Internal Control Risks and Processes in Expenditure Cycle of Adam & Co.

The report evaluates the risks and processes of internal control in the expenditure cycle of Adam & Co. and identifies weaknesses in the purchase, cash disbursement, and payroll systems. The report suggests automation as a solution to eliminate manual activities and save resources and time.

Running head: ACCOUNTING INFORMATION SYSTEMS
Accounting Information Systems
By Name of the Student
Group Number
Module Name

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ACCOUNTING INFORMATION SYSTEMS
Executive Summary
The report enumerates the risks and processes of the internal control in the expenditure cycle
of Adam & Co. after it centralized its accounting system by using various network terminals
at different locations. The main risks and processes for the internal control have been
identified in “purchases system”, “cash disbursement system” and the “payroll system”
along with designing of the respective system flowcharts. The depiction of the control issues
has paved the way for effectively tracking the areas which need improvement. The findings
have revealed that the main issues are due to the manual process being followed in all the
three aforementioned systems. The organisation needs to innovate and develop an automated
process to eliminate the manual activities and save both resources and time.

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Table of Contents
Introduction................................................................................................................................3
System Flowchart of purchase systems......................................................................................4
Internal control weakness in the purchase systems....................................................................5
Risk associated with the weakness of purchase systems...........................................................5
System Flowchart of cash disbursement system........................................................................7
Internal control weakness in the cash disbursement system......................................................8
Risk associated with the weakness of the cash disbursement system........................................9
System Flowchart of payroll system........................................................................................10
Internal control weakness in the payroll system......................................................................11
Risk associated with the weakness in the payroll system........................................................12
Conclusion................................................................................................................................12
References................................................................................................................................14

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Introduction
The evaluation of operations is necessary for identifying the sub-processes. Similarly,
it is also customary to make assessment of the time and resources required for completion of
a task (Heizer, Render and Munson 2017). Process analysis plays a vital role in depicting the
needs of improvements in the operations activities (Mahadevan 2015). The study has focused
process assessment of “purchases systems”, “payroll process” and “cash disbursement
system” in Adam & Co. Some of the other excerpts will discuss about the weakness in
internal control and risk involved in each of the processes.

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Inventory
Ledger Inventory Clerk
Ledger Checking
and preparation of
orders
Forwarding printed
copy to vendor Digital Copy to
Purchase
Placing of order
System Flowchart of purchase systems

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Internal control weakness in the purchase systems
Purchasing is defined as an activity conducted by any organisation for maintaining the
appropriate level of inventory. There are several tasks which are to be performed before or
after the purchase. In normal circumstances, the input is gathered from inventory information.
The purchase team processes the data so that the output can be produced and informed to the
vendors. (Koeppel and Perry 2019). The purchase process involves multiple stages such as
placing of an order, collecting inputs from inventory data and selecting the vendors (Hugos
2018). As soon as the data is collected on the inventory, it is processed with the support of
various teams and organizations. The output is further shared via different channels based on
the customer’s preference. The monitoring of the purchase process is done to ensure quality
based on the parameters such as accuracy and timeliness (Mukherjee 2017). The purchase
process may comprise of the following weaknesses:
1. Checking the Inventory Manually: The new orders requirement is checked manually in
the inventory. The manual monitoring process affects accuracy and requires more time.
2. Informing the Vendors through hard Copy of orders: The use of hard copy may
decrease the readability of data across different levels of the organization. This can
further negatively impact the level of collaboration and increase the chances of risks
(Mcmillion 2015).
Risk associated with the weakness of purchase systems
The challenges involved in the purchase process are listed as follows:
1. Complexity in collecting information from the inventory: The purchase quality is
dependent on the knowledge of inventory requirement. Ordering appropriate quantity
becomes easier for businesses which understands its inventory operations. However, in

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many cases knowing the inventory requirement can be cumbersome. The inventory clerk
may fail to depict the appropriate quantity required and share it accurately with the
company (Pauker and Spies 2017).
2. Timely placing of the order: In most situations, organizations expect swift processing of
purchase systems. However, sometimes the orders might take more time than elected. In
the given scenario of Adam & Co. The delay in purchase process may negatively impact
on the entire efficiency of the organisation.
3. Using the existing data inappropriately: The appropriate usage of existing data decides
whether the purchase has been executed efficiently. In this context, the businesses are
needed to assess their inventory for ensuring quality of purchasing activities.
4. Complying with expectations- The main target of purchasing service is to ensure
smooth flow of raw materials. The business needs to consider their personal production
schedule while executing the activities associated with inventory. The teams are needed
to collaborate among themselves for fulfilling the inventory requirements on time.

