INTERNAL CONTROL (Case Study 2)
As President of LJB Company is looking to go public by bringing internal controls system which is as one of the most challenging corporate governance issues because internal control involves everything that controls risks to an organization. Our accounting department has been chosen to evaluate the internal controls of LJB Company. LJB Company is planning to be a publicly traded company in the near future. Our firm needs to evaluate the internal controls
To determine where we are on the continuum of internal control compliance, where they need to be and how to close the gaps. One means of assessing readiness is to conduct a “dry run” to ...view middle of the document...
In this dual role, he purchases all of the supplies and pays for these purchases. He also receives the checks and completes the monthly bank reconciliation. The accountant also interviews and approves of all the new hires. The accountant is so busy that the company handles petty cash a bit differently. 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.
The accountant has recently started using pre-numbered invoices and wants to buy an indelible ink machine to print their checks. The president is waiting to hear from you if this is a necessary purchase before authorizing.
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 president is still quite embarrassed because he had to fire one of his employees for viewing pornography on a company computer. He later found out this individual was a convicted felon who served time for molesting children. The company had a hard time getting the employee to admit it was him because the company does not assign individual passwords.
3. Informing the president of any new internal control requirements if the company decides to go public.
Based on the current information we have gathered regarding LJB Company, if the company and president decided to go public by developing a new internal control requirements procedures such as control environment, risk assessment, control activities, information and communication monitoring need to be implemented. The objective of this is to safeguard company’s assets against fraud. Internal Control is a plan of organization, and also a system of procedures implemented by company management and the board of directors designed to accomplish by the following five objectives:
• The Five Element Objectives of Management’s Report on Internal Control
1. Safeguard assets:
A company must safeguard its assets against waste, inefficiency, and fraud. As in the case of EPIC, if management fails to safeguard assets such as cash or inventory, those assets will slip away.
2. Encourage employees to follow company policy:
Everyone in an organization—managers and employees—needs to work toward the same goals. A proper system of controls provides clear policies that result in fair treatment of both customers and employees.
3. Promote operational efficiency:
Companies cannot afford to waste resources. They work hard to make a sale, and they don’t want to waste any of the benefits. Effective controls minimize waste, which lowers costs and increases profits.
4. Ensure accurate, reliable accounting records:
Accurate records are essential. Without proper controls, records may be unreliable, making it impossible to tell which part of the business is profitable and which part needs improvement. A business could be losing money on every product it sells—unless it keeps accurate...