Adam & Co. Accounting Information Systems Case Study

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Accounting Information Systems
Individual assignment-
Case Study –
Adam & Co
1

Table of Contents
LIST OF FIGURES.......................................................................................................................3
EXECUTIVE SUMMARY............................................................................................................. 4
INTRODUCTION........................................................................................................................5
BODY........................................................................................................................................ 6
SYSTEM FLOWCHART OF PURCHASES SYSTEM....................................................................6
INTERNAL CONTROL WEAKNESS AND RISK ASSOCIATED.....................................................7
SYSTEM FLOWCHART OF CASH DISBURSEMENTS SYSTEM...................................................9
INTERNAL CONTROL WEAKNESS AND RISK ASSOCIATED...................................................10
SYSTEM FLOWCHART OF PAYROLL SYSTEM.......................................................................12
INTERNAL CONTROL WEAKNESS AND RISK ASSOCIATED...................................................13
CONCLUSION.......................................................................................................................... 14
REFERENCES........................................................................................................................... 15
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LIST OF FIGURES
Figure 1: System flowchart of purchase system.......................................................................6
Figure 2: Cash Disbursement Process.......................................................................................9
Figure 3: Payroll System Flowchart........................................................................................12
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EXECUTIVE SUMMARY
This report emphasises that there is a great importance of the accounting management
systems which revolves around effective recording and maintenance of the transactions of
the company. There are many systems in the expenditure cycle which must ensure a
sufficient amount of internal control and should draw measures to overcome those internal
control weaknesses and risks. The same has been discussed which has helped Adam & Co.
to overcome to discuss the issues of the different systems at an organisation with the help
of their system flowcharts and this reports also helped to draw out some weaknesses and
the risks associated with those risks which shall be considered by the management system
of Adam & Co.
4

INTRODUCTION
Being employed as a Business Analyst at Adam & Co which is known as a wholesaler based
in Perth of the industrial supplies. This report aims to evaluate the processes such as
purchase system, payroll system and cash disbursements systems of Adam & Co will be
evaluated based on the internal control weaknesses in each of the above systems and risks
involved with those weaknesses. This report will also present the system flowcharts of all
the three systems in context to the case of Adam & Co.
Adam & Co. is a wholesaler of Industrial supplied which mainly sources its inventories from
Vietnam, Thailand and China. It has its networked terminals at varied locations under a
centralised accounting system. Its expenditure cycle procedures will involve the payroll
system, cash disbursements system and purchases system which will be presented as under
and evaluated.
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BODY
Adam & Co. follows an expenditure cycle which is a set of purchasing actions and decisions
repetitively by creating purchase orders and receiving the same. This process also involves
approval over the invoices of these services and items and paying the invoices.
Purchasing system, on the other hand, is a process involved for buying the services and
products which encompasses the purchases from the requisition till the purchase order
attained through product receipt and payment.
SYSTEM FLOWCHART OF PURCHASES SYSTEM
Adam & Co. go through the purchase system which begins when the inventory subsidiary
ledger is checked by the purchasing clerks and ends when the clerk finally sent the invoice
together with the purchase order copy and receiving a report to the cash disbursement
department (De Mattei et al., 2016).
The system followed by a purchase system of Adam & Co. is depicted as under with the help
of system flowchart:
Figure 1: System flowchart of purchase system
(Source: Author’s Work, 2019)
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Checking of
inventory
subsidiary
ledger to chek
quntity of item
Selection of
vender from
vendor list &
Prepartation
of Digital
purchase order
Preparation of
copy of
recieving report
Sending the
copies to
Accounts
payable
department
Verification and
updation in
accounts payable
susbsidary ledger
Sending the copies
of invoice, purchase
order and receiving
report to cash
Disbursement

