Chapter 13

CHAPTER
13
The Accounts Payable/Cash

Disbursements (AP/CD) Process
Learning Objectives
After reading this chapter, you should be able to:
• Describe the relationship between the AP/CD process and its business environment.
• Summarize how various technologies, including e-invoicing and e-payments, can improve
the effectiveness of the AP/CD process.
• Depict the logical and physical characteristics of a typical AP/CD process.
• Prepare a control matrix for a typical AP/CD process, including an explanation of how
business process control plans can accomplish operations and information process control
goals.
All organizational and individuals must participate in the bill payment/cash disbursement
process. In fact, many of you might consider bill payment as an unfortunate part of your
personal life! Bill payment is an area subject to substantial risk because the purpose of
AP/CD is to send cash to appropriate recipients. Once cash is disbursed it is difficult to
get it back. Thus, the AP/CD process disburses organizational resources and the effective
administration of AP/CD is crucial to the management of working capital.
Despite its importance to organizations, AP has remained one of the last bastions of
manual processing; only 29 percent of companies are currently sending and receiving
invoices electronically, and only 19 percent are using networks to transmit invoices and
payments.1 Even more amazing is that the average business purchase-to-pay process cycle
is 60 days long and it takes on average 17.1 days to process a paper invoice. If you are using
online banking for your personal bill payments, you may be more advanced technologically
than 70 percent of business organizations. Thus AP automation is a growing area, with
55 percent of organizations planning to implement at least electronic invoicing within the
next two years.2
1
Cohen, B. How automating accounts payable unlocks financial value. Strategic Finance 8, 31, 2015. ISSN: 1524-
833X.
2
Heller, M. Electronic payments 10 times cheaper than Checks, CFO.com, http://ww2.cfo.com/applications/2015/
10/electronic-payments-10-times-cheaper-checks/
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 499
One example of the benefits of accounts payable automation is the success story
of ServiceMaster, which serves its customers through over 5,500 outlets. You may
know their brands such as Terminix, Merry Maids, and TruGreen Lawn Care.
Their business units had multiple ERP systems and multiple accounts payable
organizations. They decided to consolidate and centralize their accounts payable
operations. By automating payables using advanced software that helped them
integrate the process with their vendors, they were able to strengthen their cash
management process. From the outside, that might not appear to be exciting, but
consider the results. Using JP Morgan’s Order-to-Pay software, they are able to
take advantage of the benefits of using a secure settlement network to connect
with their suppliers. That connection includes automated purchase orders,
invoices, payments, and discount processes. In addition to increased accuracy and
reduced paperwork, the capability to take discounts has increased—in fact, it
increased 6.7 times during the first year! By paying within the discount period, the
discount savings can be invested, which adds to the company’s bottom line—an
exciting proposition for any manager!
How does it work? Of their suppliers that enrolled in the program, 65 percent
selected payment discount terms. That meant that some suppliers that did not
previously offer discounts now offer them. There is also a “PO Flip” opportunity that
allows a supplier to turn a PO into an invoice, again reducing errors at the time the
company is invoiced because the invoice is built directly from the PO. The “Pay-
Me-Now” option of the system allows ServiceMaster to save some money, if the
vendor agrees in advance, even if the discount period is passed. For example, if the
payment terms of an invoice are 2/10, net 30, and for some reason the payment
cannot be made until the 14th day, they will automatically get a portion of the
discount, an amount known in advance and agreed upon by both parties. This option
allows ServiceMaster to use accounts payable to manage cash to the company’s benefit.
Scenario is from www.jpmorgan.com/ordertopay and Christopher Rauen and June
Gregg, “Payables Automation to Improve Performance in a Difficult Economy”
(video) at http://www.jpmorgan.com/tss/General/Order-to-Pay_Webinar_ and_Case_
Studies/1159380899331, both accessed March 12, 2013.
Synopsis
This chapter concludes the purchase to pay process begun in Chapter 12. The
AP/CD process includes invoice verification and payment processing, which are
the last two steps in the purchase-to-pay process (Figure 2.10, pg. 56). After we
introduce the players involved in the AP/CD process, we describe the logic and
data typically employed in the process. In addition, we call your attention to the
“Physical Process Description” and the “Application of the Control Framework”
sections, which depict a state-of-the-art automated AP system.
Introduction
As previously noted, the AP/CD process comprises the last two steps in the purchase-
to-pay process (Figure 2.10). In addition to presenting these steps, we will also look
at problems, such as fraud, that may occur in the process. That discussion will also
500 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Chapter 13 – The Accounts Payable/Cash Disbursements (AP/CD) Process 501
include controls to help prevent the problem, or reduce the impact. Let’s now take a
closer look at the AP/CD process.
Process Definition and Functions

The Accounts payable/cash disbursements (AP/CD) process is an interacting
structure of people, equipment, activities, and controls designed to create information
flows and records that accomplish the following:
• Handle the repetitive work routines of the verifying vendor invoices and disburs-
ing payments.
• Support the decision needs of those who manage the accounts payable depart-
ment and the treasurer’s department.
• Assist in the preparation of internal and external reports such as cash requirements
forecast, aging of open vendor invoices, and spending compared to budget.
Organizational Setting
The AP/CD process is closely linked to functions and processes inside and outside
the organization. Let’s take a look at those links and on the operation of the AP/CD
process.
A Horizontal Perspective
Figure 13.1 and Table 13.1 present a horizontal view of the relationship between the
AP/CD process and its organizational environment. The two functions we show in
Figure 13.1 are the AP department, which reports to the controller, and the cashier’s
department, which reports to the treasurer. We have assumed that these two depart-
ments are the primary operating units related to the AP/CD process however,
for a given organization, the departments associated with the process may differ.
Figure 13.1 and Table 13.1 show the various information flows generated or captured
by the process. Take some time now to study the figure and get acquainted with the
process and the entities with which it interacts. The data flows in Table 13.1 indicate
the nature of these interactions.
Figure 13.1 and Table 13.1 reveal four information flows that function as vital
communication links among the various departments, business processes, and exter-
nal entities. We briefly explain each flow here to give you a quick introduction to the
AP/CD process. Although Figure 13.1 depicts the flows using the document symbol,
most of them can be implemented using electronic communications (e.g., workflow)
and data stored in the enterprise database.
• Flow 1 is the invoice from a vendor. This could be a mailed paper invoice or an
“electronic bill/invoice presentment.”
• With flow 2, the accounts payable department notifies (via document or elec-
tronic notice) the general ledger that an invoice has been received and recorded.
The general ledger uses these data to update the general ledger accounts as
appropriate. The three most common entries are: 1) debit a long term asset,
credit accounts payable to reflect an increase in payables, 2) debit an expense
account, credit accounts payable to reflect an increase in payables, or 3) debit
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
502 Accounting Information Systems
FIGURE 13.1 A Horizontal Perspective of the AP/CD Process
VENDOR VP FINANCE
Controller Treasurer
3a. Payment
request
1. Invoice (voucher)
Accounts payable Cashier
4b. Payment
notice
3b. Payment
request notice
2. Accounts 4c. Payment

payable invoice notice
notice
General ledger
4a. Payment
“the clearing account for inventory received” as discussed in Chapter 12, credit
accounts payable to reflect an increase in payables.3
• Flow 3a is a request (via document or electronic notice) from accounts payable
to the cashier for a payment to be made, and flow 3b notifies (via document,
electronic notice, or record in the enterprise database) the general ledger that a
payment is pending (these data will be matched with actual payments).
• Flow 4a is the cashier’s payment (via paper check or electronic payment) to the vendor.
Flow 4b notifies (via document or electronic notice) accounts payable that a payment
has been made so that the invoice can be closed. Flow 4c notifies (via document or
electronic notice) the general ledger that a payment has been made. The general
ledger matches Flow 4c against the notice of pending payments (3b) and updates the
general ledger accounts for cash, accounts payable, and discounts taken, if any.
3
As noted in Chapter 12, the timing of the recording in the general ledger of the receipt transaction
(i.e., increase inventory) and this invoice transaction (i.e., increase accounts payable) may depend on how close
together these two activities occur and the specific software employed. A clearing account entry will be required
when it is not possible to record the increase in inventory and increase in accounts payable simultaneously.
TABLE 13.1 Description of Information Flows

Flow No. Description
1 Invoice received from vendor

2 Accounts payable invoice notice sent to general ledger
3 Approved voucher (payment request) sent to cashier (3a) and to general ledger (3b)
4 Payment (e.g., check) sent to vendor by cashier (4a), paid voucher (payment
notice) returned to the accounts payable department (4b), payment notice sent
to the general ledger (4c)
A Vertical Perspective
Figure 13.2 presents a representative organization chart that combines the purchasing
process of Chapter 12 and the AP/CD process described in this chapter. We put
them together here so that we can discuss the interactions of these processes and the
players involved. In Chapter 12, we introduced the functions reporting to the VP of
logistics. We noted at that time the interactions between purchasing and receiving
functions such as how the warehouse manager uses purchasing data to schedule per-
sonnel to handle incoming shipments and provide storage space for the goods to be
received. Now we introduce the AP department (which reports to the controller) and
the cashier, who reports to the treasurer. As discussed above, the AP and cashier
FIGURE 13.2 A Vertical Perspective of the Purchasing and AP/CD Processes
VP VP
finance logistics
Controller Warehouse Purchasing

Treasurer
manager manager
Cashier Supervisor, Supervisor, Buyers

accounts payable receiving
department department
(Horizontal information flows, as illustrated in Figures 12.1 and 13.1)
NOTES:
1. This figure represents a partial organization chart for the finance and logistics functions.
2. The broken lines represent vertical information flows (often in the form of management reports) based
on data captured or generated by the purchasing and AP/CD processes.
functions interact as the AP department provides validated vouchers for disbursement

of cash, while the cashier has custody of the organization’s cash and executes the pay-
ments authorized by the accounts payable department. The functions also interact as
purchasing and receiving provide data to accounts payable to validate incoming vendor
invoices. Further, the treasurer uses purchasing and accounts payable data to ensure
that funds will be available to meet future obligations. Finally, treasury data about
available funds is used by purchasing supervisors to schedule purchases.
Logical Process Description

The principal activities of the AP/CD process are (1) processing invoices received
from vendors; (2) disbursing cash to vendors; (3) recording vendor invoices and pay-
ments in vendor subsidiary ledgers; and (4) informing the general ledger process to
make entries for these invoices and payments. This section uses logical DFDs to
present the basic composition of a typical AP/CD process. We also describe and
illustrate the process’s major data stores.4
Discussion and Illustration

