Controls for Order Entry, Part 2 (#2)
/In this episode, we cover the full range of controls associated with a computerized order entry function, mostly dealing with controls for electronic customer orders. The main control areas noted in the episode are noted below.
Initial Order Approval
To begin, you can get a verbal or written purchase order from a customer, and you manually enter it into your accounting computer system. In this case, you still need to verify if an approved buyer has given you the order. This control is usually skipped for old customers, but if the customer is a new one, this might be a useful control step.
Data Entry Review
The next control is one to ensure that the information on the customer order is the same information that was input into the computer system – in this case, you’re guarding against data entry errors. This may sound like an archaic control, but it’s necessary if you have new or poorly trained order entry staff, or if customer orders are extremely complicated.
Once the order is in the computer, the computer can automatically match the order quantity to your inventory records, so you can tell the customer if you have enough inventory on hand to fulfill the order. The problem for many companies is that the inventory records may be inaccurate, which leads to incorrect delivery promises to customers. Fixing that problem calls for some inventory controls, which we’ll get to in a later episode.
Match Order to Prices
Another control is to link the computerized order to your on-line price books, so that the computer tells you if the price being entered is incorrect. Unfortunately, there may be special pricing deals that cannot be monitored automatically with a price book. In that case, you still need a manual control to review these prices with the sales manager.
Issue Confirmation
With a computerized order entry system, there’s no longer a need to generate a five-part sales order, as was the case with a manual order entry system. Instead, order information is distributed throughout the company through the computer system. However, you still need to send a confirmation back to the customer, which could be a printout or an e-mail notification. In either case, the order entry system should be able to provide this notification for you.
Additional Scenarios
Now, what if there’s an up-front credit card payment that occurs at the same time as the order placement? This usually happens when a customer places an order through your web site store. For this type of order, you can skip several controls. First, there’s no need to verify that the customer exists, because the buyer just paid you up front, which eliminates your credit risk. Second, there’s no need to conduct any price matching, because they’re paying based on the prices you posted on your web site, so there’s no way the prices could be inaccurate.
Another type of order is when electronic orders are coming in, such as an electronic data interchange transaction. These orders usually drop directly into your accounting system, so there is no data entry, and therefore no need for a data entry control point. Also, there’s usually no need to verify the buyer, because electronic orders normally come from very long-term business partners, and the arrangement between the two companies is so tight that you know who’s authorizing these orders. In many cases, the order placement by the customer is coming straight from the purchasing module of their computer system, so there’s no buyer involved at all.
You may want to insert a control point here if the order is unusually large, because it’s possible that the computer system at the other end incorrectly created a really large order. This control is usually just a flag or report that appears when a maximum order quantity level is exceeded.
A control you do want here is a confirming electronic message going back to the customer. This is a standard feature for electronic data interchange transactions, and this tells the customer that their order information has arrived at your computer.
Also, price verification is probably unnecessary, because electronic orders are usually based on very large, long-term, master purchase order arrangements where both parties know exactly what the prices are. If you want to be careful – sure – you can always match it up against your pricing file on a spot check basis. But, it probably is not necessary.
Evaluated Receipts Controls
Finally, what about order entry if you’re in an evaluated receipts situation? Evaluated receipts is relatively uncommon, unless you’re in a fairly large company, or if you’re dealing with a large company that has such a system. Evaluated receipts is when the customer issues you a purchase order, you put the purchase order number on the delivery going to that customer, and then when it arrives at the customer, they enter that purchase order number into their computer system, and the purchase order number is automatically matched up against the original order in their system – and they pay you based on that information. They don’t need an invoice at all. So in this case, an additional control is to set a flag in the order entry system when the customer order is received, which is to not print the invoice and also to trigger the creation of a special shipping tag which itemizes in a bar coded format the purchase order number, and any additional information required by the customer.
This may also call for a periodic audit review to verify that evaluated receipts customers have that flag set up in their customer master file records.
Comparison to Controls for Manual Systems
Now, if you compare the controls I’ve itemized for computerized order entry systems to the ones I described in the last podcast for a manual system, you’ll find that some controls are no longer needed. One is that you don’t need any pre-numbered sales orders, since there are no longer any sales orders. Also, there’s no need to lock up any unused sales orders, for the same reason.
On the other hand, computerized systems also require some new controls that you never see in a manual system. One is password access. It’s useful to have order entry people log into the system with a unique code, so that you can track which ones are committing the largest number of data entry errors. Another control is to add data entry validation routines to the computer system, so that the computer will reject incorrect entries being made by your data entry staff. Validation is good for spotting incorrect prices, addresses, or unit quantities.
A fancier control is to use workflow management software to route any unusual billing terms to a manager who has to approve them before the order can be processed. However, that requires additional software that is not normally found in an order entry system.
Order Entry Policies
Some policies are also needed. One is to verify customer existence if an order is placed that exceeds a specific dollar amount. Another policy is that special price discounts must be approved by management if the discount exceeds a certain level.