ENTERPRISE RESOURCE PLANNING SYSTEM

Enterprise Resource Planning System:

• It is a cross functional enterprise system driven by an integrated suit of software modules that support
the basic internal business processes of a company. It is a practice of consolidating an enterprise’s
planning, manufacturing, sales and marketing efforts into a one management system. Needless to say,
it combines all databases across departments into a single database that can be accessed by all
employees.

The Benefits of an ERP system:

1. Improves integration and flexibility

2. Expected to have fewer errors
3. Improves speed and efficiency
4. Has lower the total costs in the complete supply chain
5. It shortens throughput times
6. Sustains involvement and commitment of the top management.

ERP Configurations:

Most ERP systems are based on the client-server model. Briefly, the client-server model is a form of
network topology in which a user’s computer or terminal accesses the ERP programs and data via a host
computer called the server. The servers may be centralised, but the clients are usually located at multiple
locations throughout the enterprise. To address this, there are two basic architectures are the two-tier
model and the three-tier model.

• Two-tier model. In this model, the server handles both application and database duties. Client
computers are responsible for representing data to the user and passing user input back to the server.
This model is commonly used with local area network (LAN) connectivity.

• Three-tier model. Under this model, the database and application functions are separated. This
architecture is typical of large ERP systems that use wide area networks (WANs) connectivity
among the users.

ERP Groups of Applciation:

1. Online Transaction Processing. OLTP is also known as core applications. These are
applications that operationally support the day-to-day activities of the business.

Examples:
1. Sales and distribution
2. Business planning
3. Production planning
4. Shop floor control
5. Logistics
2. Online Analytical Processing. OLAP is a decision support tool that supplies management with
real-time information and permits timely decisions that are needed to improve performance and
achieve competitive advantage.

Examples:
1. Decision support
2. Modelling
3. Information retrieval
4. Ad hoc reporting/analysis
5. What-if analysis

Key Observations about OLTP and OLAP:

1. OLTP applications support mission-critical tasks through simple queries of operational

databases.
2. OLAP applications support management-critical tasks through analytical investigation of complex
data associations that are captured in data warehouse.
3. OLTP and OLAP have specialised requirements that are in direct conflict and because of that, the
application and database servers of the two are not connected to avoid issues and because of their
distinct functions.

Remember that OLAP servers allow users to analyse complex data relationships. And to support
these function, additional analytical operations are integrated to the OLAP.

• Consolidation is the aggregation or roll-up of data. For example, sales offices data can be rolled up to
districts and districts rolled up to regions.

• Drill-down permits disaggregating data to reveal the underlying details that explain certain
phenomena. For example, the user can drill down from total sales returns for a period to identify the
actual products returned and the reasons for their return.

• Slicing and dicing enables the user to examine data from different viewpoints. One slice of data might
show sales within each region. Another slice might present sales by product across regions. Slicing
and dicing is often performed along a time axis to depict trends and patterns.

Bolt-On Software:

Many organizations have found that ERP software alone cannot drive all the processes of the company.
These firms use a variety of bolt-on software that third-party vendors provide. The decision to use bolt-
on software requires careful consideration and the least risky approach is to choose a bolt-on that is
endorsed by the ERP vendor.

For example, an entity faces a unique problem regarding their delivery system. Since it is unique, the
ERP might have no available solution to that problem. And with that, the entity is
left no choice but to outsource with third-party vendors. And in outsourcing software, the entity must
consider that compatibility of the bolt-on software with the current ERP system
employed.
Data Warehousing:

• Data warehouse is a single, complete and consistent store of data obtained from a variety of different
sources made available to end users in what they can understand and use in a business context.

• Data warehousing is a process of transforming data into information and making it available to users in
a timely enough manner to make a difference. The process of data warehousing involves extracting,
converting and standardising an organisation’s operational data from
ERP and legacy systems and loading it into a central archive.

Note that data warehousing is a PROCESS.

Five Stages of Data Warehousing:

1. Modelling Data— Normalising data in an operational database is necessary to efficiently and

accurately reflect the dynamic interactions among entities. Under this process, data attributes are
constantly updated, new attributes are added, and obsolete attributes are deleted.

2. Extracting Data— Data extraction is the process of collecting data from operational databases,
flat files, archives and external sources. To reduce the extraction time, a technique called
changed data capture is used to only capture newly modified data.