Figure 13.3 reflects the level 0 DFD for a typical AP/CD process. The next two
sections describe the processes within the two bubbles in Figure 13.3.
Establish Payable
Figure 13.4 presents a DFD for establishing accounts payable (this process is also known
as invoice verification, invoice validation or invoice matching). As shown in bubble 1.1, the
first step in establishing the payable involves validating the vendor invoice. This process
is triggered by receipt of the vendor invoice, a business document (or electronic trans-
mission) that notifies the purchaser of an obligation to pay the vendor for goods (or ser-
vices) that were ordered by and shipped (or provided) to the purchaser. Process 1.1
comprises a number of steps. First, the vendor invoice is matched against vendor master
data to determine that the invoice is from an authorized vendor. Next, the vendor invoice
is compared against the PO data (either a paper copy of the PO or electronic PO data) to
make sure that there is a PO (i.e., there is an authorized purchase) and that the invoiced
items, quantities, and prices conform to the PO. Then the invoice is matched against the
receiving report data (either a paper copy of the receiving report or electronic receiving
data) to determine that the items and quantities have been received. These line-by-line
comparisons among the vendor invoice, PO, and receiving report are known as a three-
way match, an important control in the AP process by which data from the purchasing
process is used to authorize the recording of the invoice. Finally, the invoice is further val-
idated by checking for accuracy of terms, computed discounts, extensions, and total
amount due. Note that the vendor master data are updated at this point to reflect pur-
chase history and vendor performance data.
Controls Most companies allow for the data to match within a certain tolerance level for
error (e.g., 1 percent difference between total amount due) to enhance efficiency.
However, if the data do not match within that tolerance level or there is no PO,
or items and quantities ordered and received do not agree, or prices are wrong,
4
As we have in several earlier chapters, we remind you once again that the data stores in the logical DFDs
might well be the AP/CD process view of an enterprise database.
FIGURE 13.3 The AP/CD Process—Level 0 Diagram
PO accounts
Purchasing payable Vendor Purchase
process notification master data events data
1.0
Receiving Establish Inventory
report payable master data
Vendor
invoice GL payable
update
Accounts payable
master data
General
Vendor ledger
process
2.0
Make GL cash
Vendor disbursements
payment
payment update
Cash disbursements
events data
FIGURE 13.4 AP/CD Process—Diagram 1
Reject Accounts payable

Vendor Purchase
PO master data
master data events data
accounts
payable
notification
1.1 1.2
Receiving Validate Validated Record
report invoice vendor payable
invoice
Vendor Inventory GL
invoice master data payable
update
the invoice is rejected and follow-up procedures are initiated (see the reject stub
emanating from bubble 1.1). If the data items agree, the invoice is approved, and
the validated invoice is sent on to the next step to be used to record the payable.
Enterprise Figure 13.5 depicts the PO and related data that can be displayed in the SAP
Systems system. At the top of this display is the PO data. We can drill down here to find the
related purchase requisition. At the bottom of the screen, you can see the PO history,
including the goods receipt and the invoice receipt. Before the invoice was accepted,
the three-way match described previously was performed using this related data.
506
Accounting Information Systems
FIGURE 13.5 Sample SAP Purchase Order Data Screen
Source: Copyright by SAP AG. Reprinted with permission from SAP.
Bubble 1.2 in Figure 13.4 depicts the process of recording the payable in the purchase
events data and accounts payable master data. A payable is recognized and recorded by:
• Creating a record in the purchase events data store. This record includes details on
the general ledger accounts to be updated, including accounts payable, freight,
and sales tax, unless these latter two items are to be added to the cost of the
acquired asset. If the vendor invoice is for other than the purchase of inventory,
these general ledger accounts could also include assets, such as fixed assets, and
expenses. Creating a record in the accounts payable master data to reflect an open
invoice—a payment due to a vendor.
• Updating the inventory master data for the cost of the items received. The update
to inventory when the goods were received might have been a standard cost or
the cost from the PO. Differences among the PO, standard, and actual costs
would be accounted for as standard cost variances.
• Notifying the general ledger of the amount of the payable that was recorded (see the
data flow “GL payable update”). If the update to the general ledger is periodic, the data
for this update would come from a summary of the purchase events data store rather
than from the recording of each vendor invoice. The three most common entries are:
1) debit a long-term asset, credit accounts payable to reflect an increase in payables, 2)
debit an expense account, credit accounts payable to reflect an increase in payables, or
3) debit “the clearing account for inventory received” as discussed in Chapter 12,
credit accounts payable to reflect an increase in payables. For entry type #3, we assume
that a clearing account is used because we generally receive and record the quantity of
inventory prior to receiving the vendor invoice. If the invoice is received with the
goods, then the entry is simply: debit inventory, credit accounts payable.
Make Payment
Figure 13.6 presents a DFD of the cash disbursements process. The payment process
described here is triggered by payment due date information residing on the accounts
payable master data. This payment date may not be based on the vendor’s invoice
date but may be the date of the receipt of the goods or the receipt of the vendor
invoice, whichever is later.
FIGURE 13.6 AP/CD Process—Diagram 2
Accounts payable
master data
Cash disbursements
events data
2.1
Prepare
proposed
payments
2.2
Select and 2.3 Gl cash
Proposed Issue and disbursements
record
payments record update
payments
disbursements
Approved Vendor
payments payment
As you can see, the payment process begins with the periodic preparation of a list of
payments that might be made at this time (bubble 2.1). This list is prepared “periodically”
because most organizations have a set schedule, such as twice weekly, for performing the
cash disbursements process. In addition to payment due dates, the selection of items for this
list is also based on terms that may indicate a discount can be taken if a payment is made at
this time. The proposed list is reviewed and amended (bubble 2.2) to add additional
invoices that are not due for payment yet but that can be consolidated with other payments
being made to a vendor. Proposed payments may be removed from the list if there are
insufficient funds or if payments to a vendor are on hold.
Bubble 2.3 in Figure 13.6 depicts the process of preparing the disbursement,
which is equal to the amount of the invoice less any discount taken. The payment is
recorded by:
• Marking the invoice as paid on the accounts payable master data.
• Making an entry in the cash disbursements event data store.
• Sending payment data to the general ledger, where an entry is made to reflect
the payment (debit accounts payable, credit cash, credit discount taken if a dis-
count is applicable). If the update to the general ledger is periodic, the data for
this update comes from a summary of the cash disbursements events data store
rather than from the recording of each vendor payment.
Controls The payment schedule adopted depends on the availability of any favorable dis-
counts for prompt payment and on the organization’s current cash position. Some
companies pay multiple invoices with one check to minimize the cost of processing
invoices. Most cash managers attempt to optimize cash balances to help achieve
another operations process (effectiveness) goal: to ensure that the amount of cash main-
tained in demand deposit accounts is sufficient (but not excessive) to satisfy expected cash dis-
bursements. To accomplish this goal, many banks offer their commercial customers a
cash-management service by which the bank transfers from the customer’s money
market or other investment account into its checking account the exact amount
needed to cover the checks that clear each day.
Processing Noninvoiced Disbursements

Figure 13.4 and Figure 13.6 demonstrate only those events for which an invoice is
received from the vendor for purchases of goods or services. But some disbursements are
not typically supported by invoices, such as payments for corporate income taxes, monthly
rent, movements of cash into investments, and repayment of debt obligations and
interest. In this section, we examine how such noninvoiced disbursements are processed.
Figure 13.7 is a logical DFD that shows the processing of noninvoiced payments
under two different assumptions: (1) a true voucher process is used in which all expen-
ditures must be vouchered—that is, formally recorded as a payable—before they can
be paid, and (2) a nonvoucher process is employed.
As you can see in Figure 13.7, the trigger for either process is a payment request
from an originating department. The originator might be the treasurer in the case of
payments for investment, the controller’s department in the case of tax payments, or
even an accounts payable software module for recurring monthly payments such as
rent. Upon receipt of the payment request, process 1.0 (at the top of the figure) initi-
ates the preparation of a payment voucher, for all payments without regard to the
purpose and no matter how small (even petty cash reimbursements) and adds the
accounts that will be affected by the distribution. to it. All vouchered items are then
recorded as payables (see process bubble 2.0) before they are paid. This means that
FIGURE 13.7 Processing Non Invoiced Disbursements
Purchase events
(1) Assuming a true voucher system is used:
data
Originating Payment Disbursement General

department request voucher ledger
GL payable
update
1.0 2.0
Prepare Record
disbursement disbursement
voucher voucher
Accounts payable
master data
GL cash
disbursement
update
Payment Cash disbursements

notification events data
3.0
Issue
and record
payment
Payment
Payee
(2) Assuming a nonvoucher system is used:
Originating Payment General

department request ledger
Approved
1.0 payment
Approve request
payment
Payment
GL cash
notification
disbursement
2.0 update
Issue
and record
payment
Payment Payee
Cash disbursements
events data
from an accounting standpoint, the distribution of charges to asset, expense, or other

accounts is reported to the general ledger by process 2.0 (immediately or periodically
via a summary of the purchase events data store); in process 3.0, the general ledger is
notified to eliminate the payable and reduce the cash account (immediately or peri-
odically via a summary of the cash disbursements event data).
Controls In the nonvoucher process depicted in part 2 of Figure 13.7, the payment request
also is approved in process bubble 1.0, and the account distribution is added to the
request. However, the approval process is less formal than in the voucher process—
that is, no disbursement voucher is prepared. Physically, the approved payment
request that is passed to process bubble 2.0 usually consists of the same document
that entered process 1.0, with the addition of authorized signatures and account dis-
tribution. In this process, the payment is issued and recorded in the cash disbursements
event data, and the general ledger is notified (immediately or periodically via a sum-
mary of the cash disbursements event data) to reduce the cash account and record the
distribution of accounting charges (e.g., expenses).
Logical Data Descriptions

The AP/CD process entails several data stores. The inventory master data, vendor master
data, purchase requisitions master data, purchase order master data, and purchase receipts data
were described in Chapter 12. The following are three additional data stores:
• Purchasing events data contains, in chronological sequence, the details of each
invoice that is recorded. Each record shows the date recorded; vendor invoice
number; account distributions, such as assets, expenses, freight, sales tax (or the
clearing account for inventory receipts); and gross invoice amount.
• Accounts payable master data is a repository of all unpaid vendor invoices.
The data include vendor number, vendor invoice number and date, terms, date
due, line item details (items, quantities, cost), and invoice total.
• Cash disbursements events data contains, in chronological sequence, the
details of each cash payment made. Accordingly, each record in this data store
shows the payment date, vendor identification, disbursement voucher number
(if a voucher process is used), vendor invoice number(s) and gross invoice
amount(s), cash discount(s) taken on each invoice, net invoice amount(s), check
amount, and check number (or other payment identification such as those used
for electronic payments). In a paper based system, the cash disbursements event
data store equates to a check register.
Logical Database Design

As in the prior three chapters, this section focuses on a centralized database approach to
data management. In the bottom portion of Figure 13.8, we portray the data model
for the AP/CD process in an entity-relationship (E-R) diagram. We also show (shaded)
the entities and relationships from Chapter 12 because these two chapters are inter-
related from a database design perspective.
In examining the figure, you’ll notice that the events of validating invoices
and disbursing cash are depicted by two entity boxes (VALID_INVOICES and
CASH_ DISBURSEMENTS). The E-R diagram reflects how these events relate
to prior events (PURCHASE_REQUISITIONS, PURCHASE_ORDERS, and
PURCHASE_ RECEIPTS), agents (EMPLOYEES and VENDORS), and resources
(INVENTORY and BANKS). To simplify the figure, we have done the following:
• Assumed that all POs are for merchandise inventory items (i.e., purchases of
other goods and services are ignored)
• Assumed that a nonvoucher process is employed
Figure 13.8 shows that there is no need for a separate entity for accounts pay-
able. Rather, accounts payable balances at any point in time—or their counterpart,
FIGURE 13.8 Entity-Relationship (E-R) Diagram (Partial) for the AP/CD Process
INVENTORY 1 1 EMPLOYEES
(Requesters)
(Note A)
N
PURCHASING_RELATIONS received_from
N
N N
N 1 N
N 1 EMPLOYEES
PURCHASE_REQUISITIONS approved_by
(Approvers)
1 EMPLOYEES
generate prepared_by
(Buyers)
1 N
1 N 1 EMPLOYEES
PURCHASE_ORDERS approved_by
(Approvers)
N
1
1
yield made_to VENDORS
(Note B) N
1 N 1 EMPLOYEES
PURCHASE_RECEIPTS completed_by
(Warehouse)
1 EMPLOYEES
result_in approved_by
(AP Employees)
1 N
(Note B)
1 N
VALID_INVOICES received_from
1
(Note A) 1 VENDORS
(Note C) N
1
PAYMENT_RELATIONS sent_to
(Note D) N
1
N
1 N N 1 EMPLOYEES
BANKS paid_by CASH_DISBURSEMENTS prepared_by
(AP Employees)
N
1 EMPLOYEES
authorized_by (Treasury
Employees)
A—See pages 510 and 512 for an explanation of the box around PAYMENT_RELATIONS and why the model is not fully normalized.
B—Assume there are no partial receipts of any line item on a PO or partial invoicing of any line item on a receipt.
C—Assume the difference between VALID_INVOICES and CASH_DISBURSEMENTS represents accounts payable and/or deferred charges.
D—Assume a nonvoucher system is used and a single cash disbursement could pay for several vendor invoices, but there are no partial payments
(each line item and each invoice are paid in full).
deferred charges—are computed as the difference between the continuous events,

