Free Essay

Acct 504 Case Study 2

In: Business and Management

Submitted By k6wilson1
Words 1591
Pages 7
ACCT 504 Case Study 2
Keller Graduate School
DeVry University

ABSTRACT
There are several internal control requirements that need to be put into place if the company decides to go public. Those principals are establishment of responsibility, segregation of duties, physical controls, independent internal verification, documentation procedures and human resource controls. Establishment of responsibility is making sure that only designated personnel has the authority to handle certain financial responsibilities. Segregation of duties is ensuring that different individuals have different responsibilities. A physical control is having the proper items that need to be secure in a place that has limited access. Independent internal verification is having individuals confirm the information that is received by various departments to make sure there is accuracy in the documents and reports that are being reported. Documentation procedures is using proper documentation to keep records accurate and having supporting evidence for the transactions that had taken place to make sure that fraud has not occurred. Human resource is handling personnel issues such vacations, conducting background checks and issuing bond personnel for the individuals who handle cash. All of these internal control principals are important to protect the company’s assets, increase the effectiveness of the operations and ensure compliance with laws and regulations. These controls also heighten the accuracy and reliability of accounting records.

The company is doing some things well. On payday, the accountant picks up checks and leaves them in his office for pick-up. He also locks up the checks into a safe in his office when he leaves for the weekend. This practice is a great example of physical controls of the paychecks to ensure that the checks are not mishandled. With the accountant using pre-numbered invoices, the documentation procedure principle is important to account for them in sequence. I would recommend that the President should approve the purchase of the indelible ink machine to print their checks, which would apply to the documentation procedure principle. Since the ink cannot be erased or washed away, this would prevent fraud in changing the payee, the amount or check number. This will protect the company from theft by the employee handling payments.
There are several internal controls that require some improvements. We must take a look at the procedures that are currently in place for petty cash. Currently, there is no way to maintain an accurate accounting on the funds and documentation needed to prove the transaction. The petty cash procedures violate the following internal control principles: segregation of duties, documentation procedures, physical controls, independent internal verification and human resource controls. The accountant has an establishment of responsibility by being the custodian of the petty cash. The accountant needs to locked the petty cash box or drawer and not allow individuals access to come or go as they please. To guarantee that documentation procedures are followed, pre-numbered cash receipts should be signed by the accountant and the individual that is receiving the payment. The accountant should make payments from the fund but a different individual should review the petty cash receipts and other documentation before replacing the funds. This will show a segregation of duties to ensure that there is proper documentation for the petty fund that has been paid out. The same individual that reviews the receipts also needs to perform independent internal verification. The company also may want to bond the employees that are handling the petty cash fund under the human resource controls.

The company had difficulty figuring out what employee had been watching pornography on the company’s computer because there are no individual passwords assigned. The internal control that was violated was physical control. The company needs to assign all of the employees their own IDs and passwords for the computers. This way the company can monitor the activities of the employees on the computers and if an issue arises, they can establish responsibility quickly. Although the president and accountant interviews and approve all of the new hires, one of the employees was a convicted felon. This violates the human resource control and they also need to have someone to assist in the new hire process by having an individual handle the background checks of all the potential employees.

The accountant is wearing too many hats as the treasurer and the controller. He is responsible for all of the financial transaction such as purchases all of the supplies and pays for these purchases. He also received the checks and completes the monthly bank reconciliation. The internal controls that are dishonored are establishment of responsibility, segregation of duties and independent internal verification. The accountant can maintain his role as controller but another individual needs to wear the hat of treasurer. The treasurer’s duties should include paying for purchases made, signing checks and receiving cash. The accountant should count the daily receipts, compares total receipts to bank deposits daily, compare checks to invoices and reconcile bank statement monthly to maintain the independent internal verification. There needs to be an employee that does the entire recording such as cash receipts and disbursements. If your company follows this suggestion, you will meet the internal control requirements and minimize the potential for fraud in your company.

1. Inform the President of any new internal control requirements if the company decides to go public. a. A key distinction of a company going public over a private company is that the public company must abide by the rules of the Security Exchange Commission. One of the tasks a new public company will undertake is providing the financial details of the entity, which will be readily available to the public – thus known as financial reporting. The Committee on Sponsoring Organizations framework is widely regarded as an appropriate and comprehensive basis to document the assessment of internal controls over financial reporting. It is important that LJB Company reviews and implements these standards.

