Holmes Institute HA2042: Case Study of Adam & Co. Accounting Systems

This case study analyzes the accounting information systems of Adam & Co., a Perth-based wholesaler, focusing on its purchases, cash disbursements, and payroll systems. The analysis begins with system flowcharts illustrating the processes within each system. The report identifies weaknesses in the purchases system, such as the involvement of multiple clerks and potential risks related to supplier fraud, delivery issues, and inventory management. The cash disbursements system is evaluated for internal control weaknesses, including lack of proper oversight, potential for fictitious payments, and inefficiencies in matching documents. The payroll system is also examined for internal control weaknesses. The study concludes with recommendations for improving these systems, addressing the identified risks, and enhancing overall efficiency and control within Adam & Co.'s accounting operations. The assignment highlights the need for stronger internal controls, improved authorization procedures, and more streamlined processes to mitigate risks and ensure accurate financial reporting. The case study is based on the assignment brief for HA2042 Accounting Information Systems, submitted to Holmes Institute.

Running head: CASE STUDY – ADAM & CO.
Case Study – Adam & Co.
Name of the Student
Name of the University
Author Note

1CASE STUDY – ADAM & CO.
Executive Summary
This report contains an analysis of the Purchases System, Cash Disbursements System and the
Payroll System that the organisation Adam & Co. has in place. This analysis is initially done
through a diagrammatic representation of all the systems in the form of flowcharts. The
flowcharts also enable a smoother analysis of the processes being undertaken by the company.
Various sources of literature are then referred to get an idea about the ideal systems that every
company should have in place. The analysis has identified the problems associated with each of
the systems. The risks that occur due to these problems are also mentioned in detail. This report
ends with a conclusion which contains the final meaning of all the analysis conducted on Adam
& Co. Some recommendations are also made to improve the processes undertaken by the
company.

2CASE STUDY – ADAM & CO.
Table of Contents
Introduction..................................................................................................................................3
System flowchart of payroll system.............................................................................................6
Description of weaknesses and risks of the purchases system.....................................................7
Description of internal control weakness in the Cash Disbursements System............................8
Description of internal control weakness in the Payroll System.................................................9
Conclusion.................................................................................................................................10
References..................................................................................................................................12

3CASE STUDY – ADAM & CO.
Introduction
Adam & Co. is a Perth based wholesaler of industrial supplies. It imports its inventories
from manufacturers in China, Thailand and Vietnam. It also has a centralised accounting system
which consist of different terminals. The company mainly consists of three accounting systems
called the Purchases system, Payroll system and Cash distributions system. All the systems are
maintained in a systematic manner in accordance with the necessities of the organisation.
Although the system is considered to be robust and satisfying the needs of the organisation, there
may still be a few weaknesses that might be existing within these systems. A visual
representation of the process flows is undertaken for the convenience. An analysis of the existing
systems is done to identify the potential weaknesses that exist within the system and to identify
the measures to rectify them.

4CASE STUDY – ADAM & CO.
System flowchart of purchases system
Yes
No
Select a vendor and prepare
a purchase order. Print two
hard copies of the order and
send one to vendor
Purchasing clerk checks the
inventory subsidiary ledger
at his computer terminal
Is the
quantity of
an item too
low?
Add digital purchase order
to the purchase order file
End
Have the goods
arrived at the
receiving
department?
Yes
Inspect the goods, reconcile
the item against the digital
purchase order, and prepare
two hard copies of receiving
reports
Send one copy and goods to
the inventory warehouse.
Clerk shelves the goods and
updates the inventory
subsidiary ledger
Send another copy to the
accounts payable department.
Fill it until supplier invoice
arrives. After the invoice has
arrived, reconcile invoice and
other two documents. Update
the ledgers and send the
documents to cash
disbursement department
No
End

5CASE STUDY – ADAM & CO.
System flowchart of cash disbursements system
Have the
documents
arrived from the
accounts payable
department?
Yes No
Clerk files the documents
until their payment due
date
End
Has the due
date arrived
yet or not?
Yes No
Prepare a cheque for the
invoiced account that is
sent to the treasurer who
will mail the cheque to
the vendor
End
Clerk updates the cheque register,
accounts payable subsidiary ledger
and the accounts payable control
account from his terminal. File the
invoice, purchase order copy,
receiving report and cheque copy
in the department.