VALID_INVOICES and CASH_DISBURSEMENTS.
Also carried over from Figure 12.10 (pg. 472) is the relationship PURCHASING_
RELATIONS. As in Figure 12.10, this relationship accumulates a record of events as
they occur. In this case, we add the VALID_INVOICES event (i.e., receipt and record-
ing of the vendor invoice) to this relationship. Recall from Figure 12.10 that this rela-
tionship already has accumulated a record of the PURCHASE_REQUISITIONS,
PURCHASE_ORDERS, and PURCHASE_RECEIPTS. The box around this rela-
tionship indicates that we will have a relation in our database for this relationship,
whereas the other relationships will not have a corresponding relation.
As with Figure 10.9 (pg. 378), Figure 11.9 (pg. 424), and Figure 12.10 (pg. 472),
the model in Figure 13.8 is not fully normalized yet. We include the “extra” relation-
ships and redundant attributes to help you see the logical sequence of events. Also,
the notes on Figure 13.8 indicate that this is a simplified model. Certainly, realistic
models must deal with partial receipts, invoices, and payments. From Figure 13.8,
we developed the relational tables shown in Figure 13.9.
As with the E-R diagram, many of the relational tables are the same as shown in
Chapter 12 (Figure 12.11, pg. 473) because these two chapters are tightly integrated
from a database perspective. We repeat here from Figure 12.11 all but the last three
relations shown in Figure 13.9 to emphasize the connections (linkages) among rela-
tions and to remind you that before making a cash disbursement, we have requisi-
tioned the goods (or services), sent a PO to a vendor, received the goods, and
received the vendor invoice. Also note that the relations in Figure 13.9 are not dis-
similar to those shown in Figure 10.9 (e.g., VENDORS is similar to CUSTOMERS,
PURCHASE_ORDERS resembles SALES_ORDERS, and so forth).
Finally, we should note that the primary key of the relationship
PAYMENT_RELATIONS is a composite key comprised of the invoice number
(from VALID_INVOICES) and the cash disbursement number (from CASH_
DISBURSEMENTS). This relationship matches the invoices with the disbursements
and allows us to easily obtain the total amount of each disbursement. The box around
this relationship indicates that we will have a relation in our database for this relation-
ship, whereas the other relationships will not have a corresponding relation.
Technology Trends and Developments

Information technology has fueled significant increases in productivity in accounts
payable departments. A recent study shows that leading automated organizations
can process and invoice in 3.7 days, compared with an average of 17.1 days for non-
automated organizations, and that the invoice processing cost for automated
organizations is 15 percent less. In addition, highly automated AP organizations are
60 percent more likely to take advantage of early payment discounts.5 In this section,
we explore e-invoicing, the processing of invoices in electronic form, and e-payments,
the electronic submission of payments. These two technology categories have spurred
AP/CD productivity gains.
E-invoicing is accomplished in one of three ways. First, an accounts payable
office scans paper invoices (companies typically receive 80 percent of their invoices
in paper format) upon receipt from the vendors. The digital images of the invoices
5
Heller, M. Electronic payments 10 times cheaper than Checks, CFO.com, http://ww2.cfo.com/applica-
tions/2015/10/electronic-payments-10-times-cheaper-checks/
FIGURE 13.9 Selected Relational Tables (Partial) for the AP/CD Process
Shaded Attribute(s) = Primary Key
INVENTORY
Item No Item_Name Price Location Qty_on_Hand Reorder_Pt
936 Machine Plates 39.50 Macomb 1,500 950
1001 Gaskets 9.50 Macomb 10,002 3,500
1010 Crank Shafts 115.00 Tampa 952 500
1025 Manifolds 45.00 Tampa 402 400
EMPLOYEES
Chapter 13 – The Accounts Payable/Cash Disbursements (AP/CD) Process

Emp_No Emp_First_Name Emp_Last_Name Soc_Sec_No Emp_Dept
B432 Carl Mast 125-87-8090 492-01
A491 Janet Kopp 127-93-3453 639-04
A632 Greg Bazie 350-97-9030 538-22
B011 Christy Kinman 123-78-0097 298-12
VENDORS
Vend No Vend Name Vend Street Vend City Vend_ Vend_ Vend Tel Vend_ Credit_ FOB Terms
State ZIP Contact Terms
539 Ace Widget Co. 190 Shore Dr. Charleston SC 29915 803-995-3764 S. Emerson 2/10,n/30 Ship Pt
540 Babcock Supply Co. 22 Ribaut Rd. Beaufort SC 29902 803-552-4788 Frank Roy n/60 Destin
541 Webster Steel Corp. 49 Abercorn St. Savannah GA 30901 912-433-1750 Wilbur Cox 2/10,n/30 Ship Pt
PURCHASE_REQUISITIONS
PR_No PR_Date Emp_No Emp_No PO_No
a b
(PR_Requestor) (PR_Approver)
53948 20071215 A491 E745 4346
53949 20071215 C457 A632 4350
53950 20071216 9999 540-32 4347
53951 20071216 F494 D548 4352
PURCHASE_ORDERS
PO No PO Date Vend No Ship Via Emp_No Emp_No PO Status
(Buyer) (PO_Approver)
4345 20071218 539 Best Way F395 F349 Open
4346 20071220 541 FedEx C932 F349 Sent
4347 20071222 562 UPS E049 D932 Acknowledged
PURCHASE_RECEIPTS
Rec_No Rec_Date Emp_No PO_No Invoice_No
(Receiving)
42944 20071216 B260 4322 7-945
42945 20071216 B260 4339 9542-4
42946 20071216 B260 4345 535
513
(Continued )
514
FIGURE 13.9 Selected Relational Tables (Partial) for the AP/CD Process (Continued )
VALID_INVOICES
Invoice_No Invoice_Date Vend_No Emp_No
(AP)
4388 20071224 524 G232
92360 20071223 572 G232
535 20071224 539 D923
PURCHASE_RELATIONS
PR_No Item_No Qty_Requested PO_No Qty_Ordered Rec_No Qty_Received Inv_No Qty_Invoiced Amt_Invoiced
53947 1005 200 4345 200 42946 200 535 200 1200.00
53947 1006 50 4345 50 42946 50 535 50 212.50
53947 1015 25 4345 25 42946 25 535 25 418.75
CASH_DISBURSEMENTS
CD_No CD_Date Emp_No Emp_No Amount Vend_No Bank
(AP) (Treasury)
9561 20080102 H263 M0513 1782.10 524 2239
9562 20080102 H263 M513 432.50 572 2240
9563 20080102 H263 E219 1831.25 539 2239
BANKS
Bank_No Bank_Name
2239 Acme
2240 Benton
PAYMENT_RELATIONS
Invoice_No CD_No Amount
4388 9561 1782.10
92360 9562 432.50
535 9563 1831.25
a
If automatic purchase requisition, then 9999; if employee, then employee number.
b
If automatic purchase requisition, then contract number of trading partner; if employee, then employee number.
can then be routed for processing and approval using workflow processes. To create a
payable on the system, however, the data from these scanned invoices must either be
typed into the accounts payable system or read using OCR. Nonstandard formats on
the invoices can lead to errors in the input data. Second, an organization can use pur-
chasing cards, or p-cards, to make purchases for items such as office supplies and less
expensive items. In this way, several small purchases that would otherwise lead to
individual invoices are consolidated into one credit card bill. Using p-cards reduces
the number of invoices by as much as 50 percent, along with the costs associated
with entering and approving those invoices for payment. Third, vendors can submit
invoices electronically in either EDI or XML formats. These invoices may be submit-
ted using VANs or a Web portal. Upon receipt, they are fed directly into the
accounts payable system (i.e., no manual entry is required).
To recognize the savings that can accrue from reducing the number of invoices,
some organizations have eliminated invoices altogether. Evaluated receipt settlement
(ERS) is a process by which an organization pays for a purchase on the basis of the
goods receipt. Upon receipt of the goods, the AP/CD system compares the received
quantity to the open purchase quantity and, if appropriate, makes a payment based on
the price and terms on the PO. ERS arrangements are only made with vendors who
have proven records for quality and reliability. When established, ERS can reduce the
costs associated with entering invoices, matching the invoice with the PO and receiving
report, and resolving discrepancies between the invoice and the PO and goods receipt.
E-payments technologies work toward eliminating the paper checks. A recent study
has shown that electronic payments are ten times less costly than paper checks and that
80 percent of businesses are in the process of transitioning their business to business
(B2B) payments from paper to electronic.6 These payments are settled through the
ACH network, by wire transfer, or by debit or credit card. Technology Summary 13.1
describes the use of EDI in the AP/CD processes, and Technology Summary 13.2
Technology Summary 13.1
USES OF ELECTRONIC DATA INTERCHANGE the goods are, or soon will be, in transit. After the goods have been
FOR THE AP/CD PROCESS shipped, the vendor’s billing system creates an invoice and sends it
to the customer via EDI. At the customer organization, the invoice is
EDI can be adopted in almost any business process, but it is impor-
automatically recorded in its accounts payable system. When it is
tant in the AP/CD processes, where cost savings can be significant,
time to pay the invoice, the customer/paying organization prepares
and buyers can dictate its use with their vendors. Although often
an EDI payment directing the bank to pay the vendor. At the same
considered a dying technology, EDI continues to increase in use
time, the customer/paying organization sends remittance information
among a number of large organizations and governmental units.
to the vendor via EDI. All of the translation and formatting required
NACHA reported that the electronic payments they cleared totaled
for these automated connections is performed by the EDI systems at
over $20.2 billion for 2011, an increase of 4.35 percent over 2010.a
each organization (or by VANs).
Briefly, with EDI, the AP/CD process works as follows. An orga-
Both organizations benefit from the improved accuracy and
nization’s purchasing system prepares a PO and sends it to a vendor
reduced costs associated with the automatic entry of data. Delays
via EDI. At the vendor organization, the PO is automatically recorded
and lost documents are reduced or eliminated for all business events,
in its OE/S system. As the order is being processed, the vendor may
including the purchase, shipment, invoice, and payment.
send an advanced shipping notice (ASN) notifying the customer that
“Overall ACH Volume Exceeds 20.2 Billion in 2011,” NACHA News & Resources, accessed at www.nacha.org on 10/25/2016
a
6
Heller, M. Electronic payments 10 times cheaper than Checks, CFO.com, http://ww2.cfo.com/applica-
tions/2015/10/electronic-payments-10-times-cheaper-checks/
ELECTRONIC INVOICE PRESENTMENT AND their legacy accounts payable and cash disbursement systems with
PAYMENT (EIPP) SYSTEMS the systems of the third-party provider.
For accounts payable departments, cost savings come in the
Electronic invoice presentment and payment (EIPP) systems are B2B
form of reduced staff, paper, and postage. The staff cost savings
systems that combine e-invoicing and e-payment processes to send
include elimination of data entry and reduced time spent negotiating
invoices to customers via a Web portal or secure network using a
billing disputes and handling vendor queries regarding invoice
third-party service provider and to receive electronic payments that
approvals and payment schedules. For example, vendors can exam-
are initiated by the payer, processed by the third party, and settled
ine the central repository of invoice and payment data, maintained at
by the Automated Clearing House (ACH) networka, wire transfer, or
the Web portal by the third-party service provider, to receive answers
debit or credit card company. EIPP is applied in B2B environments
to most of their questions. Also, electronic invoices can be recorded
where the payer/buyer can typically dictate the invoicing and pay-
with fewer errors, reconciled with POs and receipts automatically,
ment methods to be used. To implement an EIPP system, business
and routed for approval more efficiently. A disadvantage to the
partners usually need to change their internal business processes
payer is the elimination of float. Thus, buying organizations are moti-
(e.g., approval processes for invoices and payments) and integrate
vated to adopt e-invoicing but not necessarily e-payments.
a
The ACH moves money and information between banks.
describes electronic invoice presentment and payment (EIPP), a technology

applied in business to business (B2B) environments that is comparable to electronic bill
presentment and payment (EBPP), which is applied in business to consumer (B2C)
environments.
Controls As noted in the story at the start of this chapter, J.P. Morgan offers an EIPP-type
system that is used by many organizations to automate their purchasing, accounts
E-Business payable, and cash disbursements processes. Technology Application 13.1 explains the
J.P. Morgan Order-to-Pay system and the control techniques that it incorporates.
Physical Process Description

