Case Study - Adam & Co: Evaluation of Internal Control System

This report evaluates the internal control system of Adam & Co through the expenditure cycle of purchase system, cash disbursement system and payroll system. It identifies the weaknesses and risks associated with each system and provides a flowchart for each. The report suggests implementing a centralized computing system to reduce the chances of fraud and errors.

Running head: CASE STUDY – ADAM & CO
CASE STUDY – ADAM & CO
Name of the Student
Name of the University
Author Note

1CASE STUDY – ADAM & CO
Executive Summary
In this report, all the process of the internal control system is being discussed as per the case
study of Adam & Co. The three cycles which are purchase system, cash disbursement system
and payroll system is evaluated with the risks and the weakness of each of the processes. All
the system of the expenditure cycle is being discussed with the help of a flow chart. Through
the flowchart, the different elements are taken separately in the process and described as per
the interrelationships in the system of the departments.

2CASE STUDY – ADAM & CO
Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
System flow chart of purchase system:......................................................................................3
System flow chart of cash disbursement system:.......................................................................5
System flow chart of payroll system:.........................................................................................7
Identifying the internal control weakness in the system and its associated risks:.....................9
Purchase System.....................................................................................................................9
Cash disbursement system...................................................................................................10
Payroll system......................................................................................................................10
Conclusion................................................................................................................................11
References................................................................................................................................12

3CASE STUDY – ADAM & CO
Introduction
This report provides the information about the expenditure cycle of the Adam & Co.
It mainly deals with the wholesaling of the industrial supplies. A centralized accounting
system is followed by Adam & co. which has different network terminals in various
locations. The expenditure cycle procedure which consists of the purchase system, cash
disbursement system and payroll system, the evaluation of these process are done with
respect to risks and the internal controls of it in respect to all. The process is discussed with
the help of a system flowchart. In the later part, the weakness of the internal control of each
of the system is discussed with respect to the Accounting Information System.
Discussion
System flow chart of purchase system:
The inventories are prepared according to the requirement of the firm needed for the
production process, after the process the consumers get the finished products. Most of the
organizations use different types of inventory methods, which is depend on the volume of the
production and sales (Muller 2019). The purchasing procedure involves many step, some of
the steps which are used in the case study is:
 Requirement of inventory: The purchasing clerk checks the inventory, if there
is any requirement in the inventory.
 Receiving department: The clerk will order to the vendor, if the quantity of the
item in the inventory is low. Then, the clerk will receive the goods and the
item will be recorded in the digital purchase order.

4CASE STUDY – ADAM & CO
 Account payable: The account payable clerk will receive the report in the
department, and he will update the digital purchase order in the three
documents. The three documents which the accounts payable clerk will update
are the digital accounts payable subsidiary ledger, the accounts payable
control account and the inventory control account in the general ledger
(Sedevich-Fons 2019). Lastly, the invoice, receiving report and the purchasing
order copy is send by the clerk to the cash disbursement department.
A diagram is provided which presents the flowchart of the purchase system of the
Adam & Co. Through this process of the flowchart, the purchase system works here.
The flowchart of the purchase system is divided into three parts. In the first segment,
the purchasing clerk after ordering prepares a digital purchase order. From that purchase
order, the copies are given to the vendor and purchase department. In the second segment, the
receiving clerk manually prepares and from that one of the receipt is being send with the
goods to the inventory and the other are sent to the accounts receivable department (O'neill et

5CASE STUDY – ADAM & CO
al. 2017). Here, in the inventory control the inventory is being updated with that receipt. The
other copy which is with the account payable department, it will file the report until the
supplier’s invoice arrives. After this, the clerk updates the digital accounts payable subsidiary
ledger.
System flow chart of cash disbursement system:
In the cash disbursement system, the main objective of this system is that, it will pay
the creditors in the correct time i.e. at the due date. This cash disbursement system mainly
controls the purchase system, with that the payment process which is being created is
appreciative (DeVan 2015). If the firm pays the amount to the creditors in the correct time,
then the firm can gain because they do not have to pay the interest on the amount. In the other
way, the firm can also lose the discount at the time of the agreement of the purchase, if the
firm fails to pay at the right time. In the department of accounts payable, the cash distribution
process is done as per the identification of the items which are needed in the inventory.
Through accounts payable function, all the accounts payable file is being reviewed, after the
review the approval is being done for the payment, with that the supporting documents is
being provided for the further qualification.
The flowchart is being provided which provides the idea of cash distribution system
in Adam & Co. It displays how the payment has been done to the suppliers, after receiving
the goods (Davis et al. 2017).

6CASE STUDY – ADAM & CO
In the cash disbursement department, clerk receives the document which is in the
system of the cash disbursement. Before the due date of the payment, all the payments are
being prepared by the cash disbursement clerk. The firm prepares a cheque for the invoiced
account on the due date. After that, the treasurer received the cheque for the document
signing, and the vendor received the mail of the cheque for the verification. After all this
process, the cash disbursement clerk will update the account payable record. The record
which is found in the account payable of Adam & Co. contains account payable control
account, cheque register and accounts payable subsidiary ledger. From the computer terminal,
all the accounts are being updated by the clerk (Kimberg et al. 2019). Lastly, the clerk files
the purchase order copy, invoice, cheque copy and the receiving report. Thus, the account
payable control is being updated consequently in the general ledger.

