Analysis of Internal Control Weaknesses in Adam & Co.'s Expenditure Cycle

Running head: ACCOUNTING INFORMATION SYSTEMS
Accounting Information Systems
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ACCOUNTING INFORMATION SYSTEMS
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Executive Summary
The study relates to Perth-based wholesaler Adam & Co. The main business of the company
is to sell industrial supplies after sourcing its inventory from countries such as Vietnam,
China and Thailand. The report has generated an analysis of the expenditure cycle of the
company. The findings of this evaluation have revealed that the company follows a
centralised accounting system. However, in the purchase system the ARC, APC and the PC
completely overlooks the process of checking the inventory in order to update accounts and
preparing receiving reports and forwarding the same to the cash disbursement department.
Additionally, the assigned clerks in the PD and AP department completely overlooks their
duties. A critical analysis has been able to identify is weaknesses and risks such as reputation
loss, financial loss and increased debt burden.

ACCOUNTING INFORMATION SYSTEMS
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Table of Contents
Introduction................................................................................................................................3
System Flowchart of purchase systems......................................................................................4
Purchase system’s internal control weakness............................................................................5
Risk associated with Purchase system’s weakness....................................................................6
System Flowchart of cash disbursement system........................................................................7
Cash disbursement system’s internal control weakness.............................................................8
Risk associated with cash disbursement system’s weakness.....................................................8
System Flowchart of payroll system........................................................................................10
Payroll system’s internal control weakness.............................................................................11
Risk associated with payroll system’s weakness.....................................................................11
Conclusion................................................................................................................................12
References................................................................................................................................13

ACCOUNTING INFORMATION SYSTEMS
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Introduction
The first section of the report reviews the existing literature of existing systems,
thereby putting emphasis on internal control and usefulness of conducting audits. In the
subsequent sections, the report has depicted the weakness in Adam & Co.’s internal control
and risks related to the identified weaknesses. According to DeFond and Lennox (2017),
internal control ensures that the financial statements of an entity are prepared as per the
relevant international standard. The study also illustrates how internal control can be stated as
the process brought by the entity’s board of director and other personnel for guaranteeing
achieving the desired objectives. Based on the several types of other research studies, it has
been discerned that only a handful of large private companies is mandated to conduct audits
(Vanstraelen and Schelleman 2017). However, this research has emphasized on the benefit of
voluntarily conducting audits in an organization. Furthermore, auditing has a pivotal role
towards the accuracy of the financial statement corporate accountability and governance
mechanism (Lisic et al. 2019). As stated by Knecheland Salterio (2016), more than 37%
firms in the US conduct audit on a voluntary basis. These entities were seen to have a
remarkably low loan default ratio compared to an audit firm. This study emphasizes on the
importance in auditing of the “payroll functions”, “purchase systems” and “disbursement of
cash” of Adam & Co. along with the risks in each process.