Enterprise The physical model of the AP/CD process presented in this section depicts a highly
Systems automated AP/CD process using an enterprise system and e-payments. As with the pur-
chasing process, this process is not completely paperless, but hard copy documents are
E-Business
held to a minimum.
Discussion and Illustration

Figure 13.10 presents a systems flowchart of the highly automated process. The
following paragraphs describe the flowcharted processes as well as some of the
exception routines noted on the flowchart.
Record Accounts Payable

E-Business Our organization’s system picks up batches of the vendor’s invoices at the VAN and
routes them to the EDI translator. The EDI translator converts the invoices to the
appropriate format and records them in the incoming invoice data. Triggered by
the receipt of this batch, the accounts payable application accesses the PO and receiv-
ing report data and compares the items, quantities, prices, and terms on the incoming
invoices to comparable data from the PO and receiving report data. If the data cor-
respond (within tolerances for quantities, costs, dates, and so on), a payable is created,
Technology Application 13.1
J.P. MORGAN’S ORDER-TO-PAY PROCESS posting. During this process, the vendor can query the BSN system to
determine the status of the invoice.
Many companies use the Order-to-Pay process hosted by J.P. Morgan
The buyer acts on the invoice as it normally would and makes
for their purchasing, accounts payable, and cash disbursements pro-
a payment through the BSN system (i.e., through the enterprise
cess. Companies using the J.P. Morgan system report operational
adapter to the BSN server). The BSN system processes a digitally
savings of millions of dollars each year in addition to savings that
signed and encrypted electronic payment over a secure network
come from capturing early payment discounts.
through the banking system, using the payment method (e.g., ACH,
The J.P. Morgan Order-to-Pay system operates on a Web portal
wire transfer, debit or credit card) selected by the vendor. Detailed
called the Business Settlement Network (BSN). The BSN process
remittance information is sent to the vendor in an e-file for auto-
begins when the buying organization creates POs as it normally
matic posting to its cash receipts system. The complete history of
would and sends them electronically to a J.P. Morgan “enterprise
the purchase is stored on the BSN server to facilitate research
adapter,” where they are translated into the BSN format. The elec-
required to authorize the payment. These data are also useful to
tronic POs are then sent over the Internet to the BSN server. The POs
vendors wanting to determine the status of payments due to them.
are recorded on the BSN server, and an e-mail is sent to notify the
These data include an audit trail of all payments, including who
selling organization (i.e., the vendor) that a PO has been issued. The
authorized each payment.
vendor logs on to the BSN server using a standard Web browser and
Savings from using the J.P. Morgan Order-to-Pay process come
reads and acts on the PO (each vendor can only see POs intended for
from reduced manual processing, increased efficiency in routing and
that specific vendor). A selling organization can contract with
approval of vendor invoices, and reduced vendor calls inquiring
J.P. Morgan to have this PO data automatically imported into
about the status of payments. The information on the BSN server
its OE/S system via electronic file uploads called e-files. The vendor
facilitates cash planning for disbursements and cash receipts. Early
can acknowledge the PO and transmit advanced shipping notices.
payment discounts are more easily obtained because data are more
When it comes time to bill the buyer, the vendor sends an
accurate (e.g., the PO flip leads to accurate invoices), and payments
invoice to the buyer in one of three ways. First, the vendor can log
are approved more quickly and easily. J.P. Morgan estimates actual
on to the BSN server and convert the PO into an invoice. As the
savings to be 50 percent of accounts payable cost (savings between
vendor converts (or “flips”) a PO into an invoice, it makes changes
$5 and $7 to process an invoice and issue a paper check).
as needed, such as adding charges not included on the PO. Second,
J.P. Morgan assists its customers in signing up their vendors for
the vendor can use an e-file to directly link its billing system with the
use of the J.P. Morgan system. J.P. Morgan helps these vendors create
BSN system. Third, the vendor can use a Web template to create an
their accounts on the BSN server and prepare e-file translation routines
invoice.
to automatically connect their order entry and billing systems to the
After the invoice has been recorded on the BSN server, the BSN
BSN server. Vendors are responsible for maintaining their own data,
system applies buyer-specified rules to validate the invoice and sends
which relieves the paying organizations of having to keep vendor data
the invoice through an enterprise adapter (for translation from BSN
current (e.g., addresses, bank account numbers, payment methods).
format) to the buyer, where it is posted automatically to the buyer’s
J.P. Morgan charges payers about $1.50 to $2 per invoice and 75¢
accounts payable system. BSN’s electronic workflow may be used to
to $1 per payment. Vendors use the service free of charge.
route the invoice within the buyer organization for approval prior to
Sources: J.P. Morgan press releases, the J.P. Morgan Order-to-Pay Web site, www.jpmorgan.com/ordertopay (accessed March 9, 2013), and interviews with J.P. Morgan
officers and users of the J.P. Morgan system.
and the general ledger accounts are updated to reflect the debit side of the transac-
tion as appropriate for the invoice (e.g., inventory, fixed asset, expense account).
Controls An AP clerk reviews data that do not correspond and takes appropriate corrective
actions. Discrepancies in price, quantity, terms, and so forth are often resolved with
discussions with the purchasing agent and the vendor. Mismatches may also include a
missing receiving report, indicating that the goods have not yet been received. Inves-
tigations would be undertaken with the purchasing agent, the receiving clerk, and the
vendor to determine the status of the missing receipt. Mismatches could include a
FIGURE 13.10 AP/CD Process—Systems Flowchart
518
COMPUTER CASH DISBURSEMENTS
VAN Each day

P-3
P-1 M-1
P-4
Translate from EDI Display Display of

and record Enterprise proposed proposed
incoming invoices database payments payments
Compare incoming P-2 BT

invoices to PO and Select payment,
M-2
receiving report calculate batch
data and record totals
accounts payable
and GL data
Enter
Prepare payment payment data
AP clerk would order and RA,
handle any update AP and GL
exceptions data for payment,
display payment
totals Payment
totals
P-6 P-5
Translate payment
order and RA Exception
to EDI format routine
not shown
M-3
M-4 VAN
missing PO. In this case, the vendor may have mistakenly sent a second, duplicate
invoice. The duplicate is identified by the system because when the first invoice
arrived and was processed, the PO and receiving report were “marked” as closed.
When the second invoice arrived and was input, there would no longer be an open PO
or receiving report against which to match the invoice. Duplicate invoicing can also
result from the use of p-cards and debit and credit cards; an organization might pay for
something with a p-card and the vendor might still issue an invoice. All mismatches of
vendor invoices, POs and receiving reports must be resolved by the AP clerk.
Make Payments
E-Business As shown in Figure 13.10, our organization uses EDI to make the payment. Such
payments may be processed through a VAN, such as that shown in Figure 13.10, or
via the Internet, to be settled by the ACH Network.
As shown in Figure 13.10, the accounts payable master data are searched periodi-
cally (e.g., daily, twice each week) for approved vendor invoices due to be paid. The
cash disbursements clerk selects invoices for payment, perhaps eliminating some and
adding others, and prepares batch totals. The totals include total accounts payable
being paid, discounts taken, and total dollars disbursed. Depending on the amount of
a payment, an individual payment or the entire proposed list of payments might be
routed, using workflow, for approval to the controller, vice presidents, or the president.
The cash disbursements application prepares the payment order with all required
remittance information (e.g., invoice number, amount, vendor number, check number,
bank account number), updates the accounts payable master data and the general led-
ger for the payment, displays the payment totals (i.e., AP, discounts, cash disbursed),
and sends the data to the EDI translator. The translator converts the data to the
appropriate format, encrypts the message, adds a digital signature, and sends the EDI
payment order and remittance information to the VAN for pickup by the bank. The
dotted line between the batch totals and the display of the payment totals indicates that
the disbursement clerk manually reconciles the totals prior to releasing the payments.
What happens next is not depicted on the flowchart. The VAN sends the pay-
ment data to our organization’s bank, where the bank reduces our organization’s
cash account for the amount of the payments and then sends the payment data to
the ACH Network for processing. The ACH Network settles the transaction
between our bank accounts and our vendors’ bank accounts. Some vendors will not
accept electronic remittance information; in those cases, the remittance information
is forwarded directly (via VAN) to the supplier.
Exception Routines
In the DFDs (Figure 12.9, pg. 470, and Figure 13.4, pg. 505) and the systems flow-
charts in Figure 12.12 (pp. 478–479) and Figure 13.10, you see a number of reject
data flows or annotations depicting the locations where exceptions may occur; these
rejects and exceptions occur for a number of reasons.
First, purchase returns and allowances frequently arise with respect to pur-
chases. This exception usually occurs at the point of inspecting and counting the
goods or at the point of validating vendor invoices. To initiate an adjustment for
returned goods or for a price allowance in the case of otherwise nonconforming
goods, someone usually prepares a debit memorandum and transmits it to the vendor;
the vendor commonly acknowledges it by returning a credit memorandum. The debit
memo data also is transmitted to the accounts payable department. In the case of a
return, data also is made accessible to the storeroom and shipping department. The
merchandise to be returned then is released from the storeroom and sent to the ship-
ping department. There, the items to be returned are counted, recorded on the debit
memorandum, and shipped. The shipping department’s recording of the debit memo
data also is made available to the accounts payable department.
Three other exception routines should be noted. In Figure 13.10, we see that
an AP clerk handles any exceptions discovered during the matching of incoming
invoices with POs and receiving reports. As a result of a mismatch, the clerk might
initiate a purchase allowance (a return [vs. allowance] is initiated at the time of the
receipt of the goods). The clerk might also have some latitude to accept nonconform-
ing invoices, should the mismatch be within acceptable tolerances (e.g., the invoice var-
ies by less than one percent). Another exception routine is noted where the cash
disbursements clerk reconciles batch totals for the payments selected and the payments
made. If these totals are not the same, the clerk must determine whether some pay-
ments were not made; some extra, unauthorized payments were made; or payments
were not correct. A third exception is not noted on the flowchart. Should the payments
be routed for approval, some payments might be denied and would need to be
removed from the batch of selected payments before the payments were completed.
The Fraud Connection

