Adam & Co Case Study: Expenditure Cycle, Internal Controls, and Risks

This case study examines Adam & Co, a wholesaler of industrial supplies, and analyzes its expenditure cycle, focusing on purchase, cash disbursement, and payroll systems. The analysis involves creating system flowcharts to illustrate the processes within each system. The purchase system involves steps from need recognition to closing the order, including vendor selection, purchase order preparation, receipt, and reconciliation. The cash disbursement system covers filing documents, cheque preparation, updating documents, and filing. The payroll system encompasses time card information, verification, data input, cheque distribution, voucher preparation, cheque depositing, and general ledger preparation. The study identifies weaknesses in internal controls within each system, such as manual processes, lack of verification, and inadequate segregation of duties, and discusses the associated risks of fraud, errors, and operational inefficiencies.

Running head: CASE STUDY- ADAM & CO
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Case study- Adam & Co
Name of the Student
Name of the University
Author Note

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Executive summary:
The paper demonstrate the importance of the concepts of accounting information system to
the organization by referring to the given case study on Adam & Co. In this paper, the
evaluation of the expenditure cycle of the company has been done developing the system
flowchart that assisted in getting an insight into the step by step of the processes. The
description of each steps of the systems such as purchase, payroll and cash disbursement has
been done by using flowchart. The later section of this paper outlines the weakness in the
internal control process of the systems and the risks associated with such system.

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Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
System flow chart of purchase system:......................................................................................2
System flow chart of cash disbursement system:.......................................................................2
System flow chart of payroll system:.........................................................................................2
Identifying the internal control weakness in the system and its associated risks:.....................2
Conclusion:................................................................................................................................2
Reference list:.............................................................................................................................3

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Introduction:
The report demonstrates the analysis of the expenditure cycle of the company by
evaluating the risks, process and internal control. Analysis is based on the information
provided in the case study on Adam and Co which is a wholesaler of industrial supplies and
carries out its operation in Perth, Australia. Sourcing of inventories is done by the company
from several countries such as Thailand, China and Vietnam. It has been observed from the
case that the centralized accounting system that has a networked terminals located in different
areas. The analysis of the three different systems of the expenditure cycle of Adam and Co is
done by using the system flowchart. Flowchart is a tool that provides a graphical
representation of different elements of the process so that the interrelationship amongst the
various steps can be understood1. In the present paper, flowchart has been used to explain the
process of different departments of expenditure cycle which comprise of purchase system,
payroll system and cash disbursement system.
Discussion:
System flow chart of purchase system:
In general sense, the process of buying the inventories or the raw materials is descried
using the purchase system and the process of purchasing involves the determination of need
of placing the order, choosing a vendor, terms and conditions, arriving at appropriate price,
1 Agyemang, Gloria, and Jane Broadbent. "Management control systems and research management
in universities: An empirical and conceptual exploration." Accounting, Auditing & Accountability
Journal 28.7 (2015): 1018-1046.

5
issuing the order, flowing the delivery, inspection of material and paying the invoice and the
last steps follows the transferring the receipt or invoice to the department2.
For explaining the purchase system of Adam and Co, a detailed flow chart is
illustrated in the diagram below. The step of the purchase system is derived from a written
procedure that is based on the task list and flow chart.
2 Akhmetshin, Elvir M., and Eduard A. Osadchy. "New requirements to the control of the maintenance
of accounting records of the company in the conditions of the economic insecurity." International
Business Management 9.5 (2015): 895-902

6
Diagram 1: System flowchart of purchase system of Adam & Co
Flow Description of activities

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Need recognition The inventory subsidiary ledger is checked
by the purchasing clerk every morning. The
process of purchase is facilitated by
determining the reordering point of then
inventories when the inventories drop to a
predetermined level. Inventories of the firm
is depleted by transferring the raw materials
into the production process and then selling
the goods to the consumers of the business3.
For checking the predetermine point,
inventory is continuously monitored by the
purchasing clerk.
Vendor selection For purchasing the requested item, best
method is determined by the purchasing
clerk who opts for vendor from the valid
vendor file. That it, suitable vendor to
whom the order for inventory placed is
selected from the valid vendor file where
there is a list of vendors intended to supply
the inventories4.
Preparation of purchase order The selected vendor is provided with the
3 Booth, Peter. Management control in a voluntary organization: accounting and accountants in
organizational context. Routledge, 2018.
4 Donelson, Dain C., Matthew S. Ege, and John M. McInnis. "Internal control weaknesses and
financial reporting fraud." Auditing: A Journal of Practice & Theory 36.3 (2016): 45-69.

