Internal Control Weaknesses in Expenditure Cycle of Adam & Co

HA2042
Case Study – Adam & Co
Student name
Student Id

1
TABLE OF CONTENTS
TOPIC PAGE NUMBER
Executive summary 2
Introduction 2-3
System flowchart of purchases system 2
Internal control weaknesses in the Purchase
system
4-5
System flowchart of cash disbursement system 6
Internal control weaknesses in the cash dis-
bursement system
7
System flowchart of payroll system 8
Internal control weaknesses in the payroll sys-
tem
9
Conclusion 10
References 11

2
EXECUTIVE SUMMARY
A Perth-based wholesaler of industrial supplies, Adam & Co, outsources its inventories from the
manufacturers in countries such as China, Thailand and Vietnam. Being a business Analyst, I
have been given the task of analyzing the expenditure cycle of the company. The company’s ex-
penses are operated using a centralized accounting system software with the networking termi-
nals at different locations. Purchasing clerk, receivable clerk and accounts payable clerk are in-
cluded in the purchase system of the company for deliberately keeping an eye on the overall
process, that is, from checking the inventory to updating accounts and ledgers, preparing com-
pany reports and sending it to cash disbursement department where the clerk would be held re-
sponsible for keeping checks and updating systems. The whole payroll process in accounts
payable department and the payroll department are operated under the surveillance of the clerks.
A close observance of the weaknesses in the internal control of the expenditure systems deter-
mines the risks associated, which generally includes financial losses, debt accumulation, reputa-
tion loss etc. which are normally incidental to a business.
INTRODUCTION
The expenditure at Adam & Co, is carried along using a centralized accounting system with net-
working terminal software at different locations. There are specific systems installed with respect
to purchase, cash disbursement and payroll functions which are followed as per the company
policies and regulations. On keeping a close track of the processes, it is observed that all the
three exhibited expenditure processes primarily including internal control weaknesses needs to
be removed by conducting regular and random audits.
The report starts with a review of the literature stating the important internal control techniques
and benefits of conducting audits. This report also lays down to identify the internal control
weaknesses in each of the three expenditure systems and the risk associated with those weak-
nesses.
Zhang, Zhou and Zhou (2007) defined internal control as “a process, effected by an
entity's board of directors, management and other personnel, designed to provide
reasonable assurance regarding the achievement of objectives”.
2 | Page

3
The large private companies in Australia, are forced to conduct the audits (Carey, Simnett and
Tanewski, 2000) On the contrary, the research has shown that carrying out the voluntary audits
is beneficial to the organisation.
In the assurance of the corporate accountability, auditing forepays primarily giving the accurate
financial report (Carcello and Neal, 2000) and an important governance mechanism (Zhang et
al., 2007).
Blackwell et al. (2008) had laid in their study that 37% of the private firms independantly au-
dited in the US. Lower interest rates are paid by these firms significantly on rotating the bank
loans than the unaudited firms. Minnis (2011) reported that auditing lowers down the asymme-
try in information by improving the ability of the expected net income for future cash flows,
thereby reducing the firm’s cost of debt with audited financial statements in opposition to the
unaudited financial statements.
At last, the audits of the private company are economically fruitful by giving the lower interest
rates on debt, thereby increasing the credit ratings and always trying to have better access to
credit (Lennox and Pittman, 2011).
SYSTEM FLOWCHART OF PURCHASES SYSTEM
Internal control weaknesses in the Purchase system
The system is lacking of certain controls and weaknesses which are given as below:
3 | Page
Purchas
es
Inventor
y check
XYZ
Product
required
Vendor Receive
d
Wareho
use
Accounts
Payable
Vendor
selectio
n
Digital
purchas
e order
(PO)
created2 hard
copies
printed
PO
1
PO
2
Selecte
d
vendor
File Invoice
I
Packing
slip
Reconcil
e and
prepara
tion of
two
hard
copies
of
Receivi
ng
Reports
(RR1
&RR2)
RR
1
RR
2
RR2 +
goods
Update
inventor
y
RR filed
tempora
rily
PO
Recon
cile
PO RR
Invoic
e
Cash
disburse
ment
Update
accoun
ts
PO RR
Invoic
e