Case Study 2 - Internal Control
Case Study Two
Name
Accounting and Finance
02Feb2011
Dear President of LJB Company,
(1) If the LJB Company should decide to become a publicly traded company, a few internal controls should be implemented to comply with the Sarbanes-Oxley Act (SOX). * Management will need to provide periodic quarterly reports to evaluate the effectiveness and reliability of LJB’s internal controls over financial reporting procedures. * Management should certify the accuracy and fairness of presentation of their financial statements. * Independent auditor(s) outside of LJB will need to attest to management’s assessment of said internal controls. Additionally, non-audit services between these two parties (LJB and said independent auditor) are prohibited.
(2) There are a few internal control measures that LJB already has in effect and are better for it: the use of pre-numbered invoices by the accountant and your (the President’s) involvement in the approval and hiring process of new employees. I also recommend the purchase of the indelible ink machine as per the accountant’s request. As this applies to the Internal Control Principle of Physical Control, future check fraud will be more difficult to be accomplished.
(3) There are several internal control weaknesses that I assess LJB currently has. Following each weakness I list below is a recommendation from myself to rectify these internal control weaknesses. * One is risk is the accountant who serves as Treasurer and Controller. Although I understand this is to streamline many processes, it possesses a risk where an opportunity is created for this employee to commit fraud. This also violates the Segregation of Duties Principle of Internal Control Principles. I recommend that these two responsibilities be segregated 2 different employees. * When the accountant in charge of payroll leaves employees’ checks in his office unsupervised and unsecured, it presents an opportunity for theft. This violates the
Name
Accounting and Finance
02Feb2011
Dear President of LJB Company,
(1) If the LJB Company should decide to become a publicly traded company, a few internal controls should be implemented to comply with the Sarbanes-Oxley Act (SOX). * Management will need to provide periodic quarterly reports to evaluate the effectiveness and reliability of LJB’s internal controls over financial reporting procedures. * Management should certify the accuracy and fairness of presentation of their financial statements. * Independent auditor(s) outside of LJB will need to attest to management’s assessment of said internal controls. Additionally, non-audit services between these two parties (LJB and said independent auditor) are prohibited.
(2) There are a few internal control measures that LJB already has in effect and are better for it: the use of pre-numbered invoices by the accountant and your (the President’s) involvement in the approval and hiring process of new employees. I also recommend the purchase of the indelible ink machine as per the accountant’s request. As this applies to the Internal Control Principle of Physical Control, future check fraud will be more difficult to be accomplished.
(3) There are several internal control weaknesses that I assess LJB currently has. Following each weakness I list below is a recommendation from myself to rectify these internal control weaknesses. * One is risk is the accountant who serves as Treasurer and Controller. Although I understand this is to streamline many processes, it possesses a risk where an opportunity is created for this employee to commit fraud. This also violates the Segregation of Duties Principle of Internal Control Principles. I recommend that these two responsibilities be segregated 2 different employees. * When the accountant in charge of payroll leaves employees’ checks in his office unsupervised and unsecured, it presents an opportunity for theft. This violates the
References: Kimmel, P., Weygandt, J., & Keiso, D. (2010). Financial Accounting. (6th ed.). Hoboken, NJ: John Wiley & Sons, Inc. Management 's Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports (2008). Retrieved from http://www.sec.gov/rules/final/33-8238.htm.