As noted in Chapter 12, the AP/CD process is part of the purchase-to-pay process that
culminates with the payment of cash and has a high potential for exposing an organi-
zation to fraud and embezzlement. In this section, we continue the Chapter 12
discussion of these abuses by presenting some of the ways the AP/CD process has
been manipulated.
Fraud and the Accounts Payable Function

Abuses in this part of the AP/CD process usually involve creating phony vendors in
the vendor master data or submitting fictitious invoices. Some actual incidents follow:
• Stanley opened a business account at his local bank in the name of SRJ Enter-
prises. He deposited $100 and told the bank that the company was located at
the home address of his girlfriend, Phoebe, a disgruntled colleague from his
employer’s accounting department. Using his home computer, Stanley printed
bogus invoices in the name of SRJ Enterprises. Phoebe created a vendor record
for SRJ Enterprises on the company’s computer and put the bogus invoice in a
stack of much larger invoices for payment and approval. This scheme continued
for a year and netted more than $700,000 for Stanley and Phoebe. Stanley’s wife
became suspicious and called the organization’s internal auditor, who tracked
down the fraud. As first-time offenders, Phoebe and Stanley only got probation.
But Phoebe and Stanley’s wife both left him!
The authority to add vendors should not reside with someone such as Phoebe
who can submit invoices for payment. A typical control to address this type of fraud
is to carefully manage the process for creating vendor records. When vendor records
are created, as a minimum, relevant information such as address, phone number, and
contact person should be verified. Also, a comparison should be made between the
vendor’s information (e.g., name, phone number, address) and employee information
(e.g., name phone number, address).7
7
Joseph T. Wells, “Billing Schemes, Part 1: Shell Companies That Don’t Deliver,” Journal of Accountancy,
July 2002, pp. 76–79.
• Veronica, an accounting clerk at a dental supply wholesaler, was responsible for

processing invoices for payment. One vendor, a dental appliance manufacturer,
printed its invoices in black ink on plain paper. Veronica would make a copy of
the invoice and process them both for payment, one a few days after the other.
When the vendor recognized the duplicate payment, it sent a refund check that
was sent to Veronica! She simply deposited the check in her own bank account.
The scheme was discovered by a colleague who saw Veronica pocket some
checks and turned her in to the organization’s internal auditor.
Segregation of duties between the controller (accounts payable) and the cashier
(who should receive the refund checks), should prevent this type of fraud.8 Ironically,
both of these types of frauds continue to occur frequently due to the lack of adequate
controls in companies, not-for-profit organizations, and governments.
Fraud and the Cash Disbursements Function

Frauds in this category are more direct and less subtle than in the purchasing and
accounts payable functions. Usually, the theft of cash entails check forgery or fraud-
ulent wire transfers. Before the advent of computers, fraud committed via bogus
corporate checks first required that the thief steal a supply of blank checks.
Now, however, those checks can be counterfeited using a laser scanner, a personal
computer, and a color printer. For an investment of a few hundred dollars, the
counterfeiter can set up shop.
The risk from computer-generated forgeries has escalated significantly in the
past few years. Cheap color ink-jet printers can now generate such perfect replicas
that even counterfeiting currency has become a desktop computer operation. Coun-
terfeiting is the primary reason for the U.S. Treasury’s recent currency redesign,
using sophisticated images and papers.
What about checks that are legitimate, made out correctly, and sent to your ven-
dor? Will they arrive at your vendor and result in the elimination of your payable?
Not always. When the check gets to your vendor, a dishonest clerk can simply
deposit the check to his or her account, use it to pay a credit card bill, or whatever.
We discussed some of these frauds, such as lapping, in Chapter 11. Frauds such as
this impact both vendors and customers and their accounts receivable and accounts
payable, respectively.
While the use of checks is declining, the latest published study by the Federal
Reserve indicates that they are still widely used; 18.3 billion checks were written in
2012.9 The sheer number of checks being issued leaves a lot of room for check
fraud. There are many control plans available to prevent these frauds. First, we
might employ digitally signed electronic payments. These are either sent to the
bank directly and cannot be diverted by the clerk, or if sent directly to the vendor,
they cannot be altered without alerting the bank to the clerk’s fraudulent change
when the clerk attempts to deposit the altered check. To reduce frauds with paper
checks, we can suggest segregating duties so that no one person can authorize a dis-
bursement (e.g., prepare the check) and execute the payment (e.g., sign and send the
check). Finally, as we will discuss later in this chapter, we should segregate the duties
of those who make disbursements from those who perform a bank reconciliation.
8
Joseph T. Wells, “Billing Schemes, Part 3: Pay-and-Return Invoicing,” Journal of Accountancy, September
2002, pp. 96–98.
9
Federal Reserve Bank Services website at https://www.frbservices.org/communications/payment_system_
research.html, (accessed August 20, 2016).
Does not using checks ensure that no fraud will occur? No; in fact, electronic
funds transfer frauds have recently become so prevalent that the U.S. Federal
Bureau of Investigation (FBI) has become quite involved in pursuing frauds involv-
ing the use of the Internet, and as a result they have instigated a central point of
communication regarding these type of crimes called the Internet Crime Commu-
nication Center (IC3).10 According to the FBI, Internet crimes typically unfold as
follows:
• An e-mail is sent to individuals within the target company who can initiate funds
transfers, such as wire transfers and ACH transactions. The email appears to be
from an individual that they recognize as authorized to make these transactions.
• Upon opening the e-mail, malware is installed—directly or when the recipient
navigates to a bogus Web site—on the recipient’s computer.
• The malware contains a key logger that steals the user’s online banking creden-
tials (e.g., logon ID and password).
• Using these credentials, the fraudster initiates a funds transfer out of the target
organization’s bank account.
The fraudulent transfers have ranged from thousands to millions of dollars, often
in increments of less than $10,000 to avoid currency transaction reporting. In addi-
tion to financial transaction, these techniques have also been used in corporate espio-
nage and against defense contractors to obtain sensitive information. Controls to
prevent these type of attaches include: using firewalls, antivirus software, spam filters,
and personnel training on electronic dangers. Further, organizations should consider
performing all wire transfers from computers that are not used for any other purpose,
such as e-mail and day-to-day Internet usage, to reduce the possibility of malware
installations.
Nonfraudulent Losses
In Chapter 7, we cautioned you that although the subject of fraud and embezzlement
is seductively interesting, resource losses due to unintentional mistakes and inadver-
tent errors are as costly as—or more costly than—those caused by intentional acts of
fraud. One major source of accounts payable loss is the overpayment of invoices,
which is usually caused by simple human error, such as the following:
• Situation 1: Assume that we receive a freight bill (i.e., a bill for which we have
no underlying PO against which to verify charges), and a decimal point is
inadvertently “slid” one place to the right on that bill. As a result, we are billed
for $4,101.30 instead of for the correct amount of $410.13. Without any PO to
compare this bill to, we may make a payment for the incorrect, larger amount.
• Situation 2: Assume that we confuse a vendor’s name, perhaps 3M Co. and
Minnesota Mining & Manufacturing Company. We might pay the same invoice
twice, not realizing that 3M is the name of the company that once was known as
Minnesota Mining & Manufacturing.
Although the latter mistake should be called to our attention by an honest ven-
dor, the first error would have been made by the freight company and would not be
caught by us. Even when the overpayment is refunded to us, we have incurred the
10
For more information on these type of frauds, see the FBI’s website on internet crime at https://www.ic3.
gov/media/default.aspx
clerical cost of processing the payment, sending it to the vendor, and correcting the
error after the fact.
Application of the Control Framework

In this section, we apply the control framework from Chapter 7 to the AP/CD
process. Figure 13.11 presents a completed control matrix for the physical system
depicted in the flowchart shown in Figure 13.10.
Control Goals
The control goals listed across the top of the matrix are similar to those presented in
Chapter 7 and Chapters 9 through 12, except that they have been tailored to the spe-
cifics of the purchasing process.
The operations process control goals that are typical of the AP/CD process include
the following:
• Effectiveness of operations: Goals A and B identify effectiveness goals that are typical of
the AP/CD process. Goal A is to optimize cash discounts. Optimize cash discounts
means to take the discounts that are financially feasible and advantageous to the orga-
nization. Several processes must be in place to achieve goal A, including processes to
see that invoices are received in a timely manner, recorded promptly upon receipt,
selected for payment in in time for the discount and disbursed within the discount
period. Goal B, ensure that the amount maintained in demand deposit accounts is sufficient
(but not excessive) to satisfy cash disbursements, requires that sufficient data regarding
purchases and upcoming payments is available and used to plan the availability of
cash resources. For example, vendor invoices must be recorded with amounts due,
dates, and terms so that the treasurer can plan for payments.
• Efficient employment of resources: As noted in Chapter 9 and reinforced in Chapters
10 through 12, people and computers are the resources found in most business
processes.
• Resource security: As mentioned in Chapter 9, the resource security column should
identify assets that are at risk. The resources of interest here are the cash and the
accounts payable master data. Controls should protect the cash from unautho-
rized disbursement, fraud, and other losses. Controls should also prevent the
unauthorized accessing, copying, changing, selling, or destruction of the accounts
payable master data.
The information process control goals comprise the second category of control goals
in Figure 13.11. Information process control goals include the following:
• Input validity (IV) of vendor invoices: Achieved when recorded vendor invoices
are for goods actually ordered and actually received (i.e., the invoices are sup-
ported by proper POs and receiving reports).
• Input validity (IV) of payment inputs: Achieved when there is a documented valid,
unpaid vendor invoice for each payment.
• Input completeness (IC) of vendor invoices: Failure to achieve this goal may result in
lost discounts and negative relations with vendors due to late payments, and the
unrecorded invoices cause liabilities to be understated. In addition, invoices should
be recorded only once to preclude paying an invoice more than once.
• Input completeness (IC) of payment inputs: Failure to achieve this goal may also
result in lost discounts, late payments, or in making duplicate payments.
FIGURE 13.11 Control Matrix for the AP/CD Process
524
Control Goals of the AP/CD Business Process

Control Goals of the Operations Process Control Goals of the Information Process
Ensure efficient Ensure security For

employment of of resources For vendor accounts
Ensure resources (cash, accounts invoice payable For payment For accounts
effectiveness (people, payable inputs, master inputs, payable master
of operations: computers) master data) ensure: data, ensure: ensure: data, ensure:
Recommended Control Plans A B IV IC IA UC UA IV IC IA UC UA
Present Controls
P-1: Independent validation P-1

of vendor invoices
P-2: Match invoice, purchase P-2 P-2 P-2

order, and receiving report
P-3: Tickler file of payments P-3 P-3 P-3

due
P-4: Independent authorization P-4 P-4

to make payment
P-5: Agreement of run-to-run P-5 P-5 P-5 P-5

totals (reconcile input-output
batch totals)
P-6: Digital signatures P-6 P-6 P-6 P-6
Missing Controls
M-1 Tickler file of open M-1 M-1

purchase orders and receiving
reports
M-2: Agreement of M-2 M-2 M-2 M-2

run-to-run totals (reconcile
input-output batch totals)
M-3: Cash planning report M-3
M-4: Reconcile bank account M-4 M-4 M-4 M-4
Possible effectiveness goals include the following:

