Analysis of Accounting Information System for Adam & Co. (HA2042)

This report provides an analysis of the accounting information system (AIS) of Adam & Co., a Perth-based wholesaler of industrial supplies. The report begins with an executive summary highlighting the internal control weaknesses and associated risks within the company's purchasing, cash disbursement, and payroll systems. It includes system flowcharts for each of these departments. The core of the report focuses on identifying and describing internal control weaknesses within each system, such as inadequate procedures for ordering, reliance on single authorities, and lack of checks on working hours. Furthermore, it assesses the risks associated with these weaknesses, including potential for fraud, inaccurate payments, and inventory mismanagement. The report concludes by suggesting improvements to address these issues, such as incorporating better vendor selection, monitoring procedures, and review mechanisms to strengthen internal controls and reduce risks.

Accounting information system

TABLE OF CONTENTS
Introduction......................................................................................................................................4
Report to Managing director............................................................................................................4
System flowchart of purchase system..........................................................................................5
System flowchart of cash disbursements system.........................................................................6
System flowchart of payroll system............................................................................................7
Description of internal control weakness in each system and risks associated with the
identified weakness......................................................................................................................8
Internal control weakness in purchase system.........................................................................8
Internal control weakness in cash disbursements system........................................................8
Internal control weakness in payroll system............................................................................9
Risk associated with the identified weakness in purchase system..........................................9
Risk associated with the identified weakness in cash disbursements system........................10
Risk associated with the identified weakness in payroll system...........................................10
Conclusion.....................................................................................................................................10
List of references...........................................................................................................................12

Executive summary
Internal control procedures are practices and guidelines complied by an organization in order to
protect its resources. Effective internal control activities assist in ascertaining priorities, attaining
department goals and accomplish compliance regulations. Present study relates to assessment of
internal control of Adam & CO. in order to analyze its internal control weakness and risk
associated with same. The purchasing system of company does not have adequate procedure
relating to ascertainment of items required to be order due to which risk related to out of stock
might be faced. Cash disbursement system is depended majorly on single authority which leads
to risk associated with unauthorized payments. Lastly, weak internal control management is
available in relating to recording to working hours which result in risk associated with wrong
payments to employees.

INTRODUCTION
Internal control system of an organization comprises set of rules, procedures and provisions
which are implemented to provide direction, enhance efficiency and strengthen the existing
policies (Bedford and Malmi, 2015). An organization is able to ascertain existing loop holes in
the management through assessing the effectiveness of internal control (Buckby, Gallery and
Ma, 2015). The same can be done through segregation of duties appropriately so that single
authority is not able to manipulate records as well as enter fake transactions. Present report
relates to analysis of internal control of Adam & Co., a Perth based wholesaler of industrial
supplies. Initially system flow chart of purchases system, cash disbursement system and payroll
system has been provided. Further, internal control weakness of each department has been
analyzed along with risk associated with same in detail manner.
REPORT TO MANAGING DIRECTOR
To
ABC
Managing director
Adam & Co
Subject: This report has been prepared to evaluate the risks and internal controls in the
operational processes for the expenditure cycle of business in order to determine internal control
weakness and risks associated to it in each system.

System flowchart of purchase system
Purchase process
Purchasing clerk checks the inventory subsidiary
ledger
Quantity in
stock
Purchase requisition
No further
purchase
required
Yes further purchase required
Clerkprepares a digital purchase order and prints two hard copies for
vendor and purchasing department and recordDigital purchase order
Order received Clerk inspect and
reconcile
Appropri
ate
No
Return to
vendor
Yes
The clerk then manually prepares two hard copies of
the receiving reports for inventory warehouse and for
accounts payable department
Accounts payable clerk receives the invoice and
reconciles the documents and update records
Send invoice and receiving report, and the purchase
order copy to the cash disbursement department

System flowchart of cash disbursements system
Cash disbursement system
Cash disbursements clerk files the documents
On due date prepares a cheque for the
invoiced account
Signed by
treasurer
Send cheque to vendor
Cash disbursements clerk then updates cheque register, accounts payable subsidiary
ledger and control account
Receiving clerkfiles invoice and receiving report along with copy of purchase
order and cheque

System flowchart of payroll system
Payroll system
Employees record their hours worked on time cards
on daily basis
Supervisors review the time cards for correctness and submit the
same to payroll department
Computer terminal connected to the central system is used to input data and accordingly
hard copies of the pay cherubs are printed
Payroll clerk files the time cards in the payroll department and sends the employee pay
cherubs to the supervisors for evaluation and distribution for their corresponding department
employee
Send final copy of payroll register to the accounts
payable department

Description of internal control weakness in each system and risks associated with the identified
weakness
Internal control can be referred as process applied by management to produce correct, reliable
financial statements and for safeguarding of assets and inventories of company (Kline and
Hutchins, 2017). An organization having weak internal control than it is easy for employees and
staff to make fraud and mistakes (Hisrich and Ramadani, 2017). In order to decrease the
probability of existence of fraud whether intentionally or due to mistake it is necessary to
monitor internal control on a continue basis and modify in accordance with their requirement
(Turner, Weickgenannt and Copeland, 2016).
Internal control weakness in purchase system
The main internal control weakness associated with purchase system is that order relating to
required item is provided when it is deemed to be too low. It is not an appropriate manner of
assessing the quantum of required items or products. The method followed by the organization
would not be able to fulfill any surprise order or significant order. As items are ordered only
when the quantum of same is too low. It is necessary for management to maintain accountability
while authorize, review and approved purchased based system (Luo, 2017). Each item is not
required on continue basis, thus the company requires to assess as well as bifurcate the items as
per the requirement of demand. A quantity level should be ascertained in relation with each item
and new orders should be made on same basis
Another weakness in purchase system was that no new vendors were searched and purchases
were made from existing vendors only. Thus, the organization was unaware of new schemes
available with other vendors. Even no procedure exists in order to assess whether any
misstatement or fraud exist or not. Due to same reason the effectiveness of existing internal
control has affected and available sources could not be applied in effective manner. Even no
inventory count method is being followed by the organization due to which even though, goods
are present in books of accounts but it is possible that the same are not physical available.
Internal control weakness in cash disbursements system
It can be assessed that cash disbursement procedure is mainly depended on clerk responsible for
preparing check as well as updating same in accounts payable account. In present case one
person is responsible for all the significant activities and no provisions are made to check his