8
purchase order. In the given case, it is
observed that the clerk has prepared digital
purchase order for sending it to the vendor
and also for filing in the department5. For
this purpose, clerk prepared two hard copies
of purchase order and the record is
maintained in the purchase order file.
Receipt and inspection of order The goods received from the vendor is
inspected by the receiving clerk in the
receiving department. The information
presented in the packing slip and digital
purchase order is reconciled against the
item6.
Managing the receiving report Receiving reports are prepared manually by
the clerk. One of the copies is send to
accounts payable department and the other
is filed in the receiving department after
updating the inventory subsidiary ledger in
the inventory warehouse.
Reconciliation of the documents and
positing in the general ledger
The documents such as hard copy of digital
purchase order, receiving report and invoice
from suppliers are reconciled in the
5 Fan, Yangyang, Chan Li, and Kannan Raghunandan. "Is SOX 404 (a) Management internal control
reporting an effective alternative to SOX 404 (b) internal control audits?." Auditing: A Journal of
Practice & Theory 36.3 (2017): 71-89.
6 Frazer, Linval. "Internal control: Is it a benefit or fad to small companies? A literature dependency
perspective." Journal of Accounting and Finance 16.4 (2016).

9
accounts payable department.
Closing the order The process of purchasing is completed
after the inventory control account, accounts
payable control, account and accounts
payable subsidiary ledger is updated by the
clerk in the general ledger. The step is
completed when the cash disbursement
department receives the receiving report,
invoice and purchase order copy7.
System flow chart of cash disbursement system:
For explaining the cash disbursement system of Adam and Co, a detailed flow chart is
illustrated in the diagram below. This helps in showing the flow of information with the help
of accounting records from the sourced documents and the accounting information is
represented as the system with the help of flow chart8.
7 Libby, Robert. "Accounting and human information processing." The Routledge Companion to
Behavioural Accounting Research. Routledge, 2017. 42-54.
8 Maas, Karen, Stefan Schaltegger, and Nathalie Crutzen. "Integrating corporate sustainability
assessment, management accounting, control, and reporting." Journal of Cleaner Production 136
(2016): 237-248.

10
Diagram 2: System flowchart of cash disbursement system of Adam & co
Flow Description of activities
Filing of the documents received The documents are filed by the clerk when
received from the accounts payable
department.
Preparation of cheque Concerning the invoiced account, cheque is
prepared by the clerk on the due date. After
this, the supervisor of the department sign

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the cheque when it is received and the
signed cheque along with the other
supporting documents is mailed to the
vendor.
Updating of the documents The next step requires updating of the
accounts payable control account, accounts
payable subsidiary ledger and cheque
register and the process is done by the cash
disbursement clerk9.
Filing of the prepared documents The last step requires filing of the
documents in the department and these
documents include receiving report, invoice,
purchase order copy and cheque copy.
It can be observed from the case disbursement system that the system do not have
enough staffs for managing the accounting tasks. Such lack of employees and lack of duties
segregation might hamper the process of internal control of Adam and Co10.
System flow chart of payroll system:
The procedure of payroll system can be well understood with the help of explaining
the process flowchart of payroll. Such flowchart can help in serving the needs of reviewing
the payment and attendance of employees. Initiation of the flow chart can be done by
9 Michelon, Giovanna, Saverio Bozzolan, and Sergio Beretta. "Board monitoring and internal control
system disclosure in different regulatory environments." Journal of Applied Accounting Research 16.1
(2015): 138-164.
10 Miles, Samantha, and Samantha Miles. "Stakeholder Theory and Accounting." The Cambridge
Handbook of Stakeholder Theory (2019):

12
reviewing the completeness of the accumulated data11. This stage is regarded as vital because
this forms the basis of subsequent stages.
Diagram 3: System flowchart of payroll system of Adam & co
The automation and managing of the payroll system in the organization is done by
with the help of payroll system driven by the computer. It can be observed from the given
11 Senftlechner, Daniel, and Martin RW Hiebl. "Management accounting and management control in
family businesses: Past accomplishments and future opportunities." Journal of Accounting &
Organizational Change 11.4 (2015): 573-606.

