Internal Controls Evaluation and Assessment
1. Introduction and Scope ……………………….Page 1
2. Results and Findings……………………………Page 2
3. Recommendations………………………………Page 3
4. Reference Citations………………………….…Page 4
LJB COMPANY - Internal Controls Evaluation and Assessment
Introduction and Scope:
This evaluation looks at the current internal control system at LBJ Company, assesses for compliance with requirements for Initial Public Offering (IPO) and provides recommendations for strengthening the primary components of an effective Internal Control System.
Internal Control System Primary Components
1. A control environment: It is the ...view middle of the document...
• Documentation procedures: Documents provide evidence that transactions and events have occurred.
• Physical controls: Physical controls relate to the safeguarding of assets and enhance the accuracy and reliability of the accounting records.
• Independent internal verification: Most internal control systems provide for independent internal verification. This principle involves the review of data prepared by employees.
• Human resource controls: Bonding of employees who handle cash; Conduct background checks; Rotate employee duties and require vacations.
Results and Findings:
LJB Company is a relatively lean organization with one accountant who serves as treasurer and controller. Based on the results of audits and other reviews, my assessment of the Company’s systems of internal controls is as follows:
Observation 1: Accountant responsibilities are very broad. Includes making purchases and paying for these purchases. He also receives the checks, handles payroll, and completes the monthly bank reconciliation. There is a lack of segregation of duties and internal verification when the accountant performs, monitors and records all of the financial transactions.
Observation 2: All employees have access to the petty cash in a desk drawer and are asked to only place a note if they use any of the cash. This practice violates the establishment of responsibility principle and does not promote documentation procedures of the petty cash fund.
Observation 3: The accountant has recently started using pre-numbered invoices and wants to buy an indelible ink machine to print their checks. This purchase, along with the use of these invoices is a good way to help promote documentation controls.
Observation 4: On payday, the checks are picked up by the accountant and left in his office for pick-up. Before he leaves for the weekend, he will move the checks into a safe in his office. The use of the safe is good practice of physical controls of the assets.
Observation 5: Recent employee termination of employee due to questionable behavior due to lack of background checks. This violates the Human Resource controls principle. There is also a lack of establishment of responsibility for employee activities within the company.
Internal Controls Assessment:
Internal Controls Principle Rating Observation
Establishment of Responsibility Marginally Effective Lack of identifiable user accounts for employees
Segregation of duties High Risk Lack of evaluation of work
Documentation Procedures Marginally Effective Use of prenumbered invoices; lack of documentation of petty cash expenditures
Physical Controls High Risk Lack of physical control of petty cash and payroll checks
Independent internal verification ...