6CASE STUDY – ADAM & CO.
System flowchart of payroll system
The mistakes in the time
cards are reviewed for
correctness and then
submitted to the payroll
department
The time cards are
submitted to the payroll
department.
Do the
employees
correctly record
the time in the
time cards?
Yes No
Payroll clerk inputs the time
card data, prints hard copies
of the cheques, two copies of
the payroll register and posts
it to the digital employee
records
Clerk files the time cards and then
sends employee pay cheques to their
respective departments for review and
distribution
Send one copy of payroll register to
the accounts payable department and
file the other along with the time card
in the payroll department
Accounts payable department
reviews payroll register and
manually prepares a
disbursement voucher and sends
them to the general ledger
department.
The clerk in the general ledger
department writes a cheque for
the entire amount of payroll and
deposits in the Imprest account.
He files a copy of the cheque in
the accounts payable
department.

7CASE STUDY – ADAM & CO.
Description of weaknesses and risks of the purchases system
In case of the purchases system, the main weakness is the presence of too many people
who are responsible for its maintenance. The functions of ordering the goods whose stock levels
are too low and the clerk responsible for inspecting the goods and receiving them. The received
goods are sent to another clerk who is responsible for maintaining the goods received by the
company at a particular point of time. One of the goods received report is then sent to the
accounts payable department. The clerk in this department is responsible for filing it until the
arrival of the supplier’s invoice. After receiving the invoice, this clerk then pulls up another
temporary file and reconciles the three documents that were received by him. While the process
followed by the system ensures that the stock taking and record keeping are done in an efficient
manner, it is too costly for a number of reasons. The main risks associated with a purchase
system are the frauds by suppliers, delivery risks in transporting from a different country, fraud
that can be committed by the suppliers or the employees and problems related to the quality of
the products (Sandberg and Mena 2015). These risks also highlight the inefficiencies in the
current system. While the clerks maintain the records and quantity of the product required
efficiently, they fail to inspect the quality of the product at the time of the delivery itself. In case
of delivery of bad quality products, it will cause a delay in the reorder or return of the bad quality
products. Another inefficiency is having a terminal that is responsible for ordering the quantity
of goods. This could be done away with as the department responsible for receiving the goods
can also perform the function of placing the order of a particular item. Another risk is associated
with the estimates made by the clerks about the quantity of goods required at once. Too much of
a conservative estimate by the clerk results in the overstocking of goods and increases the

8CASE STUDY – ADAM & CO.
carrying costs associated with the goods. Another risk associated with the department is the
allocation of the budget (Dai and Gao 2014). The risks associated with this department are
similar to the risks associated with placing an order. Improper allocation of the budget results in
making the business operations unprofitable. The final problem associated with the purchases
system is related to the authorisation procedures. While individual clerks oversee their respective
functions, there is no authority that oversees the efficiency with which they function and results
in identifying any misdoings more difficult than in the normal course.
Description of internal control weakness in the Cash Disbursements System
As in the case of Purchases System, there is no proper authority that is overseeing the
operations of the Cash disbursements system. While it is true that the cash disbursements system
should be overseen only by the accounts payable department, there is always a risk due to the
nature of the people operating in the accounts payable department. Another problem is the
involvement of the receiving clerk in the process implemented by the organisation (Attom 2013).
All cheques related to a particular order should always be maintained by the accounts payable
department. Having too many copies of the same cheque results in the creation of fictitious
payments and omission of payments by one of the clerks. Matching various documents like
invoice, purchase order copy, receiving report and cheque copy of a single transaction becomes a
tedious process to undertake. There is also an absence of an authority that is responsible for
managing the restricted funds. Although this type of authority is common in non-profit
organisations, funds which are set aside for a specific purpose like procurement of goods or
payment to creditors could be utilised in the wrong manner in the current system (Herrera and
Ibeas 2015). The other problem associated with the current system is the number of signing
authorities that the company has in place. While it is always advisable that the number of signing