2. Advise the President of what the company is doing right (they are doing some things well) and also recommend to the President whether or not they should buy the indelible ink machine. When you advise the President, please be sure to reference the applicable internal control principle that applies. a. There are some tasks that the company is doing well. These tasks consist of using pre-numbered invoices, and placing the payroll checks that were not retrieved into a safe. “Pre-numbering helps to prevent a transaction from being recorded more than once, or conversely, from not being recorded at all. Second, the control system should require that employees promptly forward source documents for accounting entries to the accounting department. This control measure helps to ensure timely recording of the transaction and contributes directly to the accuracy and reliability of the accounting records. (Kimmel, 341). The application of documentation procedures and physical control can be seen with the referenced tasks. Additionally, we would recommend that the company purchases an indelible ink machine to print checks. Investing in the indelible ink machine will further add to the control of checks – which intern will assist with the mitigation of risk and fraud.

3. Advise the President of what the company is doing wrong (they are definitely doing some things poorly). Please be sure to include the internal control principle that is being violated along with a recommendation for improvement. a. There are some areas that raise red flags, which cause concern. The internal control principles that need to be re-evaluated are segregation of duties, cash controls, access controls and human resource controls. We understand that LJB Company is a small company and that many of its employees have been there for several years. However, it is a disservice to the company to give so much authority to any one person. The duties of the Treasurer and Controller should not be combined. “The rationale for segregation of duties is this: The work of one employee should, without a duplication of effort, provide a reliable basis for evaluating the work of another employee” (Kimmel 339). Additionally, stricter control policy should be enacted for cash controls. “Cash is the one asset that is readily convertible into any other type of asset. It also is easily concealed and transported, and is highly desired. Because of these characteristics, cash is the asset most susceptible to fraudulent activities. In addition, because of the large volume of cash transactions, numerous errors may occur in executing and recording them. To safeguard cash and to ensure the accuracy of the accounting records for cash, effective internal control over cash is critical” (Kimmel 346). Petty cash should not be a free-for-all. b. Access controls seem to be lacking at LJB Company. Access controls limit access to programs, files, and hardware to those who require it in the performance of their duties. LJB Company should not have to force someone to admit to an issue. User access log would generate a report that cannot be called to question. c. Controls are also needed for the Human Resources department. Necessary checks would include a criminal history and background check. It can be a huge liability for LJB Company to hire a person that is in conflict with the company’s values. d. Internal control is a process designed to provide reasonable assurance about the achievement of the entity’s objective. When a company goes public, it essentially allows the gates open to the public for scrutiny. None-the-less this is not a bad thing, but LJB Company must ensure that its policies on internal control are not compromised.

References
Kimmel. Financial Accounting, 6th Edition. John Wiley & Sons.

Similar Documents

Free Essay

Acct 504 Case Study 2

...LJB Company: Internal Control Evaluation Acct: 504 Case Study 2 Prepared by: Lennard Razor Prepared for: LJB Company 11/29/2014 LJB, 1 Table Of Contents Introduction: LJB Company Assessment 2 LJB Company: The Transition 3 Summary 5 Works Cited 6 LJB, 2 Introduction: LJB Company Assessment The overall purpose of this document is to assess the current state of the LJB Company. This assessment will thoroughly diagnose all of the components, both good and bad, used by LJB Company to help determine the company’s readiness to go public. Upon assessing all of the components and regulations currently utilized by LJB Company, I will also make recommendations for the improvement and future success of this company moving into the public market. In order to properly perform an assessment of the LBJ Company, there first had to be some set of standards or regulations that outline the internal controls and proper procedures for companies and businesses to adhere to for financial reporting. As it turns out internal control is a key component of Foreign Corrupt Practices Act(FCPA) of 1977 and the Sarbanes-Oxley Act(SOX) of 2002 which required companies to follow this set of internal controls. This list of internal controls is as follows: 1). Conduct its business in an orderly and efficient manner, 2). Safeguard its assets and resources,......

Words: 939 - Pages: 4

Premium Essay

Case Study 2 Acct 504

...Case Study 2- Internal Control Improving LJB Company Internal Control ACCT 504 Felix M. Fair October 6, 2012 Table Of Contents: 1. Introduction pg. 3 2. Proper Development of Internal Control pg. 3 3. Effective LJB Practices pg. 3-4 4. Areas for Improvement pg. 4 5. Conclusion pg. 5 6. References pg. 6 Improving LJB Company Internal Control Introduction This paper is an academic work that will define, identify, and explain the use of Internal Control within a company, as well as applying the principles of internal control activities. These principles will be reflected in the use of new requirements, comprehensive feedback of where LJB is currently and where they can be with improvement of Internal Control and the application of its principles. Proper Development of Internal Control What is Internal Control? Internal control makes up all methods that are adopted within an organization to safeguard assets, enhance the reliability of accounting records, increase operational efficiency, and ensure compliance with laws and regulations. [Kimmel (). Financial Accounting [6] (VitalSource Bookshelf), Retrieved from......

