Case Study- Adam & Co

This case study analyzes the risks, process, and internal control system of the expenditure cycle of Adam & Co. It evaluates the purchase system, cash disbursement system, and payroll system, identifying weaknesses and associated risks. The report highlights the need for improved record-keeping, verification processes, and segregation of duties to enhance internal control.

Running head: CASE STUDY- ADAM & CO
Case study- Adam & Co
Name of the Student
Name of the University
Author Note

CASE STUDY- ADAM & CO
Executive summary:
The paper is prepared to analyze the given case study by addressing the facts identified. In
this paper, risks, process and internal control system of the expenditure cycle of Adam and
Co has been evaluated. The expenditure cycle proceeds in three main systems of the
organization that is purchase system, cash disbursement system and payroll system. Analysis
of such system is done by preparing of flow chart depicting the flow of activities in respective
systems. In the later part of the paper, the weakness in the internal control of each of the
systems described has been demonstrated along with the risks faced by the organization in the
presence of such shortcomings.

CASE STUDY- ADAM & CO
Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
System flow chart of purchase system:......................................................................................2
System flow chart of cash disbursement system:.......................................................................2
System flow chart of payroll system:.........................................................................................2
Identifying the internal control weakness in the system and its associated risks:.....................2
Conclusion:................................................................................................................................2
Reference list:.............................................................................................................................3

CASE STUDY- ADAM & CO
Introduction:
The report is prepared to evaluate the risks, process and internal control of the
expenditure cycle of the company named Adam & Co illustrated in the case study. Evaluation
of the risks and internal control system of the expenditure cycle is done by analyzing the facts
presented in the case study. Discussion includes evaluating the purchase system, cash
disbursement system and the payroll system of Adam & Co and the analysis of all such
systems are done by drawing a system flow chart. Such system flowchart helps in the
identification of different elements in the process and understanding the interrelationships
between several steps of the system (Libby 2017). Later part of the report demonstrates the
description of the weakness of the internal control system and the risks associated with each
system.
Discussion:
System flow chart of purchase system:
Depletion of inventories is done by the firm by transferring raw materials in the
production process and the finished goods are sold to the customers. The process of purchase
by the purchasing clerk of Adam & Co is initiated when the inventory is dropped to a
predetermined level. The procedures of determining the inventory varies from one firm to
another firm and for each of the items of inventory, clerk purchase separate purchase order
recognition. The procedures of purchase involves identifying the needs of inventory, placing
the order, receiving the order and recognition of liability in the form of account payable.
Inventory is monitored and controlled by the clerk and after then inventory has fallen to a
predetermined reorder level, then a digital purchase order is prepared by clerk by selecting
valid vendor file (Appelbaum et al. 2017). When preparing digital purchase order, two hard

CASE STUDY- ADAM & CO
copies is prepared by clerk, of which one copy is sent to purchasing department and other
copy is send to the vendor. After this, purchase recognition is send to the purchasing
department. Purchase order is prepared for the valid vendor that has been identified. A
separate purchase recognition is prepared for each inventory and for a given vendor, there can
be multiple purchase recognition and such purchase recognized is combined to form a single
purchase order. After placing the purchase order, goods are received by the receiving
department and the goods received reconciled by the receiving clerk against the packing slip
and purchase order. Two copies of receiving reports are prepared by the clerk and one copy is
send to the inventory warehouse and other is send to the accounts payable department. The
accounts payable clerk reconcile three documents after receiving the invoice. Three accounts
are updated by the clerk that is the account payable clerk, digital accounts payable subsidiary
ledger and inventory control account in the form of general ledger. After these three
documents are prepared, receiving report, invoice and purchase order is send by the clerk to
the cash disbursement department. A journal voucher is received by the general ledger
function from the accounts payable department and account summary is generated from
inventory control (Quinn and Strauss 2017). The posting of approved journal voucher to the
file of journal voucher and the purchase phase of expenditure cycle is completed with this
step.

CASE STUDY- ADAM & CO
The diagram above presents the flow chart of the purchase system of Adam and Co
that outlines the entire procedures involved in the purchase of product. Last step of the
purchase system is posting of the amount to the general ledger.

CASE STUDY- ADAM & CO
System flow chart of cash disbursement system:
The payment of obligation is processed that has been created in the purchases system
is processed by the cash disbursement system. Making the payment to valid creditors so that
the correct amount of money is paid and in correct time is the principle objective of the
system. If early payment is made by the system, them the interest that could be earned by the
firm on its fund is foregone. On other hand, firm can lose its purchase discount if late
payment of obligations are done. The process of disbursing cash is initiated in the accounts
payable department by identifying the items that are due. The opening file of the accounts
payable is reviewed by the accounts payable function and the approval for payment in send in
the form of supporting documents (Cleary 2017).
In the system of cash disbursement, the documents from the accounts payable
department is received by the clerk of the cash disbursement department. The documents is
then filed by the cash disbursement clerk until the due date of payment. For the invoiced
account, a cheque is prepared by the firm on due date. The cheque is then send to the
treasurer for signing the document and then the cheque is mailed to vendor for verification.
After this, the record of accounts payable is updated by the cash disbursements clerk and the
records include accounts payable subsidiary ledger, cheque register and account payable
control account. Updating of all such accounts are done from the computer terminal of clerk.
The receiving report, invoice, purchase order copy and cheque copy in the department is filed
by the receiving clerk. In the general ledger, these numbers relating to accounts payable
control are reconciled and updated accordingly. The procedures of cash disbursement is
completed after this step.

