Ajax Corporation is a manufacturing firm with a sophisticated purchasing system. The system is capable of automatically generating purchase requisitions for inventory items used in the manufacturing process as well as handling manual purchase requisitions for simple items such as consumable supplies and out-of-the ordinary purchases which happen infrequently such as replacements for equipment that become inoperable or required shipments of emergency items. Described below are the procedures for both types of purchases.
Automatic Purchase Requisitions
The purchasing system automatically generates purchase requisitions (PR) for inventory items used in the manufacturing process by monitoring the receipt of items into inventory, the rate of usage of those items in the manufacturing process and the estimated time for delivery after an order is placed.
Based on the above information, the system automatically generates an electronic PR for the item. The Purchasing Department reviews the PR and authorizes the issuance of an electronic purchase order (PO). If there is a regular supplier with negotiated prices, the system automatically generates the PO. If there is not a regular supplier with negotiated prices, the Purchasing Department calls suppliers of the item and gets price quotations. Once a supplier is selected, the electronic PO is generated.
In both cases described above, the PR and PO are electronically attached and filed in the Open Purchase Orders File which is accessible by the Accounts Payable Department. Electronic copies of the PO are sent to the supplier and the Undelivered Orders File which is accessible by the Receiving Department and Inventory Control.
The items which have been ordered are delivered to the Receiving Department where the items are examined and compared to what was ordered on the PO in the Undelivered Order File. If the items and the PO agree, the shipment is accepted and an electronic Receiving Report (RR) is generated. The PO is removed from the Undelivered Orders File, electronically attached to the RR and filed in the Delivered Orders File. A copy of the RR is electronically attached to the RR and PO in the Open Purchase Orders File. A copy is also sent to Inventory Control for updating the Inventory File.
If the items received do not agree with the PO, the shipment is rejected with an electronic message being sent to the Purchasing Department where an investigation is conducted as to the reason for the discrepancy.
When an invoice arrives, it is sent to the Accounts Payable Department. Here it is compared to the PR/PO/RR documentation in the Open Purchase Orders File. If they are in agreement, the invoice is approved for payment with the invoice information being entered into the Open Invoice File and set up for payment. A copy of the invoice is scanned and electronically attached to the PR/PO/RR documentation in the Open Purchase Orders File. This documentation is then transferred to the Closed Purchase Orders File
If there is a discrepancy with the invoice, it is scanned into an Invoice Suspense File where it is held while an investigation of the discrepancy is conducted. An electronic message is also sent to the Purchasing Department providing notification of the discrepancy. Once the discrepancy is satisfied, the invoice information is set up for payment and an electronic message is sent to the Purchasing Department.
Once an invoice has been paid, the information in the Open Invoice File is transferred to the Paid Invoice File.
MANUAL PURCHASE REQUISITIONS
The only difference in the handling of manual PRs is how they are initiated. When a department realizes it needs an item, it manually prepares an electronic PR and submits it to the Purchasing Department. From this point forward, the process is the same.
The system generates the following reports on a weekly basis which are distributed to the departments shown:
Report Departmental Distribution
Open Purchase Orders Purchasing, Accounts Payable
Undelivered Orders Purchasing, Receiving, Inventory Control
Closed Purchase Orders Purchasing, Receiving, Accounts Payable, Inventory Control
Delivered Orders Purchasing, Receiving, Inventory Control
Inventory Transactions Inventory Control
Open Invoices Accounts Payable
Paid Invoices Accounts Payable
1. Prepare a 3 column table, with the columns labeled from left to right as follows:
Inputs, Processes and Outputs. Identify each of the processes involved in the system along with the inputs and outputs associated with each process, as they are described above. This should be typed using a word processor or a spreadsheet program.
2. Prepare a system flowchart, following good practices including annotations, documenting the system as it is described above. Use VISIO or another flowcharting tool of your choice.
3. The system described above contains a number of inefficiencies and weaknesses in internal control, along with other items that create problems. Make recommendations for modifying the system inputs, processes and outputs to improve internal control or efficiency or solve a problem in the system. Be sure to justify your recommended changes identifying each inefficiency/weakness/ problem in the system design as it currently exists and why your recommended change solves the inefficiency/weakness/problem. This should be done in a document titled Recommended Modifications.
4. Prepare modified versions of 1 and 2 above reflecting your recommended modifications.
5. If you have to make any assumptions (you will), be sure to document them in a separate document titled Assumptions. Explain each assumption and your rationale for making it.