Words: 998 - Pages: 4

Premium Essay

Acct 504 Case Study 2

...Requirements for Publicly Traded Companies In a meeting last week, the president of LJB expressed interest of going public in the near future and asked us about the internal control requirements for such action. To become publicly listed, LJB must follow the Sarbanes-Oxley Act of 2002 (SOX), which requires all US publicly traded companies to maintain an adequate system of internal control. Under SOX Section 404, a company must report on internal controls over financial reporting in its annual report. Four key elements must be included in this report (Smith, Ledyard;): 1. Statement of responsibility by the company management (CEO and CFO) for establishing and maintaining an adequate internal control structure and procedure for financial reporting. 2. Statement identifying the framework used by management to evaluate the effectiveness of the company’s internal control over financial reporting. 3. Management’s assessment of the effectiveness of internal controls over financial reporting. 4. Attestation by the company’s external auditor on management’s assessment of the effectiveness of the company’s internal controls and procedures for financial reporting. As the president of LJB, he and other executives and board of directors must ensure that the internal controls are reliable and effective. In addition, he must hire independent outside auditors to attest to the adequacy of the internal control system. LJB’s Proper Internal Controls To become publicly listed, LJB must......

Words: 1398 - Pages: 6

Premium Essay

Acct 504 Case Study 2

...Internal Control Recommendations for the President of LJB Company Should your company decide to go public, it is important to know that all publicly traded U.S. corporations are required to maintain an adequate system of internal controls and procedures for financial reporting in accordance with the Sarbanes-Oxley Act Section 404. It is the responsibility of your executives to ensure there are reliable and effective controls in place, and auditors from outside the company must attest to the adequacy of the internal control systems as well. This information must be recorded in an internal control report each fiscal year as a part of the annual Exchange Act report. The purpose of this act is to reduce the possibilities of corporate fraud by mandating specific procedures for financial reporting. It is recommended that your company adopt the framework defined by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in order to comply with the SOX Act. The first of five components of this framework is to create the control environment. This refers to the significance that management places on a company’s risk management and accountability processes and how they foster an environment of compliance with the company’s internal control systems. Next, you should conduct a risk assessment which is the process of identifying potential threats to legal, financial or overall operational security. Control activities are another component, which includes the......

Words: 838 - Pages: 4

Free Essay

Acct 504 Case Study 2

...Running Head: INTERNAL CONTROL Internal Control Ashley Pognant Keller Graduate School of Management Professor Hope August 10, 2014 Table of Contents Abstract 3 Internal Control 4 Internal Control Requirements 4 What the Company is Doing Right 5 What the Company Needs to Improve 6 Conclusion 7 References 9 Abstract The purpose of this case study is to analyze a company’s system of internal control. We will discuss if there are any new requirements in regards to internal control should the company decide to go public. The President of the company will be advised on what they are doing right and what controls need improvement. We will also discuss the reasons why and what internal control principle applies to the situation. Internal Control The President of LJB company has asked my accounting firm to evaluate their system of internal controls because they intend on going public here in the near future. The company has a lot of faith in their long term employees. Their accountant is responsible for purchasing supplies, paying for these purchases, receiving checks, completing monthly bank reconciliations and is in charge of not only interviewing but hiring new employees. The company leaves their petty cash in a desk drawer for all their employees to have access to. All the company requests in that the employee leaves a note should they use any of the cash. The accountant has recently started......

Words: 1372 - Pages: 6

Premium Essay

Acct 504 Case Study 2

...Prepared For ACCT405: Financial Accounting Instructor Tim Vantuyl 6/8/2014 Case Study 2: LBJ Company Internal Control Assessment By Brian Tucker Student ID D40318643 Table of Contents Preface …..3-5 Body of Report Page …..6 Objectives of Internal Control …..6 Components of Internal Control …..6 Strengths …..7-8 Weaknesses Summary and Conclusion Preface With its introduction in 2002 the Sarbanes Oxley Act was meant to slow and detour the accounting infractions and criminal acts of recent companies like Enron, Arthur Anderson, World Com. SOX has changed the landscape of regulations as it relates to the role of corporate governance in overseeing and verifying the internal function and financial practice of reporting for publicly traded companies. The U.S. Securities and Exchange Commission to mean “controls that pertain to the preparation of financial statements for external purposes that are fairly presented in conformity with generally accepted accounting principles as addressed by the Codification of Statements on Auditing Standards §319 or any superseding definition or other literature that is issued or adopted by the Public Company Accounting Oversight Board” (http://www.sec.gov/rules/final/33-8238.htm). In reviewing the major changes by select sections, leadership and management of the firms should note the following as significant: Section 302 requires officer of the company to review and certify financial reports that the firm generates.......