Filing of the documents
Cash disbursement clerk
Preparing a cheque
Invoiced account
Treasurer
Vendor
Sign
Updating payable control
account, cheque register,
subsidiary ledger
Filing the documents
Mail
Receiving
clerk
CASE STUDY- ADAM & CO
The above figure presents the flow of procedures of making payment to the suppliers
after the goods are received by issuing purchase requisition. The receiving department
receives the document from accounts payable department and then a cheque is prepared for
the invoice account. Approved journal voucher is then posted to general ledger along with
sending a copy of cheque to the clerk of cash disbursement.

CASE STUDY- ADAM & CO
System flow chart of payroll system:
The payroll system of Adam and Co works on a card system as the total hours worked
is recorded on cards. The time card is reviewed for correctness s by the supervisors and at the
end of each week, supervisors are responsible for submitting the card to the payroll
department. The central payroll system has a computer terminal connected to it and the
computer is located in the unit of data processing. In addition to this, the data on the time card
is inputted by the payroll clerk. The hard copies of the pay cheque is printed by the clerk of
processing department and in addition to printing of hard copies of cheque, clerk is also
responsible for printing two copies of payroll register and thereafter positing to digital
employee records is done. The time card is filed in the payroll department by the payroll
clerk and several supervisors review the employee pay cheque when it is send by payroll
clerk. The employee pay cheque is then distributed to the employees of respective
departments. One copy of payroll register is send by the payroll clerk to accounts payable
department and other copy is send to the payroll department. The payroll register is reviewed
by the accounts payable clerk and he is also responsible for preparing the disbursement
voucher. Accounts payable clerk is also responsible for writing the cheque for the entire
payroll and depositing in the account of the bank along with filing the cheque copy in the
accounts department (Chalmers et al. 2019). General ledger department receives the payroll
register and the voucher. After this is done, another duty of accounts payable clerk is to post
the general ledger, voucher filing and payroll register to the department.

Supervisor Payroll department Accounts payable
department General ledger
department
Reviewing time card for correctness
Reviewing employee pay cheque
Distributing 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 ledge
Filing in the department
CASE STUDY- ADAM & CO
Identifying the internal control weakness in the system and its associated risks:
The purchase system of Adam and Co suffers from few weakness which is listed
below:
 The hard copies of receiving reports of the goods is prepared by the receiving clerk
manually.

CASE STUDY- ADAM & CO
 The accounts payable clerk files the receiving report until the time when the invoice
of supplier arrives. Therefore, filing of the copy of receiving report seems to be time
consuming.
From the above two points identified, it can be inferred that the company has poor
record keeping for the intakes, request and needs of the goods. It is observed that the
appropriateness of the transaction is not questioned by the subordinate staffs. In addition to
this, the manual preparation of hard copy of receiving report by the receiving clerk would
increase the probability of occurrence of the fraud as the total quantities of goods received
might not be entered manually (Asatiani et al. 2019). This also increase the chance of manual
error and thereby weakens the internal control of the purchase system.
The internal control of cash disbursement system of Adam and Co has been evaluated
in terms of its effectiveness and it has been ascertained that:
 The system of cash disbursement suffers from few shortcomings as there is no
adequate verification of the documents received.
 Moreover, the cheque prepared by the clerk are not verified by the treasurer before
signing and mailing it to the vendor (Mahama et al. 2016).
This increases the probability of the occurrence of fraud as the figures on the cheque
might be misappropriate. There should be a centralized computer system so that any errors or
fraud activities can be traced automatically and leaving no room for conducting the fraud
(Frazer 2016).
The payroll system of Adam and Co also suffers from few weakness that are listed below:
 It can be seen that the disbursement voucher is manually prepared by the account
payable clerk. In addition to this, the process of data which includes inputting of the
time card data, printing hard copies of the payroll register and cheque and posting to

CASE STUDY- ADAM & CO
the record are all done by account payable clerk. Therefore, there is a lack of
segregation of duties in the payroll department.
 There is manual preparation of disbursement voucher that might increase the chances
of occurrence of error and cause others to indulge in conducting some fraudulent
activities (Huerta and Jensen 2017).
The payroll system of the company is suffering from monitoring issue as there is lack
of monitoring of the transactions and preparation of documents. Hence, the reliability and
accuracy of the accounting records become doubtful. In addition to this, the procedure of
documentation is not well established and this might increase the occurrence of errors and
missing of relevant files for verifying the records of transaction (Guragai et al. 2015).
Conclusion:
The report prepared above analyzed the risks and the process of the internal control
system of expenditure cycle of Adam and Co. In this regard, the three departments that is
purchase system, cash disbursement system and payroll system has been evaluated for its
effectiveness. It has been ascertained from the analysis of the different systems of the
company that the internal control suffers from few weakness that might cause the chance of
increasing the fraud activities and commitment of errors by the staff members. One of the
significant weaknesses that has been observed in the purchase and payroll system of the
company is that the staffs are manually engaged in the preparation of reports and voucher.
Such manual recording of the facts comes with the increased chances of human errors and
thereby making the data less reliable and inaccurate. Furthermore, there is absence of the
adequate verification of the documents and accounting record and this increase the risk of
indulging in the fraud activities.

CASE STUDY- ADAM & CO
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CASE STUDY- ADAM & CO
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