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Information related to vendor list
Lower inventory
information in ledger Purchasing Clerk Purchase
Making hard copies for vendorsForwarding digital copy to purchase departm
Specification of the supplies at the
receiving department
Manually preparing two hard copiesPacking slipOrder’s arrival at receiving side
Inventory Accounts Payable
Inventory shelving
Computer
Invoice of supplier
Printing invoice and forwarding to cash disbursement along with other two
Entering
information on
Computer
Due date checking by the clerk at cash disbursement
Invoice sent and signed by treasurer
Mailing to vendor
Updating the subsidiary ledger of
accounts payable, cheque register
and control account of accounts
payable from computer
Filing the copies of
cheque, invoice, purchase
order and receiving report
by receiving clerk
System Flowchart of cash disbursement system

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Internal control weakness in the cash disbursement system
The cash disbursement process involves processing of the cash flows associated to
procurement activities which involves payments to be made for purchase obligations (DeVan
et al. 2015). The designing of such a system is done to ensure that an organisation is able to
process the payments appropriately in its accounts payable over red whenever it is due.
Therefore, the Accounts Payable department is usually responsible for notifying the need for
maintaining vendor accounts and making cash disbursements (O’Reilly 2019).
The challenges identified in the cash disbursement system are as follows:
1. Monitoring the received orders manually- In general, the suppliers are paid as per the
quality of the products received. In the given case study of Adam & Co. The quality
checking of the products is done manually, based on which the payment is initiated. This
increases the consumption time of the entire process. In addition to this, manual labour is
itself more risk prone in nature (Potts and Everi Payments 2015).
2. Infrastructure lacks supplier integration- In order to ensure transparency in the
payment process, there needs to be an integration of the suppliers. As for the given case
study, there are two distinct systems used for communicating with the internal and
external stakeholders. The suppliers are notified about the payment with the use of hard
copies, while the digital records are regulated for the purpose of internal teams within the
business. This shows the lack of digital infrastructure for communicating with the
supplier which acts as an obstacle to transparency for the organisation (Klapper and
Singer 2017).

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Risk associated with the weakness of the cash disbursement system
The risk associated with the cash disbursement system is listed below as follows:
1. Erroneous payment- The organizations are required to use the financial resources
optimally. It needs to also ensure that accurate payments are being made to the suppliers
for preventing any waste of the financial resources. The given case suggests that the
payment process relies on tasks which are manual in nature. This leads to increased risk
of errors while making payment to the suppliers (Rachlin 2019).
2. Lack of trusted relationship with the suppliers- In order to ensure that the supply of
raw materials is done efficiently, it is important to ensure that the organisation has
maintained a trusted relationship with the suppliers. In the given scenario, there is clearly
an absence of sufficient digital infrastructure which is mainly responsible for negatively
impacting the transparency in the transactions. Due to this, the business may face several
issues to maintain its trustworthiness with the suppliers (Hay, Schaefers and Thomas,
Union Supply Group 2019).

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Keeping record of hours done by employees on a daily basisSupervisors reviewing of the Timecard
Data Processing
Department of Central
Payroll system
Input by the Data Processing Clerk
Posting digital employee records by printing two hard copies of payroll register a
Forwarding of cheques to the supervisors for distribution and review
Forwading the copies along with timecards to the payroll and accounts payable
System Flowchart of payroll system

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Internal control weakness in the payroll system
Payroll system deals with all the activities which is needed for filing of employment
taxes and making payment to the implies (DeWitt 2017). Such an information system is
conducive in tracking the total working hours, delivering cheques, printing cheques,
withholding taxes and also managing other deductions (Mahajan, Shukla and Soni 2015). The
initiation of payroll system is done when a company hires its first employee. There can be
several mistakes in the payroll which can originate from the source of income. This can occur
during collecting payroll inputs, distributing payslips, defining of the components and setting
pay policies (Sople 2016).
Some of the most notable weakness of the payroll system for Adam & Co. is listed as
follows:
1. Manually entering and reviewing the data- Based on the facts of the case study, the
employees at Adam & Co. record the working hours manually on the time cards every
day. Additionally, the supervisors are responsible for reviewing the time cards manually
for ensuring correctness in the time cards and forwarding the same to the payroll
department every week. This makes the payroll system not only inefficient but also time
consuming in nature (Gupta, Kundu and Das 2019).
2. Sending hard copies of the payroll documents to the accounts payable department -
As per the given information, the payroll clerk is responsible for filing the time cards in
the payroll department and sending the hard copies of employee paychecks to the
different supervisors for distribution and review of the retrospective department
employees. This takes up a lot of time for the organisation in filing the time cards in a
manual procedure. The copy of payroll register is also sent in a hard copy format to the
Accounts Payable department which is a time-consuming process.