work. He is authorized to make the cheque and provide same to the treasurer to sign and mail the
cheque the vendor. Even, the receiving clerk files the received invoice, receiving report but does
not reconcile the same with accounts payable account.
Internal control weakness in payroll system
No checking policy or process relating to recording of hours worked by employees is available in
internal control procedure. It means in case an employee has entered wrong working hours and
no has accessed same than he might get payment for the hours for which he has not worked. The
time cards are reviewed at weekly basis but provision does exist for making entry for workers
who are absent; thus an employee can make wrong entry in his card before it is provided for
correcting to the supervisor. The cheque made available by the accounts payable clerk comprises
amount for entire payroll and no reconciliation procedure does exists that whether individual
payments made to the employees are correct or not.
Even the responsibility of accounting in department computer terminal and filing same in payroll
register is provided to single authority. As both the responsibility is to be conducted by single
person, it is easy to make fault or higher probability of occurring of error exist as transactions are
neither reconciled nor rechecked by another authority (Zakaria, Nawawi, and Salin, 2016).
Risk associated with the identified weakness in purchase system
The risk associated weakness relating to ordering products at very low level is excessive
availability of dead stock (items which are not sold). It could lead to inappropriate application of
available resources i.e. the existing funds are applied for items which are not required and
shortage of necessary items could exist. As mere low level of quantum of item does not mean
that it is required to be ordered (Bhattacharjee, Maletta and Moreno, 2015.). It is necessary that
specific item should be in demand for ordering same. The purchase system does not comprise
any procedure relating to checking whether purchase order has been received within specified
time or not. The same had negative impact on inventory management. The risk relating to fraud
does exist as no policy relating to selection of vendor is available in present system. It is possible
that the purchasing clerk might make agreement with existing vendor and make personal profits
through charging higher price for items purchased.
The risk relating to loss of items presented at inventory register but physically not available does
exist due to absence of physical checks of items. It is necessary to assess whether the existing

items are available in useable quality or not. It might be possible that items do exists but they are
of no more use and unnecessarily taking space in shelves. This weakness will lead to risk relating
to obsolete items available in stores. Further, management will not be able to order required
amount of items as it is unaware of its vacancy due to absence of physical count check method.
Risk associated with the identified weakness in cash disbursements system
Risk relating to dependency on single person for major operation does exist in case of cash
disbursement system. The cash disbursement clerk does not reconcile the documents receipts
from accounts payable department and prepares cheque without rechecking the amounts. Even
risk of happening of fraud is higher in the organization if same authority of making cheque and
updating accounts payable control accounts (Brasel, Doxey, Grenier, and Reffett, 2016). He can
make fake entries or manipulate the amount due to vendors.
Risk associated with the identified weakness in payroll system
Inaccurate calculation of working hours leads to risk relating to unfair payments to the
employees (Euchner and Ganguly, 2014). As no separate presentation of time off and unpaid
absence have been provided on time card. It is possible that it might affect the environment of
organization negatively as improper payments would result in misappropriation of funds. In
present case as cheque provided comprises total amount payable to employees of each
department. But no reviewing or reconciliation procedure is applied to assess whether payment
received to individual employees are correct or not.
As inadequate internal procedures are available in pay-roll system, the risk of compensation
being issued for non-existing or terminated employees. Even possibility of mistake in calculation
of working hours is high which might lead to issues such as overpayments to dishonest
employees and incurring expenditure through redo payroll records.
CONCLUSION
It can be concluded from above discussion that expenditure cycle of Adam & Co’s mainly lacks
in monitoring and assessing risk assessment relating existing internal control weakness. In order
to address these issues control activities can be incorporated in policies and procedures to risk-
prone areas. For instance as in case of purchasing system, adequate procedures should be
incorporated so that vendor choice is made appropriately. It should be not the choice of

purchasing manager but the best option for organization and even the new available options
should be considered. Through same organization will be able to attain gain from existing
opportunities.
Monitoring procedure is required to be incorporate at each expenditure process in order to attain
information relating to potential and actual break down in control system (Soudani, 2013). It will
assist in ascertaining the loop holes in existing procedures at initiative stages. Measures can be
taken by company though including informal monitoring activities such as management
checking with subordinates to assess whether objectives are met or not (Sheedy, and Griffin,
2018). Reviewing and reassessing procedure are main part of internal control process as internal
control can be maintained effectively only when existing flaws in procedures are ascertained and
rectified timely. As in case of payroll internal control, working hours are not recorded
appropriately due to which fair payments are not provided to employees. Thus, the possibility
exists that excessive or unfair payments are made to the employees. The fact cannot be denied
that each employees of organization is integral part of internal control which comprises board of
director, management, internal and external auditors. Thus, through making specified changes in
existing internal control system Adam & Co would be able to enhance the integrity of existing
internal control system.

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