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.

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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

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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.

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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).

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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.

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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):