It is increasingly unlikely that companies will use entirely paper-based order entry and shipment systems, but some smaller ones still use this ap­proach. The flowchart in Exhibit 1 shows the basic process flow for these organizations, with the minimum set of controls needed to ensure that it op­erates properly. In essence, the order entry person converts a customer’s purchase order into a sales order that is used as the foundation document for credit approval, shipment, and billing. The main reasons for controls in this process are to ensure that the initial purchase order is correctly trans­lated into the sales order and that the order meets with the corporate credit-granting guidelines. The small black diamonds on the flowchart indicate the location of key control points in the process, with descriptions next to the diamonds.

Exhibit 1 Basic Controls for Paper-Based Order Entry/Credit/Shipment

The controls noted in the flowchart are described at greater length next, in sequence from the top of the flowchart to the bottom:

• Verify approved buyer. Even if the order entry staff receives an osten­sibly complete purchase order document from a customer, it is possible that the person who completed and signed the purchase order is not au­thorized to do so by the customer’s management team. This control is not frequently used, since the chances of a control problem are rela­tively slight in most cases. However, it may be useful when the size of the order being placed is extremely large.
• Verify price against price book. It is quite common for a customer to issue a purchase order for a unit price that differs from the official cor­porate price book. Consequently, a very useful control is to verify all purchase order line items against the corporate price book and to con­tact the customer regarding any discrepancies. It is also possible that the purchase order will not authorize any billing for freight or insurance costs, which may call for further communication with the customer.
• Compare sales order to purchase order. Once the order entry staff has completed the sales order, it may be necessary to have a second party compare the sales order to the purchase order to ensure that the infor­mation on both documents is identical. This control is more useful when the order entry staff is relatively untrained, the dollar value of items ordered is extremely high, or when customers are promised a high degree of accuracy in the fulfillment of orders placed.
• Review by credit department. If the order entry staff simply creates a sales order and forwards it to the warehouse for delivery, then there is a high risk that customers will default on their payments. This is an es­pecially large problem where the gross margin on products sold is quite low, so the company will sustain a substantial loss if a customer does not pay. Accordingly, a mandatory control is to send all sales orders to the credit department for approval before any shipment is made. It is customary to bypass the credit approval process for small orders, repair and maintenance orders, and when customers have established credit lines with the company.

• Stamp approval on sales order. It is possible for sales orders to be fraud­ulently routed around the credit department and sent to the warehouse, so an approval stamp to be used on each sales order should be created. This approval stamp should include space for the signature of the credit manager and for the date when the approval was granted. The ware­house manager should not ship from any sales order that does not con­tain this signed approval stamp.

The order entry procedure shown in Exhibit 2 incorporates the control points already noted in Exhibit 1. This procedure contains a number of additional processing steps not shown in the flowchart.

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