HA2042 T2 2019 Case Study: Accounting Information Systems at Adam & Co

This case study analyzes the accounting information systems of Adam & Co., focusing on purchases, cash disbursements, and payroll processes. It examines flowcharts for each system, identifying weaknesses such as inadequate segregation of duties, manual processes susceptible to errors, and lack of physical internal controls. The report highlights potential risks, including fraud, misallocation of funds, and data manipulation. It also discusses the limitations of the company's payroll system, emphasizing the need for improved timekeeping methods and automated processes. The analysis underscores the importance of robust internal controls and suggests improvements to mitigate risks and enhance efficiency within the company's financial operations. The report is intended for the management of Adam & Co to highlight vulnerable areas of the company's accounting system that may need attention.

ACCOUNTING INFORMATION SYSTEMS 1
Processes, risks and internal controls
Student’s name
Course
Instructor’s name
Institutional affiliation
City and state
Date

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Table of Contents
Executive summary.........................................................................................................................3
Introduction......................................................................................................................................3
The purchases flowchart system......................................................................................................4
Purchase flowchart weaknesses.......................................................................................................5
Cash disbursement flow chart..........................................................................................................6
The potential risk associated with the company cash disbursement system...................................7
Payroll system flow chart................................................................................................................9
The weaknesses of the Adam and company payroll system..........................................................10
Other internal control weakness of the within the company.........................................................10
Conclusion.....................................................................................................................................11

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Executive summary
The information provided in this short report is an assessment of the accounting
information systems, regarding the risks, internal controls, weaknesses together with the different
information flow charts. The report is specifically addressed to the management of Adam and
company. The report is therefore in an to attempt to identify the possible vulnerable areas that
are present to the company that may require attention. The report covers the point of interest in
about four aspects of the accounting system information of the company. These include the
purchases system, cash disbursements, payroll and description of the internal control weaknesses
and risks associated with such weaknesses.
Introduction
Globally, there is an increasing rate of demand for efficiency effectiveness of preparing,
recording and presentation of financial data within the organizations. It is due to such demands
that business has come with a series of internal control measures to achieve such an objective.
These control measures are classified into several ways depending on the organizational goals
and objectives. For such reasons, accounting information systems have been part of the changing
trends in ensuring efficiency and effectiveness. An accounting information system can, therefore,
be defined as an internal control tool or structure that a business entity puts in place to ensure
that all financial activities are carried out most appropriately. This system involves components
such as the purchases control system, the payroll and cash disbursement system as further
discussed below:

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The purchases flowchart system
The purchase flow chart refers to the various steps and stages that a company undertakes
when procuring or purchasing materials, stock or inventories that are used to carry out daily
operations of the business. The purchase flow chart system is a cycle of events that are carried
out by different personnel or individuals (Mitrenfinch, 2019). Additionally, the purchase
flowchart system is carried in about nine stages or processes. The very first step in the system is
need recognition and the last stage, therefore, needs satisfaction. When the need arises in the
organization or department, a requisition note is prepared which then has to be authorized. The
next step is obtaining quotations. From the quotations stage a suitable supplier is then selected
which s followed by issuing a purchase order and delivery is made. When goods are delivered,
inspection is carried out to verify the specifications. If all the items are in good condition,
payment is authorized to the supplier and the last stage is recording the purchase in the books of
accounts. This cycle expenditure cycle takes place on a continuous process.
Expenditure cycle
1. Placing orders of the goods, services and or supplies
2. Receiving the items ordered
3. Making payment for the items.

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Source: Saha, k., A., 2019
The purchase flow chart below is an illustration of the various stages that are undertaken
throughout the purchase flowchart.
Source: FMD Prostarter, 2017

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Purchase flowchart weaknesses
An internal control weakness is referred to as a limitation or within an internal control
environment that hinders the possibility of achieving a goal or objective or an organization or
company. a risk, on the other hand, refers to any influencing factor that can cause damage or
danger to facility, business or asset of interest. Risks are categorized into several groups. These
may include financial risks, market risks, and business risks among other others (Darrough et al,
2012). Therefore, different companies have come up with several internal control strategies to
reduce the possibility of such risks occurring. To make an evaluation, this paper will focus on
analyzing the possible risks identified in the different company flowchart systems.
According to the system that is used by the company, there is a weakness resulting from
the low levels of duty segregation (Prasetyaningsih et al, 2014). The clerk is found to have most
of the duties assigned to him and this consequently presents a potential exposure to fraudulent
practices. The purchasing system is also subject to cases such as unwanted purchases preparation
of improper purchase accounts and so many other threats available.
The manually prepared receiving reports of the flow charts could be subject to errors, and
they could as well be very untidy and clumsy making them difficult to read or interpret.
Therefore, the risk or potential threat that such manually prepared receipt present is the
increasing level of misinterpretation combined with miscommunication. The ultimate effect that
can result out of such poorly or clumsy reports is poor productivity, low quality due to wrong
measurements use in the process and so many other unwanted outcomes. Additionally, due to
clumsy reports, follow-ups may not be possible to evaluate at any required point in time. Delays
are most likely to occur if such reports use and are kept for future use.

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According to the effective and efficient internal control environment requires that duties
of the organization should be separated. This implies that no single individual or person has the
liberty or mandate to carry out all activities as one (Crouthamel, 2013). However, at Adam and
company, this is rather the opposite. From the information that is provided, that purchasing clerk
is the only person who can determine how much stock should be purchased, which vendor
should supply and it is still the same person who determines when to purchase. All such duties
are not in line with the requirements of an effective internal control system. Consequently, the
company stands to be significantly exposed to threats and risks resulting from fraud, poor quality
material purchases, and so many other risks that are associated with low levels of duty
distribution.
Cash disbursement flow chart
The cash flow chart is an internal process or procedure through which an entity's cash
inflows and outflows are monitored over a period. These periods tend to vary in most cases as
they can be in a week, day, month or even a year. The cash disbursement flow chart system is
prepared for meeting the debts and liabilities of the organization to meet daily expenses. These
payments can be made with cheques or cash. The image below is an illustration of the cash
disbursement flow chart or system.