A—Optimize cash discounts IV = input validity
B—Ensure that the amount of cash maintained in demand deposit accounts is sufficient (but not excessive) to satisfy expected cash IC = input completeness
disbursements IA = input accuracy
See Exhibit 13.1 for a complete explanation of control plans and cell entries. UC = update completeness
UA = update accuracy
• Input accuracy (IA) of vendor invoices: Failure to achieve this goal results in a
misstatement of liabilities. Incorrect dates and terms can lead to early or late
payments.
• Input accuracy (IA) of payment inputs: Failure to achieve this goal may result in
incorrect payments, payments to the wrong vendor, and so on.
• Update completeness (UC) and update accuracy (UA) of the accounts payable master
data: The accounts payable data must be updated properly for the vendor invoice
to reflect that there is a payment due, when it is due, and the amount and terms
of the payment. The data must be updated properly when a payment is made to
ensure that invoices are closed to prevent duplicate payments. In a highly auto-
mated system, such as the one we have chosen to depict in Figure 13.10, we
do not generally implement control plans directed at these control goals because
the input and update are simultaneous and the input controls also function as
the update controls. Thus, these columns on the control matrix shown in
Figure 13.11 are empty.
Recommended Control Plans

Recall that application control plans include those that are characteristic of a particu-
lar AIS business process and those that relate to the technology used to implement
the application. We introduce you here to those new plans that are particular to the
accounts payable and cash disbursements business process. We first define
and explain these controls and then summarize, in Exhibit 13.1, each cell entry in
Figure 13.11, the control matrix:
• Independent validation of vendor invoices (Exhibit 13.1 and Figure 13.11,
P-1): To preclude unauthorized and invalid accounts payable records, authority
to record a vendor invoice should come from the PO and receiving report data
created by entities other than the entity that records the vendor invoice. Typi-
cally, this requires a segregation of duties among purchasing, receiving, and accounts
payable.
• Match invoice, purchase order, and receiving report (Exhibit 13.1 and Figure
13.11, P-2): The invoice should be matched to the PO and receiving report data
to ensure that items on the invoice were ordered and received (validity) and that
the invoice is accurately recorded.
• Independent authorization to make payment (Exhibit 13.1 and Figure
13.11, P-4): To ensure that only authorized payments are made, the accounts
payable records on which the payment is based should be created by an
entity other than the entity that executes the payment. Typically, this requires
segregation of duties between accounts payable (a controller function) and the
cashier (a treasurer function) or between functional areas within accounts
payable.
• Reconcile bank account (Exhibit 13.1 and Figure 13.11, M-4): Records of cash
disbursements should be matched to the bank’s records to ensure that all disbur-
sements actually made by the bank were authorized and accurate. This reconcili-
ation attempts to determine that an organization’s accounts payable records and
general ledger records for cash and accounts payable are in agreement with the
bank’s records. Discrepancies may be due to inaccurate, incomplete, or invalid
recording of disbursements. An entity other than accounts payable and cash dis-
bursements should perform this reconciliation.
EXHIBIT 13.1 Explanation of Cell Entries for the Control Matrix in Figure 13.11
authorized by the cash disbursements clerk ensures that cash

P-1: Independent validation of vendor invoices.
is not disbursed inappropriately (security of resources) and
• Vendor invoice input validity: The computerized accounts that all inputs are valid.
payable application, which is separate from the departments • Payment input validity, payment input completeness, and pay-
that authorized the purchase and recorded the receipt of the ment input accuracy: By comparing totals prepared before the
goods or services, actually performs the validation of the input to those produced after the update, we ensure that all
vendor invoice. Therefore, validity of the invoice should be selected payments were authorized (input validity), were input
ensured. once and only once (input completeness), and were input
correctly (input accuracy).
P-2: Match invoice, purchase order, and receiving report.
P-6: Digital signatures.
• Effectiveness goal A, vendor invoice input validity, and vendor
invoice input accuracy: The accounts payable program matches • Security of resources, payment input validity, payment
the invoice to the PO and receiving report data to ensure that input completeness, and payment input accuracy: When the
the goods were ordered and received (validity) and that the digital signatures are authenticated at the VAN, the VAN
items, quantities, prices, and terms are comparable to data knows that the sender of the message has authority to send
on h/e PO and receiving report to ensure that the invoice is it and thus prevents the unauthorized diversion of resources
accurate. By recording terms accurately, we can ensure that (security of resources). This also determines that the message
appropriate discounts can be obtained (i.e., optimize cash itself is genuine (validity), whether the payment message has
discounts). been altered in transit, and thus the message is incomplete
(i.e., some payments are missing from or added to the pay-
P-3: Tickler file of payments due. The computer automatically gener- ment message/file) or inaccurate and does not agree with the
ates a list of proposed payments. inputs and updates that took place prior to sending the pay-
ment file.
• Effectiveness goal A: Action on this list should ensure that pay-
ments are made in a timely manner, not too early and not too
M-1: Tickler files of open POs and receiving reports.
late (i.e., to optimize cash discounts).
• Efficient employment of resources: The computer-generated • Effectiveness goal B and vendor invoice input completeness:
list is more efficient than a manual scanning of open Following up on open POs and receiving reports ensures that
invoices. all vendor invoices are received and input (i.e., input complete-
• Payment input completeness: Action on this list should ensure ness) in a timely manner (i.e., to ensure that cash discounts can
that all payments are input. be taken).
P-4: Independent authorization to make payment. M-2: Agreement of run-to-run totals (reconcile input–-output batch
totals). The totals received from the VAN (or prepared before
• Security of resources: Because cash cannot be expended in the
the input) should be compared to those produced after the
absence of a valid, open vendor invoice, security over the cash
invoices are recorded.
asset is enhanced.
• Payment input validity: Records in the accounts payable master • Security of resources, vendor invoice input validity: Determining
data were created by the accounts payable process. Therefore, that recorded invoices reflect only those received from an
the data gives independent authorization to the cash disburse- authorized vendor ensures the cash will not subsequently be
ments process to approve vendor invoices for payment. The disbursed inappropriately (security of resources) and ensures
validity of payments is thereby ensured. the validity of the vendor invoice inputs.
• Vendor invoice input validity, vendor invoice input complete-
P-5: Agreement of run-to-run totals (reconcile input–output batch ness, and vendor invoice input accuracy: By comparing
totals). the totals before and after recording the invoices we can ensure
that only valid invoices were input, that all vendor invoices were
• Security of resources and payment input validity: Determining
that payments input and payments made reflect only those
(Continued )
EXHIBIT 13.1 Explanation of Cell Entries for the Control Matrix in Figure 13.11 (Continued )
input once and only once (input completeness), and that all M-4: Reconcile bank account.
invoices were input correctly (input accuracy).
• Security of resources, payment input validity, payment input
completeness, and payment input accuracy: Comparison of
M-3: Cash planning report.
the bank’s record of disbursements to those retained in
• Effectiveness goal B: An aging of open vouchers/accounts the organization can detect disbursements that should not
payable records must be produced and reviewed on a regular have been made (security of resources, input validity),
basis to ensure that there is an adequate cash reserve to were not recorded or were recorded more than once
make required payments. Excess cash on hand should be (input completeness), or were made incorrectly (input
invested. accuracy).
Each of the recommended control plans listed in the matrix in Figure 13.11 is
discussed in Exhibit 13.1. We have intentionally limited the number of plans to
avoid redundancy. For example, we do not include several plans from Chapter 8 and
Chapter 9 such as computer access controls, digital signatures, preformatted screens, online
prompting, programmed edits (e.g., a reasonableness test on the invoice amount and
quantities), procedures for rejected inputs, confirm input acceptance, and populate input
screens with master data. We could also include enter receipts data in receiving from
Chapter 12.
Turn to Exhibit 13.1, and study the explanations of the cell entries appearing in
the control matrix. As you know from your studies in prior chapters, understanding
how the recommended control plans relate to specific control goals is the most
important aspect of applying the control framework.
Some common AP/CD plans are not listed in the control matrix nor discussed in
Exhibit 13.1 because they aren’t appropriate to the highly automated AP/CD process
that we described and documented earlier in the chapter. However, recent research
indicates that 50 percent of remittances from large companies (those with revenues
greater than $1 billion) and 90 percent of remittances from smaller companies are
still made with paper checks.11 Therefore, you will still encounter many controls for
paper checks in practice. The following are a few examples:
• Defaced documents: Where paper documents are the basis for making disbur-
sements, paid invoices (and the supporting POs and receiving reports) are often
marked “void” or “paid” to prevent their being paid a second time. In paperless
systems, the computerized payable records are “flagged” with a code to indicate
that they have been paid. The purpose of this control is to prevent duplicate or
unauthorized payments.
• Control over check stock: Where payments are by check, appropriate physical
controls should exist over supplies of blank checks or watermarked paper
on which checks are printed. Check stock should be kept in secured places with
limited access. Check stock should never be left in a computer printer.
11
Krishna, B.C., American Banker, September 30, 2015, “Check Please! The Future of B2B Payments,”
http://www.americanbanker.com/partnerinsights/check-please-the-future-of-b2b-payments-1077019-1.
html (accessed August 20, 2016).
• Use of automated signing devices: Check signing machines are often used to
imprint signatures on paper checks. This control plan is designed to promote
efficiency in time use as the person with authority to disburse funds is usually a
high level manager or officer in the organization (e.g., controller, treasurer) who
might not want to spend two or three hours signing checks each week. Check
signing devices also have built in controls such as a key to turn them on, a setting
that limits the number of checks signed, and using a different color of ink to
imprint the check signature or amount.
• Duplicate signatures: It is not uncommon to have more than one authorized
signature required on large-dollar-amount checks.
• Time limits on check validity: Most companies have standing instructions with
their banks not to honor checks that have been outstanding longer than a certain
number of months (e.g., three or six months).
• Reconciliation of vendor statements: While most companies have a
policy not to write checks for amounts shown on vendor statements, vendor
statements should be reviewed and compared to the accounts payable master
data to ensure that invoices and payments have been accurately and completely
recorded.
• Positive pay: Bank Positive Pay is an anti-fraud service offered by virtually every
U.S. commercial bank. When checks are issued by company who participates in
positive pay, the company sends a list of those checks with number and dollar
amount to the bank. The bank then compares any check presented for payment
against the list the company provided.
• Duplicate payment programmed edits: Most companies that have automated
their AP/CD process use programmed edits to check for potential duplicate
payments prior to cash disbursement being made. These edits match vendor
number, invoice number, and amount to be paid over a set period of time (e.g.,
90 days). If there is a match, the invoice is flagged and must be investigated prior
to disbursement.
Summary
This chapter covered the AP/CD process, the fourth and fifth steps in the
purchase-to-pay process—invoice verification and payment processing—introduced
in Chapter 2. Like the process in Chapter 12, the physical process implementation
presented in this chapter evidences many attributes of the paperless office of the
future. In addition, technologies being employed to improve the efficiency and
effectiveness of the accounts payable and cash disbursements processes were intro-
duced. Some questions in the end-of-chapter materials ask you to consider how
these technologies also can help reduce the errors and frauds often found in these
processes.
SOX As we did at the end of Chapters 10 through 12, we include here, in Technology
Summary 13.3, a review of the entity-level controls (i.e., control environment, per-
vasive controls, and general/IT general controls) that may have an impact on the
effectiveness of the accounts payable and cash disbursements business process
controls.
CONSIDERING THE EFFECT OF ENTITY-LEVEL where the AP clerk handles exceptions to the three-way match
CONTROLS ON ACCOUNTS PAYABLE AND and approves—or rejects—the recording of a vendor invoice
and when the cash disbursements clerk selects invoices for
BUSINESS PROCESS CONTROLS
payment while adding some and putting others on hold.
The effectiveness of AP/CD business process controls depends on the • As noted in Technology Summary 9.1 (pg. 331), the perfor-
operation of several controls described in Chapter 8. In this sum- mance of manual controls depends on the quality of the people
mary, we examine some of those relationships. performing the control activities. Therefore, we expect controls
Segregation of Duties such as selection and hiring, training and education, job
descriptions, and supervision to be in place.
Several functions in the AP/CD process must be segregated for the
business process controls to be effective, including the following:
Automated Controls
• Authorization to create vendor records and assign payment All of the AP/CD controls performed by the computer depend on the
terms should be duties that are segregated from those com- general controls (also known as IT general controls or ITGCs) in
pleting the accounts payable and cash disbursements pro- Chapter 8. Those controls include independent validation of vendor
cesses. For example, vendor records might be maintained by invoice (e.g., check for authorized vendor and valid PO); match PO,
a separate function within the purchasing department. invoice, and receipting report; and independent authorization to
• The accounts payable process assumes that there has been an make payment (e.g., check for authorized vendor and valid, unpaid
authorized PO and a valid receipt. This presumes the segrega- invoice). We need to know that the programs will perform the con-
tion among purchasing, receiving, and accounts payable func- trols as designed (e.g., program change controls). Also, we need to
tions. A treasurer/cashier function separate from the controller/ know that the stored data used by the computer when executing
accounts payable function must execute payments. these controls is valid and accurate (e.g., physical and logical access
controls). For the AP/CD process, we are particularly concerned, for
Additional Manual Controls
example, with controlled access to the following:
Several manual, pervasive, and general controls can affect the per-
• Vendor master records so that one cannot be added or modi-
formance of the business process controls, including the following:
fied without authorization
• One-time vendor records created to facilitate one-time pay- • PO master data and receiving report data so that bogus POs
ments may not receive the same level of scrutiny as records and receipts cannot be created so as to record an unauthorized
for other vendors. Management must review these records to invoice
determine that there is no abuse of this process. • Accounts payable master data so that bogus invoice data
• Two functions in the AP/CD process must be performed care- cannot be created so as to execute unauthorized payments
fully by authorized, qualified personnel. These are at the point
Key Terms
accounts payable/cash disbursements purchase returns and allowances, 519
(AP/CD) process, 501 independent validation of vendor
vendor invoice, 504 invoices, 525
purchasing events data, 510 match invoice, purchase order, and
receiving report, 525
accounts payable master data, 510
independent authorization to make
cash disbursements events data, 510
payment, 525
evaluated receipt settlement (ERS), 515
reconcile bank account, 525
electronic invoice presentment and
payment (EIPP), 516
Review Questions
RQ 13-1 What is the AP/CD process?
RQ 13-2 What primary functions does the AP/CD process perform? Explain
each function.
RQ 13-3 With what internal and external entities does the AP/CD process interact?
RQ 13-4 What are the fundamental responsibilities of the accounts payable
department and the cashier?
RQ 13-5 What major logical processes does the AP/CD process perform? Explain each.
RQ 13-6 Describe how the processing of noninvoiced disbursements is handled in
(a) a “true” voucher system and (b) a nonvoucher system.
RQ 13-7 What data are contained in the purchasing events data, the accounts
payable master data, and the cash disbursements event data?
RQ 13-8 What are e-invoices and e-payments?
RQ 13-9 How does EDI improve the effectiveness and efficiency of the AP/CD
process?
RQ 13-10 What is EIPP? How does it improve the efficiency and effectiveness of
the AP/CD process?
RQ 13-11 What are the two operations process (effectiveness) goals of the AP/CD
process? Provide an example illustrating each goal.
RQ 13-12 What characterizes a valid vendor invoice input? What characterizes a
valid payment input?
RQ 13-13 What are the key control plans associated with the AP/CD process?
Describe how each works and what it accomplishes.
RQ 13-14 Describe the impact that entity-level controls (i.e., control environment,
pervasive controls, and general/IT general controls) can have on the
effectiveness of AP/CD business process controls.
Discussion Questions
DQ 13-1 Describe your personal bill paying process. What control plans do
you have in place to meet the control goals in this chapter? Consider
the effectiveness, efficiency, security, and information system goals.
DQ 13-2 This chapter discusses both fraud and non-fraudulent losses in the
AP/CD process. Describe any losses you have encountered in your per-
sonal bill paying process. Did you change any aspect of your bill paying
process after the loss(es) you encountered?
DQ 13-3 In terms of effectiveness and efficiency of operations, as well as of meeting
the generic information system control goals of validity, completeness, and
accuracy, what are the arguments for and against each of the following?
a. Sending a copy of the vendor invoice to the purchasing department
for approval of payment.
b. Sending a copy of the vendor invoice to the requisitioning depart-
ment for approval of payment.
DQ 13-4 An electronic data interchange (EDI) system may present an organiza-