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Risk associated with the weakness in the payroll system
The challenges involved with the weakness in the payroll process are listed as follows:
1. Inappropriate payment followed by lack of employee satisfaction- The satisfaction
level among the employee increases when they are being paid for their work. In the given
scenario recording of all the payroll activities are maintained in a manual process.
Therefore, recording and reviewing the payroll activities in a manual process may
increase the risk of errors which may in turn lead to inaccurate payment made to the
staffs. This can have a negative impact on the overall satisfaction level of the employee’s
in the long-term (Oro and Ogar 2016).
2. Increase in cost – As Adam & Co. is following a manual process, the cost and time taken
for completion of completing the activities in the payroll system may increase
significantly. In the present scenario, the company lacks implementation of any
innovative process to automate the payroll system or include soft copies of payroll
documents to be forwarded to the Accounts Payable department. This leads to increased
costs of operations (Roy, Mahadi and Hasan 2018).
Conclusion
The research shows that business systems are highly susceptible to the risk brought by
manual labour. Despite of the importance of manual process, it is more prone to error,
thereby degrading the process quality. Based on the given case study there are only a few
instances of computerised process being followed in “purchases systems”, “payroll process”
and “cash disbursement system”. Firstly, in the purchase system the receiving reports need
to be prepared automatically as soon as the goods arrive in the receiving departments.
Secondly, in the cash disbursement system the clerk manually prepares the cheque for the
invoiced accounts. This process needs to be replaced with an automated email of the amount

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which is to be sent to the vendors. Thirdly, Adam & Co. lacks any biometric system which
would automate the tracking of total duration worked by each employee. As the employees
enter their working hours manually, there may be errors in the recording of the hours worked.
Moreover, the implementation of biometric system would have eliminated manually
reviewing the time cards for correctness at the end of each week. The improvement process in
the operations of Adam & Co needs to be done by putting more focus on automation.

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References
DeVan, S.M., Markwell, S. and Myers, D., JP Morgan Chase Bank, 2015. Integrated
Electronic Disbursement and Cash Flow Management System and Method. U.S. Patent
Application 14/106,999.
DeWitt, K. 2017. What Is a Payroll System?. [online] Payroll Tips, Training, and News.
Available at: https://www.patriotsoftware.com/payroll/training/blog/what-is-payroll-system-
introduction/ [Accessed 13 Sep. 2019].
Gupta, A., Kundu, A. and Das, R., 2019. AUTOMATED ATTENDANCE SYSTEM FOR
EFFICIENT EMPLOYEE MANAGEMENT: A BIOMETRY BASED
APPROACH. International Journal on Recent Trends in Business and Tourism, 3(3), pp.117-
121.
Hay, L.D., Schaefers, D.R. and Thomas, O., Union Supply Group, Inc., 2019. RELEASEE
CASH-RELEASE TOOL AND METHODS OF USE. U.S. Patent Application 16/029,772.
Heizer, J., Render, B. and Munson, C., 2017. Operations management. Pearson Education
Limited.
Hugos, M.H., 2018. Essentials of supply chain management. John Wiley & Sons.
Klapper, L. and Singer, D., 2017. The Opportunities and Challenges of Digitizing
Government-to-Person Payments. The World Bank Research Observer, 32(2), pp.211-226.
Koeppel, A. and Perry, R., Capital One Services LLC, 2019. Systems and methods for
purchase device. U.S. Patent Application 10/319,008.
Mahadevan, B., 2015. Operations management: Theory and practice. Pearson Education
India.

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Mahajan, K., Shukla, S. and Soni, N., 2015. A Review of Computerized Payroll
System. University of Lingaya, Department of Computer Science.
Mcmillion, J.B., 2015. System and method for transforming photo tags of products into a
linkable advertisement or purchase page. U.S. Patent Application 13/931,884.
Mukherjee, K., 2017. Technology at point-of-purchase-a journey from electronic cash
registers to all inclusive point-of-purchase systems. Asian Journal of Applied Science and
Technolgy, 1(8), pp.1-4.
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Edition. [online] Available at: https://www.oreilly.com/library/view/accounting-information-
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Public Sector. In MSc Seminar Department of Accounting University of Calabar.
Pauker, M.J. and Spies, T., EntIT Software LLC, 2017. Purchase transaction system with
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Potts, C.K. and Beer, R., Everi Payments Inc, 2015. System and method for checkless cash
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Rachlin, R., 2019. Return on Investment Manual: Tools and Applications for Managing
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Roy, M.C., Mahadi, M. and Hasan, R., 2018. Simple online payroll system (Doctoral
dissertation, Daffodil International University).

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Sople, V.V., 2016. Business process outsourcing a supply chain of expertises. PHI Learning
Pvt. Ltd.