Case Study 2—Internal Control
ACCT 504 WK 5
Professor: Melinda Howerton
Date: April 5, 2014

Table of Contents

Introduction 3
New Internal Control Requirements 4
Internal Control Strengths 4
Internal Control Weakness 5-6
Recommendations and Conclusion 6-7
Works Cited 8

Introduction
This report is being presented as an assessment of the preparedness of the LJB Company to go public, and must first understand what and why successful internal controls are necessary. Internal control is a plan of organization and a system of procedures implemented by company management and the board of directors designed to accomplish the following five objectives: Safeguard assets- A company must safeguard its assets against waste, inefficiency, and fraud. 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. 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. 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 records for the cost of its products. Comply with legal requirements-Companies, like people, are subject to laws, such as those of regulatory agencies like the SEC, the IRS, and state, local, and international governing bodies. 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 that are too small to hire separate persons to do all of these functions, the key to good internal control is getting the owner involved, usually by approving all large transactions, making bank deposits, or reconciling the monthly bank account. The Accountant also interviews and approves of all the new hires, this is another flaw. All personnel decisions, including hiring, firing, and pay adjustments, should be handled by a separate human resources (HR) department that specializes in personnel-related matters.
Putting too much on the accountant could set the company up for making mistakes and missing errors.
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 is also a weakness there should be a custodian who oversees the cash and balances to maintain honesty, and accurate accounting.
Smart hiring practices, criminal background checks, and creating individual passwords for employees will clear up the final weakness of covering your bases on crime or unauthorized content being viewed on company computers.
Recommendations and Conclusion
To sum up an reiterate the above weaknesses and strengths, the recommendations are as followed: * Maintain SOX provisions to stay regulated * Continue using pre-numbered invoices, and Purchase the ink machine which safeguards the company from fraud and theft * Keep paychecks in Lockbox during paydays, and in safe thereafter * Split the following duties among different employees: Purchasing goods, Receiving goods, Approving and paying for goods, and All personnel decisions * President should approve all large transactions, make bank deposits, and/or reconcile the monthly bank account for review purposes * There should be a custodian for Petty Cash who oversees the cash and balances to maintain honesty, and accurate accounting. * Smart hiring practices, criminal background checks, and Create individual passwords

In conclusion, this report thoroughly explained what and why successful internal controls are necessary. Informed of the new internal control regulations and provisions to maintain public laws. Showed what strengths and weaknesses hindered or helped the preparedness of the LJB Company to go public. And if the company follows the recommendations listed above, they will safeguard the company and succeed in have great internal control.

Works Cited
Thomas, W. T. H. C. T. H. C. W. (. (2013). Financial Accounting, VitalSource for DeVry University [VitalSouce bookshelf version]. Retrieved on April 5, 2014 from http://devry.vitalsource.com/books/9781269196536/id/ch04lev1sec2
Thomas, W. T. H. C. T. H. C. W. (. (2013). Financial Accounting, VitalSource for DeVry University [VitalSouce bookshelf version]. Retrieved on April 5, 2014 from http://devry.vitalsource.com/books/9781269196536/id/pg239