Case Study 2—Internal Control
ACCT 504 WK 5
Professor: Melinda Howerton
Date: April 5, 2014
Table of Contents
New Internal Control Requirements 4
Internal Control Strengths 4
Internal Control Weakness 5-6
Recommendations and Conclusion 6-7
Works Cited 8
This report is being presented as an assessment of the preparedness of the LJB Company to go public, and must first understand what and ...view middle of the document...
When companies disobey the law, they are subject to fines, or in extreme cases, their top executives may even go to prison. Effective internal controls help ensure compliance with the law and avoidance of legal difficulties (Thomas, 2013).
The following report will also inform the president and board of any new regulations, strengths, weaknesses, and recommendations of internal controls to successfully complete their goals.
New Internal Control Requirements
To address public concerns, Congress passed the Sarbanes-Oxley Act of 2002 (SOX). SOX revamped corporate governance in the United States and profoundly affected the way that accounting and auditing is done in public companies. Here are some of the SOX provisions:
1. Public companies must issue an internal control report, and the outside auditor must evaluate and report on the soundness of the company’s internal controls.
2. A special body, the Public Company Accounting Oversight Board, has been created to over-see the audits of public companies.
3. An accounting firm may not both audit a public client and also provide certain consulting services for the same client.
4. Stiff penalties await violators—25 years in prison for securities fraud; 20 years for an executive making false sworn statements.
Internal Control Strengths
The accountant has recently started using pre-numbered invoices and wants to buy an indelible ink machine to print their checks. This is a strength and also recommend the ink machine which safeguards the company from fraud and theft, of hand writing checks.
On payday, the checks are picked up by the accountant and left in his office for pick-up. This is strength but recommend a lockbox while on break or any length of time the accountant is not in the office. Before he leaves for the weekend, he will move the checks into a safe in his office, another strength.
Internal Control Weakness
You have one accountant who serves as treasurer and controller, which streamlines many of their processes. In this dual role, he purchases all of the supplies and pays for these purchases. This is bad, for good internal control, the purchasing agent should neither receive the goods nor approve the payment. If these duties aren’t separated, a purchasing agent can buy goods and have them shipped to his or her home. Or a purchasing agent can spend too much on purchases, approve the payment, and split the excess with the supplier. To avoid these problems, or segregation of duties violation, companies split the following duties among different employees:
▸ Purchasing goods
▸ Receiving goods
▸ Approving and paying for goods
He also receives the checks and completes the monthly bank reconciliation. The accountant can prepare the bank reconciliation, but they should be reviewed regularly by someone else whether or not there are discrepancies .Perform regular and independent reviews. For companies...