9CASE STUDY – ADAM & CO.
authorities should be kept to a minimum, it is better to have another signing authority. This is
due to the risk that occurs with the processing of urgent payments in case of the absence of a
signing authority. There is also no mention of the company maintaining pre-numbered cheques.
This will cause confusion in the maintenance and identification of pre-existing records. There is
also no pre-written notice that prohibits the signing of cheques in advance. This is another way
of manipulating the records where multiple cheques can be issued to manipulate the records but
they are related to a single transaction. The mail system that is implemented by the company also
needs to be efficient to ensure that the cheques that are being mailed by the accounts payable
department reach the vendor correctly. There is also no segregation of a cheque that is being
mailed on the basis of amount. Cheques containing large amounts and petty cash cheques are
different from each other and hence should be treated separately. This will lead to the creation of
a more clear system that maintains records in an appropriate manner.
Description of internal control weakness in the Payroll System
In the given scenario, the main inefficiency that exists in the payroll system of Adam &
Co. is the time card system (Oloyede, Adedoyin and Adewole 2013). There are a large number
of these time cards and maintaining them properly is an extremely difficult task. One of the main
problems that exist in a payroll system are the improper claims made on the basis of improper
bills (Sullivan 2014). An unethical understanding between the supervisors and employees of the
payroll department will likely result in overpayment of wages. The lack of supervision also
increases the chances of the occurrence of this risk. The payroll patterns that are being followed
by the company are quite complicated in nature and any form of ignorance by anyone involved
in the system will lead to major frauds or errors in the payroll system of the company. Involving
the accounts payable department in the payroll department increases the pressure on them as they

10CASE STUDY – ADAM & CO.
also have to undertake the responsibilities of the cash disbursements department and purchases
system (Thite and Sandhu 2014). There is no proper authority for the cheques written by the
clerk for the entire payroll system. As the amounts that would be written by him tend me of large
scale, there should be a proper authority that is responsible for processing and authorising the
cheques written by the clerk. Having one person responsible for the entire payroll increases the
risk of theft, embezzlement, falsification of documents and manipulations for personal gains.
Clerical errors like setting up the wrong tax rate, mismanaging documents related to the salaries
and missing deadlines is also a risk that is faced by the current payroll system. This also leads to
the risk of paying huge penalties to the regulatory authorities for mismanagement and
falsification of funds. Wrong processing of the documents results in the miscalculation of the
salaries of the people in the payroll and causes losses or unnecessary disruptions in the
organisation. Although this may not always occur due to the intentional misdeed of the person in
charge, the consequences occurring due to the misdeed cannot be avoided altogether. The tasks
undertaken by the general ledger clerk are also complicated in nature and require them to deal
with a huge number of documents at once.
Conclusion
From the above analysis, it can be suggested that the systems that the organisation has in
place are intended to make sure that all the processes within the organisation are carried out
smoothly. However, there are a huge amount of risks that the entity is facing due to the
responsibilities being placed on a selected group of persons. There are a number of risks that are
being faced by Adam & Co. due to the lack of a proper internal control system. Some of them
include the falsification and manipulation of documents, embezzlement of records, wrong claims
made by employees and ignoring the patterns being followed in the company as a whole. The

11CASE STUDY – ADAM & CO.
company needs to employ more people in the organisation, especially in the supervision of tasks.
While this may not immediately reduce all the risks, it reduces the burden on the employees and
ensures a more efficient performance by the company.