Holmes Institute HA2042: Adam & Co Internal Control System Case Study

This case study examines the internal control system of Adam & Co, a Perth-based wholesaler. The analysis covers the company's purchase, cash disbursement, and payroll systems, including detailed flowcharts for each. The report identifies weaknesses within these systems, such as the lack of a dedicated purchase department, issues in the cash disbursement process (like missing pre-numbered cheques), and data manipulation in the payroll system. The study highlights the risks associated with these weaknesses, such as overstocking, potential fraud, and employee dissatisfaction. The assignment aims to provide a comprehensive understanding of the internal control system and its impact on the company's operations and financial stability.

Running head: INTERNAL CONTROL SYSTEM
Internal Control System
Name of the Student
Name of the University
Author note

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Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Purchase system.........................................................................................................................3
Cash disbursement system.........................................................................................................5
Payroll system............................................................................................................................6
Conclusion................................................................................................................................11
Reference..................................................................................................................................12

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Executive summary
The aim of the report is to give brief explanation of the flowchart of the purchase, cash
disbursement and payroll system of the company. The report further explains the weakness
that the company has in the flow of the expenditure cycle. In conclusion the weakness of the
internal control system and the risks due to such weakness has been explained in brief.

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Introduction
The report contains a brief impression of the internal control system of Adam and co a
Perth grounded wholesaler of supplies. Adam & co bases its inventories from manufacturers
in china, Thailand and the accounting system of the company is centralized for which it
become easy for the company to maintain a control system in order to control the affairs of
the company effectively. The company used an effective expenditure cycle procedure by
which it is possible for the organization to monitor all the business transactions and
implement a cost control method so that all the optimal usage of the resources is possible.
The entire expenditure cycle is arranged in such a way that it is possible for Adam & co to
reduce the cost and increase the profitability.
Discussion
The entire expenditure cycle of the company is classified in to three system the
purchase system, a cash disbursement system and the payroll system. The internal control
system of the company is well planned and the strategy of Adam & co is to maintain a steady
growth rate through the application of the efficiency of its expenditure cycle. The entire flow
of the expenditure of the company is explained below
Purchase system
Purchase is the first step from which the activity of the business starts. The company
give emphasis on the purchase of the best quality product from the market in order to ensure
customer satisfaction. Purchase is the most important part of the business activity as all the
activity of the business is directly related with the quality and quantity of the raw materials
purchased to produce the specific product that the organization desires to produce and sell in
the market. So, Adam & co take all necessary steps to ensure that the process of purchasing

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the raw materials does not have any loopholes for which the supply process of the company
does not have to suffer. The process of the purchase starts with the checking of the inventory
subsidiary ledger which is done by the purchasing clerk on a regular basis on the early
morning when the goods arrived. if the clerk finds the quantity of any specific item is too low
in that case the clerk immediately chooses a seller from the wholesaler file and makes a
digital purchase order. The clerk prints hard copies from which one copy is sent to the
respective wholesaler and another copy is marched in the purchase section. A ordinal
purchase order record is attached to the purchase order file (Swanson Swanson and Lindsay
2017).
In the next step of the purchase process the control system starts after the goods
arrived in the receiving department. Here the receiving clerk receive the goods after
inspecting all the goods against the details that are mentioned in the digital purchase order
and the packing slip. After the verification process the clerk then create two hard copies of
the receiving reports. One of which is attached with the goods and send to the inventory
warehouse, in the warehouse the clerks defers the goods and update the inventory ledger
which is kept in the computer terminal of the receiving department. The receiving report is
then filed by the clerk and kept in the respective department. The other copy of the receiving
report is sent to the accounts payable department, where the clerk of the accounts payable
department files until the invoice of the supplier is received by the company. At the time of
receiving the invoice the accountant pulls the receiving report from the temporary file, the
accountant then prints a hard copy of the digital purchase order, and reconcile the three
documents. The clerk updates the accounts payable subsidiary ledger, the accounts payable
control account and the inventory control account in the general ledger form the terminal of
the receiving department. At the final stage the clerk sends the invoice to the receiving report

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and the purchase order copy to the cash disbursement department from which the supplier
will collect its cheque (Ellis 2018). The entire process can be explained in a better way
through the flowchart
Cash disbursement system
After receiving the pamphlets from the accounts payable department, the clerk of the
disbursement department files the documents till their imbursement date is due. On the
outstanding date the clerk makes a cheque for the billed account, then it is directed to the
financial officer to take the approval of the treasurer and then the cheque is mailed to the
vendor (Mahajan Shukla and Soni 2015).
The cash disbursement clerk after that apprises the cheque record, accounts payable
subsidiary ledger and the accounts payable account from his computer incurable. Finally, the