INTERNAL CONTROL WEAKNESS AND RISK ASSOCIATED
Internal control weaknesses of Purchase system at Adam & Co
Some of the internal control weaknesses that Adam & Co might face include the
overstocking which is due to the failure to independently check the stock with the purchase
requisition leading to a weakness for the purchase system (Le and Lehmann, 2016).
Another weakness is that the sequence of orders in Adam & Co. is not accounted together
with the cancelled orders that may lead to the displacement of the orders and also it may
lead to no purchase transactions. This, therefore, emerges to be one of the biggest internal
control weaknesses of Adam & Co.’s internal control concerning the purchase system (De
Mattei et al., 2016).
Another set of internal control weaknesses that emerges out in purchase system of Adam &
Co. is that while selecting the vendors and suppliers the selection is made on the basis of the
past reputation keeping in mind and ignoring the other important factors such as delivery
time, prices offered and terms and conditions (Le and Lehmann, 2016).
In absence of the purchasing clerk or the Goods inward Manager there is nobody else to
authorise the approval or discrepancy between the delivery docket and order. This may lead
to another control weakness on part of Adam & Co.’s purchase system.
In the purchase system, another internal control weakness is of the lack of physical
verification of the stock that is a major weakness as it may lead to failure to record the sales
or sales return in case of technical issues (De Mattei et al., 2016). And this ultimately may
lead to overstocking of stock in case the purchasing clerk fails to record the sales return
entry and orders a new stock without physical verification.
The risk associated with internal control weaknesses of the purchase system of Adam &
Co.
Due to the above weaknesses identified Adam & Co. may face the risk of lack of
reconciliation of the stock as there is no coordination with the inventory management and
the sales (Le and Lehmann, 2016). For instance, the purchasing clerk of Adam & Co. is solely
dependent over the software to record and order inventory which is not recorded in the
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control system. This, in turn, may lead to the risk of overstocking of the inventories. Another
risk due to the control weakness identified will be due to the centralised control system
which may lead to the failure to recover data in case of any technical mishap. This risk may
lead to high risk and due to the centralised system multiple errors may also emerge due to
the manual preparation of the records (De Mattei et al., 2016).
Another risk associated is of the no guarantee of the items which have been received from
suppliers as there is no checking or comparison of the inspection reports and receiving
records. The purchasing clerk relies on personal knowledge and does not verify the prices as
well which may lead to understated or overstated prices (Bragg, 2019).
Thus it can be connoted that the weaknesses of internal control and risk associated with the
purchase system of Adam & Co. can be easily overcome when the daily reports from the
purchasing department of Adam & co-related to the accounting of sequences of pre-
numbers purchase requisitions and orders ensure that they are delivered to corresponding
dockets and make sure that they have been arrived and purchased. Another
recommendation for purchase system of Adam & Co. is to have a signature of Inspection
Clerk on each Delivery Docket to ensure evidence of its corresponding receiving report
documents which will signify that the items are received without defects or damages and
will ensure double-check and authorisation (De Mattei et al., 2016).
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SYSTEM FLOWCHART OF CASH DISBURSEMENTS SYSTEM
Cash Disbursement system is proper documentation wherein the financial records of a
company must be recorded ensuring good internal controls and cash payment for legitimate
transactions (Rojas, 2019).
The process of Cash Disbursements at Adam & Co. starts when the copies are received from
purchase clerk to accounts payable department and the clerk of cash disbursements then
files the documents till the payment is due (Crouthamel, 2013). The process ends when the
receiving clerk in the department successfully files the purchase order copy, cheque copy,
receiving report and invoice (Ketchum, 2018).
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Recording of Documents
recieved from purchase
department untill due date
Prepare cheque for vendor
Updation in Cheque register
& Accounts payable ledger
Review Invoice and cheque
amouunt
Files invoice,Recieving
report and purchase copy
Figure 2: Cash Disbursement Process
(Source: Author’s Work, 2019)

INTERNAL CONTROL WEAKNESS AND RISK ASSOCIATED
Internal control weaknesses of Cash Disbursement system at Adam & Co
The presence of healthy internal controls is vital for the Cash Disbursements for the same
the weaknesses of the internal control will be identified as under of the cash disbursement
system of Adam & Co:
One amongst the weaknesses in cash disbursements system of Adam & Co is that there is an
incorrect recording of cash and the clerk that is responsible for recording the documents are
initially received from the purchasing department so the errors committed by purchase
department are carried forward to here. This leads to a situation where incorrect amounts
are recorded and cash register thereafter reflects the wrong amount (Lacoma, 2017).
Apart from this, there may also be chances of cash embezzlement in Adam & Co as there is
no control system which may lead to fraudulent transfers of cash from the cash department.
Thus it is essential to complete a timely bank reconciliation to check the bank statement and
images for unusual transactions (Bragg, 2019).
There may also emerge an internal control weakness or improper control which is due to
the board of directors and the leaders where decisions are not undertaken appropriately.
There may be some lack of control which may lead to security concerns and time
consumption due to funding delays (Ketchum, 2018).
The risk associated with internal control weaknesses of the purchase system of Adam &
Co.
While dealing with the weakness of internal control of cash disbursements Adam & Co. may
lead to faulty tracking system due to the poor accountability function. This, therefore, may
lead to the risk of losing money as a result of unscrupulous behaviour (Lacoma, 2017).
Another risk associated with the internal control weaknesses of cash disbursement is that it
usually prepare the receipts separately which leads to the risk of multiple errors and which
emerge to be a risk (Bragg, 2019).
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To prevent the risk associated with the internal control weakness of cash Disbursement at
Adam & Co. it is recommended to have effective segregation of duties which will reduce the
likelihood of undetected errors due to accounting control and will help in accessing the cash
accounts. Physical control should also be encouraged which will help in limiting the
authorised check signers and will help Adam & co. in recording the company’s stock of
unused checks and records (Crouthamel, 2013).
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SYSTEM FLOWCHART OF PAYROLL SYSTEM
Payroll System is the process that involves the items which are related to the employment
taxes and the invoices. The payroll system of Adam & Co. involves the number of tasks that
are performed by the employees and the working hours that are worked by employees is
recorded on time card (Beasley, 2019).
The system flowchart of payroll system followed by Adam & Co. is depicted as under:
Figure 3: Payroll System Flowchart
(Source: Author’s Work, 2019)
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Recording of working
Hours on time card
Submission of time cards to
Payroll department at the end
of each week
Printing the copies of
Payroll register and post
to employee record
Sending of employees cheques to
superviser for review and
distribution
Depositing cheques by the
accounts payable clerk in
imprest and recording of
cheque in accounts payable
department.