3. Cleansing Extracted Data— Since operational data are dirty for many reasons, data cleansing
is needed to filter out or repair invalid data prior to being stored to the warehouse. During this
process, all data collected will be transformed into a uniform, standard business term.

4. Transforming Data— Data warehouse is composed of both detail and summary data. To improve
efficiency, data can be transformed into summary views before they are loaded into the
warehouse. This will enable users to see an overview of the available data.

5. Loading Data in the Warehouse— After processing the data to make everything fit for the
warehouse, the same will be stored in the warehouse database to make it available to all end users.
This integration is one of the most distinctive and advantageous characteristics of an ERP system.

Implications for Internal Control and Auditing:

Firstly, is the transaction authorisation. A key benefit of an ERP system is its tightly integrated
architecture of modules. This structure, however, also poses potential problems for transaction
authorisation. For example, the bill of materials drives many manufacturing systems. If the procedures for
the creation of the bill of materials are not configured correctly, every
component that uses the bill of materials could be affected. Controls need to be built into the system to
validate transactions before other modules accept and act upon them. Because of an ERP’s real-time
orientation, they are more dependent on programmed controls than on human intervention, as was the
case with legacy systems. The challenge for auditors in verifying transaction authorisation is to gain a
detailed knowledge of the ERP system configuration as well as a thorough understanding of the
business processes and the flow of information between system components.
Next is the segregation of duties. Operational decisions in ERP-based organizations are pushed down to
a point as close as possible to the source of the event. Manual processes that normally require segregation
of duties are, therefore, often eliminated in an ERP environment. For example, shop supervisors may
order inventories from suppliers and receiving dock personnel may post inventory receipts to the
inventory records in real time. Furthermore, ERP forces together many different business functions, such
as order entry, billing, and accounts payable, under a single integrated system. Organizations using ERP
systems must establish new security, audit, and control tools to ensure duties are properly segregated. An
important aspect of such control is the assignment of roles, which is discussed in a later section.

Third is the supervision. An often-cited pitfall of an ERP implementation is that management does not
fully understand its impact on business. Too often, after the ERP is up and running,
only the implementation team understands how it works. Because their traditional responsibilities will be
changed, supervisors need to acquire an extensive technical and operational understanding of the new
system. Typically, when an organization implements an ERP, many decision-making responsibilities are
pushed down to the shop floor level. The employee-empowered philosophy of ERP should not eliminate
supervision as an internal control. Instead, it should provide substantial efficiency benefits. Supervisors
should have more time to manage the shop floor and, through improved monitoring capability, increase
their span of control.

Then the accounting records. ERP systems have the ability to streamline the entire financial
reporting process. In fact, many organizations can and do close their books daily.
OLTP data can be manipulated quickly to produce ledger entries, accounts receivable and payable
summaries, and financial consolidation for both internal and external users. Traditional batch controls
and audit trails are no longer needed in many cases. This risk is mitigated by improved data entry
accuracy through the use of default values, cross-checking, and specified user views of data.

The independent verification. Because ERP systems employ OLTP, traditional, independent verification
controls such as reconciling batch control numbers serve little purpose. Similarly, process reengineer- ing
to improve efficiency also changes the nature of independent verification. For example, the traditional
three-way match of the purchase order, receiving report, and invoice and the subsequent writing of a
check may be completely automated in an ERP environment. The focus of independent verification thus
needs to be redirected from the individual transaction level to one that views overall performance. ERP
systems come with canned controls and can be configured to produce performance reports that should be
used as assessment tools. Internal auditors also play an important role in this environment and need to
acquire a thorough technical background and comprehensive under- standing of the ERP system. Ongoing
independent verification efforts can be conducted only by a team well versed in ERP technology.

And lastly, the access control. Access security is one of the most critical control issues in an ERP
environment. The goal of ERP access control is to maintain data confidentiality, integrity, and
availability. Security weaknesses can result in transaction errors, irregularities, data corruption, and
financial statement misrepresentations. Also, uncontrolled access exposes organizations to
cybercriminals who steal and subsequently sell critical data to competitors. Security administrators
therefore need to control access to the tasks and operations that process or otherwise manipulate
sensitive corporate data.