This wastes time in
unloading and then subsequently
contacting the supplier to return the
Create a policy requiring receiving
department employees to always verify the
existence of a valid purchase order before
accepting delivery.
Publish and enforce sanctions for violating
this policy.
Receiving department employees inform
purchasing of discrepancies between
quantities received and ordered greater
than 5%. They may fail to do this during
busy periods, resulting in failure to
timely resolve problems.
Configure the system to compare quantities
received to quantities ordered. The system
should send discrepancies exceeding a
tolerable deviation directly to the purchasing
manager.
The identity of employees removing
inventory from the storeroom is not
recorded. This makes it difficult to
investigate the cause of any discrepancies
between recorded and actual counts of
inventory.
The identity of employees removing
inventory should be recorded. This can be
done either by swiping an ID badge or by
entering a user ID in an online terminal.
Accounts payable clerks can create one-
time supplier records without review and
subsequently approve payments to those
suppliers. This creates the possibility of
fraudulent disbursements.
The system should be configured to print a
list of all one-time suppliers. Management
should review that list regularly.
Accounts payable should not be able to create
any new supplier records – that task should
only be done by the purchasing manager.
There is no indication that supporting
documents in the voucher package are
marked “cancelled” or “paid” after being
used to issue a check. This can result in
duplicate payments.
The system should be configured to mark
supporting documents in a voucher package
as PAID when used to generate a check or
EFT payment.
Checks are returned to accounts payable
to be mailed to suppliers. This provides
an opportunity to intercept and alter a
check.
Checks should be mailed by the cashier or the
cashier’s assistant.
The treasurer, who has the ability to write
checks and authorize EFT payments, also
reconciles the bank account. This
provides an opportunity to commit fraud
and cover up the discrepancy by altering
the reconciliation.
Someone other than the cashier or treasurer
should reconcile the bank account statement.
b. Draw a BPMN that reflects the ABC Company’s reengineered expenditure cycle processes.
Actual solution will depend upon which weaknesses were identified; this diagram addresses all the weaknesses.
Employee
Activity Performed (sequential, left-to-right across all rows)
Any
Employee
Purchasing
(Buyer)
Receiving
Clerk
Inventory
Control
Accounts
Payable
Purchase
Requisition
Order
Inventory
Receive
& Inspect
Use P.O and
R.R. to approve
invoice and
update A/P
Receive
Invoice from
Supplier
Receive &
Reconcile bank
statement
Review & Approve – if
not approved, return to
requester Update open
P.O.s
RR copy
Receiving
Report
Store Goods &
Sign off with
Receiving
Clerk
Copy of P.O.
File Cancelled
Voucher
Package
Monthly
Treasurer or
Cashier
Pay Supplier
& Cancel
Voucher
Package