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worker of the receipt department files the bill purchase order copy, receiving statement, and
cheque copy in the department. This process ensures that the appropriate amount is paid to
the vendor and that there are no discrepancies in the payment system. The process of the cash
disbursement is the most important process of the expense cycle as it helps in maintaining
healthy relationship with the vendors. As the vendor gets their payment at the right time, they
get satisfied and provide the required raw materials when ever the company requires. The
disbursement system is organized in such a way that it never allows the happening of any
discrepancies and ensure that the vendors get their payment at the right time and supply the
required raw materials (Licciardello et al 2017).
The flowchart of the cash disbursement system
Payroll system
The payroll system is a important part of the organization as it is related directly with
the interest of the workers on whom the entire production process is dependent. The company
always try to create a environment in which a healthy relation exists between the

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management and the workers. By paying the correct wages at the specified time the company
try to satisfy the basic need of the company. The flow of the payroll system is explained in
detail (MASHADI et al 2017).
On regular basis the employees record the number of hours that they have worked on
time cards on daily basis. The supervisors of each department check the time card and verify
the same with his own records and then submit it to the payroll department the end of every
month and in this way the monthly payroll system is maintained. The payroll clerk then
records the data given by the supervisors in the centralized payroll terminal which is situated
in the data dispensation section. The payroll clerk records the time card data print the hard
copy of the pay cheques and then posts these in the digital employee records. The payroll
clerk then files the time cards in the department of the payroll and then send the payroll
cheque to the supervisors of the various departments for review of the cheque amount and all
other details once and then distribute the same to the respective labour. After this the clerk
sends one copy of the payroll record to the accounts payable department and files the other
copy with the time cards in the payroll department (Barrett, 2017).
In the next step the accounts payable clerk verifies all the details that are provided to
him and then manually prepares a voucher. After this the clerk sends the voucher and the
register of the payroll to the general ledger department. In the general ledger departments, the
accounts payable clerk then writes a cheque for the entire payroll and deposits it in the impest
account at the bank. At the last stage the clerk files a copy of the cheque in the accounts
payable department. The entire process goes through various steps of manual checking to
ensure that the accurate payment has been made to the workers. The company wants to make
sure that not a single labour feels disappointed for the wages paid to him as it will indirectly
affect the production process. A dissatisfied worker will never give his best effort and that

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will affect the progress of the company. So in view of this kind of problems may arise if the
payment to the workers are paid properly the company has adopted a systematic method of
the payroll system which enables the company to keep the workers happy and also saves
resources for the company (Collins et al 2016).
Flowchart of the payroll system
The weakness in each system
Purchase system
It has been observed that there is no specific purchase department in the organization
and only one clerk is appointed to look after the process of the purchase. The orders are
placed after the verification of the clerk which means that the company does not maintain any
system before placing a order. The products are received and kept with out following any
method of inventory that is either the products are stored as per first in first out basis or last in

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last out basis. The company also does not have any predefined vendor management system so
there is no specification that from which vendor how much order has been placed (Taha and
AbdulRazzaq 2019). Some of the major issues of the purchase system are stated below
 Not self-sufficiently verified with inventory in contradiction of the procurement
demand that can consequence to overstock.
 There is no proper system of the numbering of the orders counting the invalid orders
that can consequence to inappropriate order and no acquisition deal occurs.
 Proper selection process of the suppliers are not followed and the company used to
select the vendors based on their past performance and not on the basis of prices and
terms and delivery time.
 All inward possessions that includes fixed assets are not cleared by a goods inwards
receipt section.
 Any inconsistency among instruction and distribution tag only accepted by properties
inward manager. There is no additional person to give approval in the nonappearance
of the administrator.
 No autonomous verification on the acquiring in contradiction of the order.
 No monitoring of comparison among receipt of accounts and the examination reports
which might consequence to no assurance that all substances conventional are in good
ailment or not.
 Acquiring officer trusts on individual information and there is no certifiable self-
governing price list to guarantee that the contractor’s price list to confirm traders’
price are precise. Recording of values could be lower or exaggerated.
 No suitable indication on bill to specify numerous interior checks have been achieved.

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Weakness in the cash disbursement system
 No pre numbered cheques
 Proper maintenance of cheques is not done which might leads to the manipulation of
the cheques
 Duty is not segregated properly for which confusion arise between the staffs regarding
their responsibility.
Weakness of the payroll system
The major weakness that are identified in the payroll system are stated below
Data collection
The time card is recorded manually by the employees this led to the manipulation of
the data that are recorded in the time card. The process of data collection system is wrongly
done by the organization.
Separation of the duty
The duty of the payroll system should be divided among various staffs so that they
can do their job professionally and that will ensure that all the data are correct and that there
is no scope of embezzlement.
Data security
Security controls are meant for the protection of the confidential information of the
employees. The company still maintains hard copy information cheque stamping process
which will led to the occurrence of the theft of information money or equipment.

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Conclusion
From the above discussion it can be concluded that the Adam & co has tried to
impose a strong system of purchase , cash disbursement, and payroll to ensure that the
company does not face the problem of the manipulation data and that all the flow of the entire
expenditure cycle moves in a smooth way and that will ensure the sustainable growth of the
company. Though from the analysis it can be observed that there is some weakness in the
internal control system that will lead to the occurrence of the manipulation of data and will
lead to the obstruction of the production process.