tion with opportunities and risks.
a. What opportunities might an EDI system present? Discuss your answer.
b. What risks might an EDI system present? What controls and other
responses might an organization choose to address these risks?
DQ 13-5 In the physical implementation depicted in Figure 13.10 (pg. 518), the pay-
ment order and the Remittance information were sent together through
the banking system. We also described an option of sending the Remit-
tance information directly to the vendor. Which is better? Discuss fully.
DQ 13-6 In the “Fraud and the Accounts Payable Function” section, we
described a fraud committed by Stanley and Phoebe and another by
Veronica. For each fraud, describe controls and technology that could
be used to reduce the risk of those frauds occurring.
Short Problems
SP 13-1 In the physical implementation depicted in Figure 13.10, the computer
updated the accounts payable data upon receipt of a vendor invoice
(a clerk handled any exceptions). Describe the procedures that you
believe should control that process.
SP 13-2 With an EDI system, a customer’s order may be entered directly into
the OE/S system without human intervention. Discuss your control
concerns under these circumstances.
SP 13-3 The following is a list of six control plans from this chapter or from
Chapters 8 through 12. These are followed by a list of five system fail-
ures that have control implications. Match the five system failures with a
control plan that would best prevent the system failure from occurring.
Also, give a brief (one or two sentences) explanation of your choice.
A letter should be used only once, with one letter left over.
Control Plans
A. Reconcile bank account
B. Match invoice, PO, and receipt
C. Tickler file of open POs and receiving reports
D. Batch sequence check
E. Procedures for rejected inputs
F. Independent authorization to make payment
System Failures
1. Pownal Company was sent an invoice for goods that were never
received. The invoice was paid in full.
2. Dewey, Inc. has several vendors who do not send invoices in a
timely manner. Terms for payment are based on dates that goods
are received, and discounts are being lost due to the late receipt,
entry, and payment of these invoices.
3. Washington Company processes invoices in batches. The accounts
payable program performs a three-way match of the invoice with
the PO and receiving report. Those that match are recorded on the
accounts payable master data. Those that do not match are printed
on an exception and summary report. Some of these invoices are
legitimate but are never recorded.
4. Betty Saunders, the cashier at Southwick Company, has been writing
small checks to herself for many months. No one has noticed.
5. On a weekly basis, Pete, the cash disbursements clerk at Dalton
Company, prepares a batch of payments, including some to himself,
and sends the batch to the treasurer for approval. Pete has worked
out a deal with Sue, who works in the treasurer’s office, to approve
these batches, and they split these fraudulent payments.
SP 13-4 The following is a list of six control plans from this chapter or from
Chapters 8 through 12. These are followed by a list of five system fail-
ures that have control implications. Match the five system failures with a
control plan that would best prevent the system failure from occurring.
Also, give a brief (one or two sentences) explanation of your choice. A
letter should be used only once, with one letter left over.
Control Plans
A. Program change controls
B. Independent validation of vendor invoices
C. Access control software
D. Batch control plans
E. Compare input data with master data (e.g., vendor master data)
F. Match invoice, PO, and receipt
System Failures
1. Vendor Invoices are received at Samuel Company via an EDI feed
over the Internet. Some of these are fraudulent invoices from bogus
vendors.
2. Vendor invoices are sent to clerks in the AP department at Seneca,
Inc., where they are entered once each day to create a file of invoice
data that is then processed by the accounts payable program each
evening. Several errors have been found in the invoice data.
3. The accounts payable program at Laramie Company compares
incoming invoices to open POs and receiving reports. The reject
rate is very high, so Duane, the AP clerk, went into the program
and changed the tolerance limits so that more invoices would
pass the matching process and he would have fewer rejects to
correct.
4. Cornick Company ordered 15 widgets from Stringson, Inc. Only 12
widgets were received; the other three were on back order at String-
son. An invoice for 15 widgets was received at Webster, recorded,
and eventually paid.
5. Beth, a clerk in accounts payable at Elise Company, has a cousin
who owns a small office supplies company. Beth’s cousin periodically
sends invoices to Beth for office supplies that Elise never ordered or
received. Beth creates a one-time vendor record and records the
invoice. Once recorded as a payable, the invoice gets paid.
SP 13-5 Using the following table as a guide, describe for each function (Figure 13.1,
pg. 502):
a. A risk (an event or action that will cause the organization to fail to
meet its goals/objectives)
b. A control/process or use of technology that will address the risk
Risks Controls and Technology

Function
Finance
Accounts payable
??? (debit)
Accounts payable (credit)
Cash disbursements
Accounts payable (debit)
Cash (credit)
Discounts taken (credit)
SP 13-6 There are many instances where controls may be implemented using man-
ual processes or alternatively automated using technology. One example of
this is a signature. It can be manual or digital. Describe the positives and
negatives of each implementation. Based on your observations, can you
make a general statement about manual versus automated controls?
Problems
Note: As mentioned in Chapters 10 through 12, the first few problems in the business
process chapters are based on the processes of specific companies. Therefore, the
problem material starts with case narratives of those processes. (The purchasing and
receiving portions of these two cases are discussed in Chapter 12.)
CASE STUDIES
CASE A: PureProducts Company (Accounts payable and cash disbursements processes)
The PureProducts Company sells medical supplies to hospitals, clinics, and doctors’
offices. PureProducts uses an ERP system for all of its business processes. PurePro-
ducts employs the following procedures for accounts payable and cash disbursements.
The accounts payable (AP) department receives invoices from vendors. An AP
clerk enters the PO number from the invoice into the computer, and the computer
displays the PO. The clerk then keys the invoice data. The computer matches the
invoice data with data on the PO (purchase and receipt data). If there are price or
quantity variances of more than 5 percent, the invoice is routed, via workflow, to a
purchasing agent for approval. Once validated (by the computer and, if necessary,
purchasing), the computer records the invoice (i.e., accounts payable) and updates
the PO and general ledger master data.
Every morning, the accounts payable department reviews open invoices (i.e.,
accounts payable) to determine if they should be paid. An AP clerk selects those
invoices that are to be paid, and the computer prints a check in the accounts payable
department and updates the accounts payable and general ledger master data.
Accounts payable mails the check to the vendor.
CASE B: CarMaker, Inc.