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Source: vishekbatra, 2019
The potential risk associated with the company cash disbursement system
An entity that has all its cash and funds managed by individuals is at high risk of losing financial
resources and perhaps is the management of the cash resource. At times the financial manager is
limited by various unethical practices such as theft, fraud and misallocation of funds, therefore,
having the individuals controlling the cash accounts of the company such as Adam Company is a
threat to company funds (Beasley, 2019). The internal control system of the company s still very
inadequate since it is only the clerk and the treasurers who have access to most of the company
accounts such as the purchases ad cash disbursements system. This is however not ideal because
it gives these individual the liberty to carry out activities without any supervision. The system of
the company does not have provision for any periodic reconciliation of the different accounts.
This combined with the manual handling of the cash resources further weakens the internal
control within the organization.

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The cash disbursement system is that is used at Adam and company is highly manual. Although
this type of system has its associated advantages, it is critically under potential and significant
threats. For instance, at the company receipts of payment are manually stored and kept within
the company premises (Indico, 2015). The risk of such an accounting system is that critical
information is extensively subjected to manipulation, loss through fire outbreaks and any other
damage. If such important records are lost in a fire outbreak, the company could suffer
significant financial losses.
The other alternative risk that is present to the company is related to the significance of errors in
financial data entry. Because the systems of the company are operated manually, the possibility
of recording wrong amounts and failure to follow the double-entry principles of accounting are
high. Humans make mistake daily and having an accounting system that solely depends on
human knowledge could lead to significant losses (Bowers, 2017).
Since the company does not have any person to review or approve the cash transaction and
movements, this as well presents an internal control weakness. Reviews on activities such as
purchase orders payroll systems need to be carried out to ensure that all the transactions are
genuine and material necessary (Salin et al, 2018). On the contrary, however, the Adam and
company limited do not have such personnel in place to assess and evaluate or eve authorize the
different transactions that are carried conducted throughout the business. This weakness in the
company system presents a likelihood of paying to incur improper charges on purchases, making
payments for items that have not been delivered to business and so many other consequences of
the sort.

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Payroll system flow chart
A payroll system is referred to as the approach or method that is used to calculate and determine
the amount of or payment that the company pays to the employee depending on the terms of the
contract. These terms of a contract may include the total time worked especially if the payment is
an hourly wage rate. Therefore the payment is based on the time worked multiplied by the wage
rate (Levy, 2017). This system, however, operates on several steps and it involves assessing the
total time worked. Below is an illustration showing a flow chart of a payroll system that can be
used to determine employee salaries in an organization.
Source: Guilbault, K. 2019

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The weaknesses of the Adam and company payroll system
The traditional process of analyzing and assessing the total time worked by employees has been
challenged by the increasing rate of inefficiency for the past periods. Therefore is due to such
limitations associated with the traditional methods such time cards that have created the need for
more sophisticated techniques and equipment to keep roper records concerning the time worked
by an individual (Nashwan,2018). However, the payroll system at Adam and company is still
under significant threats (Lai et al, 2017). The traditional time cards that are fully operated by
manual standards are highly exposed to manipulation. There is a huge and significant potential of
exposure because of the different personnel can easily and freely alter the reporting time and
consequently, this means that management will have pay wages for hours that are not worked for
(Al-Sharairi et al, 2018).
Secondly, the system of that is used at Adam and company is very manual and it involves
numerous procedures to accomplish (Akwas-sekyi and Gene, 2016). The challenge or weakness
width such a system is that it is very time consuming and delays are very inevitable. Transactions
tend to take a lot of time to process thereby resulting in time wastage a scenario that leads to
inefficiency and reduced productivity (Agbenyo et al, 2018). For instance, employees may often
get themselves waiting for very long periods just to register their arrival or departure from work.
Other internal control weakness of the within the company
Adam and company limited does not in any way reflect the presence of physical internal controls
in the system (Monisola and Rekiat, 2016). This is adversely among the weak points of the
company that need to be addressed with huge interest and seriousness. Without the physical
controls to guard and protect the company assets and purchases, there is a high likelihood that

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losses are very inevitable. Such losses could arise out of thefts of company stock and other fixed
assets that are valuable to the entity.
Almost all of the systems of the company are operated on a manual basis. Starting for the hard
receipt payments, the clock cards, payment vouchers and so on are stored in the form of hard
copies. Such as system of operating requires large amounts of space to keep and such documents
in the long run (Mahadeen et al, 2016). Not only does this particular system subject important
information to threats such as theft but it also makes it hard to make corrections where necessary
if an error has been made in a transaction.
Conclusion
Conclusively, an effective and efficient internal control system is a vital requirement that each
and very active firm or business entity should possess. The level of profitability of performance
within any business organization or company is to some extent dependent upon efficiency and
effectiveness that results from activities such as resource utilization. The current and present
market trends that have introduced new technologies of management and internal controls that
are a more efficient and highly effective call for immediate organizational changes. Adam and
company limited should, therefore, revise the type of internal controls that are more efficient.
Systems such as the current manual systems of purchases flow chart, the time cards of used for
recording time worked are have over the years been phased out and they cannot sufficiently
facilitate effective operations.