7CASE STUDY – ADAM & CO
System flow chart of payroll system:
In the case study of the Adam & Co., it is seen that the payroll system is dependent on
the total working hours which has been recorded on the cards. The employee’s working hours
is being recorded in the time cards every day. At every weekend, the supervisors used to
review the time cards, and the supervisors use to submit the time cards at the end of each
week at the payroll department. In the data processing department, a computer terminal is
connected to the central payroll system for the data recording (Mahajan, Shukla and Soni
2015). The payroll clerk use to input all the data on the time card. In the processing
department, the clerk is used to print all the hard copies of the pay cheque. There is a
responsibility of the clerk, where the two copies of the payroll register have to be printed.
After the printing has been done, the employee records have to be posted. The clerk of the
payroll department uses to fill the time card and the review of the pay cheque of employees
will be done by the supervisors, when the cheque will be send by the clerk of the payroll
department. After all this process, the distribution of the pay cheque of the employee is been
done as per their particular section (Wilson et al. 2016). The accounts payable department
receives a payroll register copy, which is been send by the payroll clerk. The another copy of
the payroll register is sent to the payroll department. The clerk of the account payable
department reviews the payroll register. The disbursement voucher is prepared by the account
payable clerk (Parento et al. 2017). The payroll for the employees is entirely done by the
accounts payable clerk, and there are also other responsibilities which includes filling the
cheque copy, and after that depositing the bank. The voucher and the payroll register is
received by the General Ledger Department. After the completion of all the process, the
voucher filing, general ledger and the register to the payroll department is done by the clerk
of the accounts payable department.

8
Supervisor Payroll department Accounts payable departmentGeneral ledger department
Reviewing time card for correctness
Reviewing employee pay cheque
ributing employee cheque to different departments
Inputting time card data
Printing hard copies of pay cheque
Two copies of payroll register
Filing one copy of payroll with the time card
Reviewing register by the clerk
Preparing disbursement voucher
Writing of cheque by clerk
Depositing in the bank account
Filing the cheque copy
Posting to general ledger
Filing in the department
CASE STUDY – ADAM & CO
The flowchart is being provided which provides the idea of the payroll system in Adam &
Co.

9CASE STUDY – ADAM & CO
Identifying the internal control weakness in the system and its associated
risks:
In an organization, there are certain weakness which can be controlled by
implementing some of the advanced technologies. All the expenditure procedure is being
discussed with the internal control weakness and with the association of the risks.
Purchase System
From the case study, it is seen that at the time of receiving the goods, the clerk use to
receive the goods manually. It used to receive the hard copy receipts. In the accounts payable
department, the filing is done only after the supplier arrives by the clerk. Thus, it consumes
more time for the filing of the report.
The problems which the Adam & co. is facing is been discussed. It is seen that; the
process which Adam & Co. uses for the inventory control is not beneficial for the
performance of the organization. The process of ordering the goods, the way of receiving and
the allocation of keeping the goods in the inventory is deliberate. The staffs those who are
working is following a slow procedure in keeping the inventory, so it is affecting the
purchase system of Adam & Co. The staffs are manually receiving all the documents, which
includes all the purchasing order, payroll register, accounts payable subsidiary ledger
(Donelson, Ege and McInnis 2016). Thus, in this case there can be a high chance that there
can be a high chance of fraud, as there can be manipulation happened at the time of entering
the data. These are the risk and weakness which the Adam & Co is facing in the purchasing
system

10CASE STUDY – ADAM & CO
Cash disbursement system
The limitations which the cash disbursement system is facing is that, there is no
verification process at the time of receiving the documents (Jacoby and Zheng 2018).
Furthermore, it was observed that the treasurer does not verify the cheques which is prepared
by the clerk of the account payable department, before sending it to the vendor. Thus, there
can be a high chance of mistake that can happen at the time of writing of the cheques. So, the
Adam & Co should take a measure by implementing a centralized computing system, such
that there will be no chance of manipulating the report.
Payroll system
The weakness which the Adam Co. is facing in the payroll system is that, in the
account payable department, the disbursement voucher which is prepared by the clerk is done
manually. There are also other responsibilities of the clerk which includes the data processing
of the time card data input, the payroll register has to be printed and kept as a form of hard
copies, the posting of the cheques has to be done by him (Navarro, Roberts and Wallace
2018). Hence, it can be easily seen that in the payroll system the duty of the clerk is not
properly segregated. As the clerk performs most of the task manually, there can be an
involvement of the fraudulent activities.
Therefore, it can be seen that Adam & Co. have to take care of the process for the
preparation of the documents. At the time of recording the transactions, there should be an
involvement of the higher management. If the higher management involves, then there can be
an accuracy in the documents which are prepared (MEHTA 2019). Thus, there should be a
change in the process of the documentation which is to be done so that the documents that are
produced should be reliable and there is less chance of errors.

11CASE STUDY – ADAM & CO
Conclusion
From the above discussion based on the report, it can be concluded that the major
weakness which has been observed from the case is that the clerks are manually recording all
the transactions for the preparation of the reports and the vouchers in the payroll system and
the purchase system of the Adam & Co. The effectiveness of the three department is being
discussed here, which includes purchase system, cash disbursements system and payroll
system and the evaluation is being done in this report. Form the analysis, it can be seen that
there is an issue with the internal control, as most of the document which is being recorded is
done manually. So, there can be a chance of the manipulation of the documents, and the
effect will be on the financial statements. In other way, there is a less accuracy as there can be
human errors included while recording. Moreover, there should be a proper verification of the
reports and the documents which is being recorded by the staffs. Through this the risks and
the process of the internal control can be maintained.

12CASE STUDY – ADAM & CO
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