CarMaker is a major manufacturer of automobiles. This narrative describes the pur-
chasing, accounts payable and cash disbursement process for original equipment
windshields for its only supplier of windshields, Glass.
CarMaker’s inventory system requests the purchasing department to reorder
windshields. When the PO is created a record is added to the PO file (all data is
stored on magnetic disks) and an electronic transmission is sent to Glass. Glass
acknowledges the order (also electronically).
Glass ships the order and sends an electronic invoice to CarMaker. The elec-
tronic invoice data is recorded to a pending invoices file.
When the goods arrive at CarMaker’s warehouse, a receiving clerk examines the
goods and keys in the receiving data. The keying operation creates a receiving record
on the receiving file and updates the PO record to reflect the receipt.
Each morning, the AP clerk accesses the pending invoices file to identify invoices
for which there are receiving reports and POs. The computer matches the invoice data
to the PO and receiving data and displays them to the clerk. If the data does not match
the clerk follows up with Glass to resolve discrepancies. If the data matches, the clerk
enters the date the invoice should be paid and an authorization code for the bank to
transfer payment to Glass on that date. The payment authorization is encrypted and
transmitted electronically to CarMaker’s bank where it is stored until the payment date.
P 13-1 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.
P 13-2 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 12 that are ger-
mane to your company’s process.
c. Annotate the flowchart prepared in part (a) to indicate the points
where the control plans are being applied (codes P-1, …, P-n) or the
points where they could be applied but are not (codes M-1, …, M-n).
P 13-3 Note: If you were assigned DQ 13-3, consult your solution to it. Modify the
DFDs in Figure 13.3 (pg. 505), Figure 13.4 (pg. 505), and Figure 13.6 (pg.
507), as appropriate, to reflect the following independent assumptions:
a. Employing a voucher system that involved, among other things,
establishing vouchers payable that covered several vendor invoices
b. Making payments twice per month, on the 5th and 25th of the
month, and taking advantage of all cash discounts offered
Note: Because the two assumptions are independent, your instructor
may assign only one of them.
P 13-4 The following are 10 process failures that indicate weaknesses in con-
trol. For each of the process failures described, provide a two- to
three-sentence description of the control plan that you believe would
best address that deficiency. Obviously, more than one plan could exist
that is germane to a particular situation. However, select only one plan
for each of the process failures and include in your description a justifi-
cation of why you believe it is best. When in doubt, opt for the plan that
is preventive in nature, as opposed to plans that are detective or corrective.
Process Failures
1. A vendor invoice was posted to the wrong vendor record in the
accounts payable master data because the data entry clerk transposed
digits in the vendor identification number.
2. Several scanned invoice documents were lost and did not get recorded.
3. The amount of a cash disbursement was what the cash disbursements
clerk had authorized prior to running the disbursement program.
4. The AP clerk prepares a list of proposed payments that is based on
due dates and vendor payment terms. Many of these payments are
not approved by the cash disbursements clerk due to lack of funds.
5. The vendor invoiced for goods that were never delivered. The
invoice was paid in its full amount.
6. The unit prices the vendor charged were in excess of those that had
been negotiated. The invoice tendered by the vendor was paid.
7. A vendor submitted an invoice in duplicate. The invoice got paid twice.
8. Because of several miscellaneous errors occurring over a number of
years, the total of the outstanding vendor payable balances shows a
large discrepancy from the balance reflected in the general ledger.
9. Several electronic invoices were misrouted to an organization. The
invoices were received, input, and paid, but the organization had
never purchased anything from the vendors that were paid.
10. Goods receipts from a certain vendor are always on time. However,
the invoices from this vendor are often late or never received. As a
result, the organization has lost significant amounts of money by
failing to obtain cash discounts for prompt payment.
P 13-5 Our narrative and DFDs are created assuming that accounts payable result
from the purchase of inventory using a perpetual inventory system. However,
inventory is not the only item that a company might purchase. For each of the
following situations, show the journal entry (in debit/credit journal entry for-
mat with no dollar amounts) that would result when the accounts payable was
created. Make and state any assumptions you think are necessary.
Situations:
1. Merchandise is purchased, and a periodic inventory process is used.
2. Merchandise is purchased, and a perpetual inventory process is used.
3. Office supplies are purchased.
4. Plant assets are purchased.

5. Legal services are purchased.
P 13-6 Use the DFDs in Figure 13.3 (pg. 505), Figure 13.4 (pg. 505), and
Figure 13.6 (pg. 507) to solve this problem.
Prepare a four-column table that summarizes the AP/CD processes,
inputs, and outputs. In the first column, list the two processes shown in
the level 0 diagram (Figure 13.3). In the second column, list the subsidi-
ary functions shown in the four lower-level diagrams (Figures 13.4 and
13.6). For each subsidiary process listed in column 2, list the data flow
names or the data stores that are inputs to that process (column 3) or
outputs of that process (column 4). (See Note.) The following table has
been started for you to indicate the format for your solution.
Note: To simplify the solution, do not show any reject stubs in column 4.
Solution Format Summary of the AP/CD Processes, Inputs, Outputs,
and Data Stores
Subsidiary
Process Functions Inputs Outputs
1.0 Establish 1.1 Validate PO accounts payable Validated vendor
payable invoice notification invoice
Receiving report Vendor master data
Vendor invoice
Vendor master data
1.2 Record Validated vendor … Continue
payable invoice solution…
Inventory master data
P 13-7 The following is a list of 12 control plans from this chapter or from
Chapters 8 through 12. These are followed by a list of 10 system
failures that have control implications. Match the 10 system failures
with a control plan that would best prevent the system failure from
occurring. Because there are 12 control plans, you should have two
letters left over.
Control Plans
A. Digital signature
B. Tickler file of open POs and receiving reports
C. Procedures for rejected inputs
D. Compare input data with master data (e.g., vendor master data)
E. Segregate duties among purchasing, receiving, and accounts payable
F. Program change controls
G. Reconcile bank account
H. Reconcile run-to-run totals
I. Review of a cash planning report
J. Match invoice, PO, and receiving report
K. Access control software
L. Segregate duties between accounts payable and cashier
System Failures
1. Wilson Inc. ordered 30 circuit breakers from Elon Electric. Only 25
breakers were received; the other five were on back order at Elon.
An invoice for 30 breakers was received at Wilson, recorded, and
eventually paid.
2. Trent Company often does not receive invoices in a timely manner
and cannot record them in time to take advantage of payment
discounts.
3. Norma, the cashier at Scarsdale Company, has been writing checks
to herself. This fraud has gone undetected for years.
4. At East Bend Company, all incoming invoices are matched against
open POs and receiving reports. When Juan, the purchasing man-
ager, is performing this match, he sometimes can’t find a PO, and
so he prepares a PO to cover the invoice.
5. India Company receives batches of vendor invoices once each day
via an EDI feed from a VAN. Some of these invoices are from ven-
dors that do not do business with India.
6. Westover Corp. often loses discounts on payments to vendors
because of cash flow problems.
7. Allie, the AP clerk at Fuller Company, has grown tired of resolving
discrepancies among vendor invoices, POs, and receiving reports.
To make his life easier and to reduce rejects, she changed the AP
invoice program to allow large variances.
8. Twice each week, Nellie, the AP clerk at Zagreb Company, selects a
batch of vendor invoices and sends them to Gary, the clerk in cash
disbursements. Occasionally, after Gary makes the electronic pay-
ments, it is discovered that not all the payments were made or that
some were made incorrectly.
9. Searcy, Inc. receives electronic invoices through a Web portal
hosted by a third party. Some of these invoices are not correct.
After investigation, it is discovered that the invoices were altered in
transit from the vendor.
10. Gary, the cashier, looks over the invoices that he has received and
makes payments as needed. Some of those payments are to bogus
vendors who Gary knows have not provided any goods or services to
Rainbow.
P 13-8 This problem should be completed with database software, such as

Microsoft Access. As directed by your instructor, submit the completed
database file and the printouts noted in the following text.
1. Using the E-R diagram in Figure 13.8 (pg. 511), select any three or
four related entities and implement them as tables using Microsoft
Access (or any other database software acceptable to your instruc-
tor). Link the tables using the cardinalities shown in the figure. For
the tables, you may use attributes shown in Figure 13.9 (pp. 513–
514) or create different attributes.
2. Using Microsoft Visio (or other software), draw an E-R diagram of
the three or four tables chosen previously in part 1. Also, include
linking lines and cardinalities.
3. Create forms for each table from part 1 of this problem and use the
forms to populate the tables with representative data. Forms should
be in good order, readable, and properly formatted. Create at least
three records in each table. Print out the populated tables and one
instance of each form.
4. Design three queries using the tables from part 1 of this problem.
Print out the output of each query and attach an explanation as to
why someone would be interested in the output of each query.
5. Using the report function in Access, design a report for each query
from part 3 of this problem. Reports should be in good order, read-
able, and properly formatted. Print out each report.
P 13-9 Using Excel to test controls in AP/CD Data

Obtain data file AnyCO-C13 Excel Problem from the product companion
website. Do any of the following activities as assigned by your instructor
to test the controls you have learned in this chapter. A major control plan
in accounts payable processing is to compare the vendor invoice to the
receiving report and purchase order (PO). Perform the following steps
to verify/validate vendor invoices.
1. Test whether the vendor invoiced for the correct quantity (that is,
does the quantity that was billed for match the quantity that we
received?). (Hint: use VLOOKUP on PO number to the Receipt
table and return the Quantity received.) Compare quantity received
with quantity billed and report the vendor name of any vendor who
billed for more than we received. How many vendors billed for
incorrect quantities? What steps should the AP clerk now follow?
2. Test whether the vendor invoiced for the correct amount (that is,
does the dollar value on the invoice match what we agreed to pay
in the PO?). (Hint: use VLOOKUP on PO number to the PO
table and return the unit amount from the PO.) Compare the billed
unit amount with the agreed unit amount. Also test the vendor’s cal-
culation of the total amount. How many vendors billed for incorrect
amounts? What steps should the AP clerk now follow?

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CHAPTER

The Accounts Payable/Cash

Process Definition and Functions

FIGURE 13.1 A Horizontal Perspective of the AP/CD Process

Accounts payable Cashier

2. Accounts 4c. Payment

TABLE 13.1 Description of Information Flows

1 Invoice received from vendor

FIGURE 13.2 A Vertical Perspective of the Purchasing and AP/CD Processes

Controller Warehouse Purchasing

Cashier Supervisor, Supervisor, Buyers

(Horizontal information flows, as illustrated in Figures 12.1 and 13.1)

functions interact as the AP department provides validated vouchers for disbursement

Logical Process Description

Discussion and Illustration

FIGURE 13.3 The AP/CD Process—Level 0 Diagram

FIGURE 13.4 AP/CD Process—Diagram 1

Reject Accounts payable

Source: Copyright by SAP AG. Reprinted with permission from SAP.

FIGURE 13.6 AP/CD Process—Diagram 2

Processing Noninvoiced Disbursements

FIGURE 13.7 Processing Non Invoiced Disbursements

Originating Payment Disbursement General

Payment Cash disbursements

(2) Assuming a nonvoucher system is used:

Originating Payment General

from an accounting standpoint, the distribution of charges to asset, expense, or other

Logical Data Descriptions

Logical Database Design

deferred charges—are computed as the difference between the continuous events,

Technology Trends and Developments

Shaded Attribute(s) = Primary Key

Chapter 13 – The Accounts Payable/Cash Disbursements (AP/CD) Process

Technology Summary 13.1

Technology Summary 13.2

describes electronic invoice presentment and payment (EIPP), a technology

Physical Process Description

Discussion and Illustration

Record Accounts Payable

Technology Application 13.1

VAN Each day

Translate from EDI Display Display of

Compare incoming P-2 BT

The Fraud Connection

Fraud and the Accounts Payable Function

• Veronica, an accounting clerk at a dental supply wholesaler, was responsible for

Fraud and the Cash Disbursements Function

Application of the Control Framework

Accounting Information Systems

Ensure efficient Ensure security For

Recommended Control Plans A B IV IC IA UC UA IV IC IA UC UA

P-1: Independent validation P-1

P-2: Match invoice, purchase P-2 P-2 P-2

P-3: Tickler file of payments P-3 P-3 P-3

P-4: Independent authorization P-4 P-4

P-5: Agreement of run-to-run P-5 P-5 P-5 P-5

P-6: Digital signatures P-6 P-6 P-6 P-6

M-1 Tickler file of open M-1 M-1