13
case on Adam and Co that the preparation of the cheques and posting of the documents is
done manually which gives rise in human error. However, the use of automated payroll
system helps in minimizing the potentiality of errors conducted by staffs. The flow chart
depicting the steps of the payroll system of Adam and Co is illustrated below:
Flow Description of activities
Timecard information collection The total number of hours worked by
employees is recorded in the time card and
this can be done by the use of computerized
clock, stamp filing and manual clock12.
Information verification At the end of each week, correctness and the
accuracy of the information on the time card
is verified and reviewed by the supervisors
and the same is submitted to the payroll
department.
Inputting the data in the time card The central payroll system of the company
is used for imputing the data on the time
card with the help of payroll clerk. In the
next step, the digital employee’s records is
posted with two copies of payroll register
and that of cheques.
Pay cheque distribution After the time card is filed by the clerk in
the payroll department, the supervisors of
the department reviews the prepared
12 Senftlechner, Daniel, and Martin RW Hiebl. "Management accounting and management control in
family businesses: Past accomplishments and future opportunities." Journal of Accounting &
Organizational Change 11.4 (2015): 573-606.

14
employee cheques. The cheques are
distribution to the employees in various
departments13. Next step is that the payroll
department and the accounts payable
department is provided with one copy of
payroll register.
Disbursement voucher preparation In this stage, the disbursement voucher for
disbursing the cash is prepared manually
and the responsibility of preparation lies
with the of accounts payable clerk. After
this, the general ledger department receives
the payroll register and the voucher from
clerk that is being sent by the accounts
payable clerk.
Cheque depositing In this step, cheques are written for the
entire payroll system by the accounts
payable clerk and then the cheques are
deposited in the bank. In addition to this,
clerk is also responsible for sending the
copy of the cheque to the accounts payable
department for initiating the payment
process.
General ledger preparation The last step is to posting of the payroll
register and the voucher by the general
13 Susanto, Azhar. "The effect of internal control on accounting information system." International
Bussiness Management10.23 (2016): 5523-5529.

15
ledger clerk in the general ledger. This step
is completed after the payroll register and
the voucher is filed in the department.
Depiction of the weakness in the internal control of system and the risk associated with
identified weakness:
From the analysis of the case study concerning the information presented on the
procedures and the system of expenditure cycle, it can be inferred that there exist some
weakness in each of the systems and this can be listed below.
Some of the identified weakness of the purchase system and the risk related with it
are:
The system of purchase of Adam and Co has some operational weakness as some of
the routine clerical work is done manually. It can be observed that the receiving clerk
prepares the receiving report manually. This might lead to fraudulent activities as
there can be difference in the actual amount of goods received and what is being
recorded. This might mislead the users about the financial figures depicted in the
records or book of accounts14.
The system also lacks the adequate verification process as the documents prepared
should be verified by authorized staffs or employees. In the absence of proper
verification system, the likelihood of committing crime or being involved in theft
increases. In addition to this, existence of any discrepancies is not accounted for
adequately.
14 Van der Stede, Wim A. "“Global” management accounting research: some reflections." Journal of
International Accounting Research 16.2 (2017): 1-8.

16
Some of the weakness in the internal control of cash disbursement system and the
risks related to it are:
The control system of this particular system is weakened due to the lack of evidence
supporting the documents presented.
Before signing of the cheques by the supervisor, it is essential to conduct a proper
verification of the cheque and should not be directly signed.
Some of the weakness in the internal control of the payroll system and the risks
related to it are:
The preparation of payroll cheque and the disbursement voucher by the clerk should
be verified. In the given case, the payroll system lacks the adequate level of
monitoring and this increases the chance of getting involved in fraud activities and
theft15.
Moreover, the disbursement voucher is prepared manually by the clerk and the
possibility of committing human error is enhanced. The system also lacks the
segregation of duties and the clerk is required to perform many of the accounting
tasks. This would increase the likelihood of indulging in errors and wrong activities16.
Conclusion:
From the analysis of the evaluation of the process of the expenditure cycle of Adam
Co, it is inferred that the system is effective in managing the accounting tasks. However, the
existence of some weakness in the internal control system of the system creates impact on the
efficiency of the whole system. The flowchart used for explaining the steps of each of the
15 Woods, Margaret, Philip Linsley, and Marco Maffei. "Accounting and risk special issue." British
Accounting Review(2016).
16 Vovchenko, Natalia G., et al. "Ensuring financial stability of companies on the basis of international
experience in construction of risks maps, internal control and audit." European Research Studies
Journal 20.1 (2017): 350-368.

17
system has helped in gaining an insight into the process in an adequate manner. Evaluation of
the payroll, cash disbursement and the purchase system has ascertained some of the weakness
in the internal process which is putting some of the assertions related to the account at risk. In
addition to this, it also needs to be pointed out that the manual preparation of the accounting
records is one of the greatest weakness along with the lack of monitoring such records. It is
therefore required by the company to enhance the effectiveness of their internal control
system by developing appropriate measures.

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References list:
Agyemang, Gloria, and Jane Broadbent. "Management control systems and research
management in universities: An empirical and conceptual exploration." Accounting, Auditing
& Accountability Journal 28.7 (2015): 1018-1046.
Akhmetshin, Elvir M., and Eduard A. Osadchy. "New requirements to the control of the
maintenance of accounting records of the company in the conditions of the economic
insecurity." International Business Management 9.5 (2015): 895-902.
Booth, Peter. Management control in a voluntary organization: accounting and accountants
in organizational context. Routledge, 2018.
Donelson, Dain C., Matthew S. Ege, and John M. McInnis. "Internal control weaknesses and
financial reporting fraud." Auditing: A Journal of Practice & Theory 36.3 (2016): 45-69.
Fan, Yangyang, Chan Li, and Kannan Raghunandan. "Is SOX 404 (a) Management internal
control reporting an effective alternative to SOX 404 (b) internal control audits?." Auditing:
A Journal of Practice & Theory 36.3 (2017): 71-89.
Frazer, Linval. "Internal control: Is it a benefit or fad to small companies? A literature
dependency perspective." Journal of Accounting and Finance 16.4 (2016).
Libby, Robert. "Accounting and human information processing." The Routledge Companion
to Behavioural Accounting Research. Routledge, 2017. 42-54.
Maas, Karen, Stefan Schaltegger, and Nathalie Crutzen. "Integrating corporate sustainability
assessment, management accounting, control, and reporting." Journal of Cleaner
Production 136 (2016): 237-248.

19
Michelon, Giovanna, Saverio Bozzolan, and Sergio Beretta. "Board monitoring and internal
control system disclosure in different regulatory environments." Journal of Applied
Accounting Research 16.1 (2015): 138-164.
Miles, Samantha, and Samantha Miles. "Stakeholder Theory and Accounting." The
Cambridge Handbook of Stakeholder Theory (2019):
Senftlechner, Daniel, and Martin RW Hiebl. "Management accounting and management
control in family businesses: Past accomplishments and future opportunities." Journal of
Accounting & Organizational Change 11.4 (2015): 573-606.
Susanto, Azhar. "The effect of internal control on accounting information
system." International Bussiness Management10.23 (2016): 5523-5529.
Susanto, Azhar. "The influence of business process and risk management on the quality of
accounting information system." Journal of Theoretical & Applied Information
Technology 96.9 (2018).
Van der Stede, Wim A. "“Global” management accounting research: some
reflections." Journal of International Accounting Research 16.2 (2017): 1-8.
Vovchenko, Natalia G., et al. "Ensuring financial stability of companies on the basis of
international experience in construction of risks maps, internal control and audit." European
Research Studies Journal 20.1 (2017): 350-368.
Woods, Margaret, Philip Linsley, and Marco Maffei. "Accounting and risk special
issue." British Accounting Review(2016).

20