Words: 1985 - Pages: 8

Premium Essay

Acct 504 Case Study 2

...Devry University LJB Company Internal Controls Eddie Daniel Velez ACCT 504 Professor Ramiro Serrano August 10, 2014 Table of Contents Introduction………………………………………………………………………………………..3 Public Trading……………………………………………………………………………………..4 Internal Controls…………………………………………………………………………………..5 Current Concerns………………………………………………………………………………….6 Summary…………………………………………………………………………………………..8 Works Cited……………………………………………………………………………………….9 Introduction: This report is used for the purpose of evaluating internal controls with the company stated: LJB Company Inc. LJB plans on going public in the near future and has enlisted the help of Serrano Accounting Services (SAS) to prepare a formal document discussing changes that need to be made in the company before going public is plausible. This report will discuss some of the current procedures at LJB with the proper recommendations to help streamline the process of becoming a public company along with any concerns the President might have and wishes to have addressed. Public Trading: LJB wishes to move forward and become a publicly traded company. First of all I want to thank for choosing SAS with all of your accounting needs. We are honored to help with this report and hopefully future endeavors. First we will review any regulations regarding private companies converting to public entities. One of the many added benefits of going public is it shows consumers, and investors a strong corporate governance. Under......

Words: 1155 - Pages: 5

Free Essay

Acct 504 Case Study 2

...LBJ Company: Internal Control Evaluation Accounting 504: Managerial Use & Analysis Case Study 2 Written by: 8/10/13 This evaluation is being presented as an assessment of the preparedness of the LJB Company to go public at a future date. By researching current regulations regarding publicly traded firms we hope to prepare for a smooth transition into the trading market. The Sarbanes-Oxley Act of 2002 (SOX) has established the following guidelines for publicly traded corporations and require adherence for internal controls and procedures for financial reporting. Senior management and executives will be responsible for ensuring that controls are effective and reliable. Outside auditors must periodically verify the accuracy of and adherence to the internal controls. As part of the annual Exchange Act report, an internal control report will generated along with the information recorded during each fiscal year. It is recommended that the LJB Company adopt the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and remain in compliance with the SOX Act. This framework will follow six principles of internal control. 1) Establishment of Responsibility 2) Segregation of Duties 3) Documentation of Procedures 4) Physical Controls 5) Independent Internal Verification 6) Human Resource Controls Bruce Bulmer Consultations has completed its preliminary assessment of the current......

Words: 617 - Pages: 3

Free Essay

Acct 504 Case Study 2

...Y’Lonn James Yolanda Serrano ACCT504-10563 Case Study #2 02/05/2016 Situation a. Missing Internal Controls: Monitoring control is the missing internal control weakness. This monitoring provides “eyes and ears”, so that no one person or group of persons can process a transaction completely without being seen and checked by another person or group.  This control involves understanding how companies monitors its control and how effective the monitoring is. The clerk should not be the only person who maintains the entire inventory. Segregation of duties is also missing. Segregation of duties is one of the steps that decrease the likelihood of theft. Segregation of duties prevents a breakdown in a key element of controls, such as improper segregation of duties and/or improper access to assets. Or it might result from a weak control environment. In the absence of the segregation of duties, the clerk has opportunity to steal. Problems: Can record inaccurate information since nobody is there to double check Theft Solution: Put a supervisor in place to for oversight until the cashier is adequate. Implement check and balances by preventing one person from processing transactions. Situation b. Missing Internal Controls: Adequate records, bookkeeping, and Authorization: Nicole is a part of a successful growing business, but does not book keep and provide any reports for the sales team. Problem: Not being able to accurately account for what......

Words: 406 - Pages: 2

Premium Essay

Acct 504 Case Study 2

...Prepared for: The President of LJB Company October 5, 2014 Table of contents Introduction: _______________________________________________________________3 New internal control requirements: ______________________________________________3 What the company is doing right: _______________________________________________4 What the company is doing wrong: ______________________________________________5 Conclusion: ________________________________________________________________5 References: ________________________________________________________________7 Introduction: Internal control is one of the integral parts of an organization. It is a system which controls different types of risks, bringing into focus different frauds of the company, assuring the transparency of the company which helps in a reliable financial reporting. It focuses on achieving the goal of the organization with an aim that ensures that the operations of the organization are done effectively and efficiently. The major concern of internal control is concerned with the optimal and effective utilization of assets. Assets being the most important part of the organization help in generating services and benefits. Internal control focuses on effective and efficient use of assets. According to COSO, “Internal Control is the process of designed to provide reasonable assurance regarding the achievement of business objectives” The business objectives that needs to......

Words: 1030 - Pages: 5

Free Essay

Acct 504 Case Study 2

...Case Study 2—Internal Control Due by Sunday of Week 5, 11:59 p.m., Mountain time LJB Company, a local distributor, has asked your accounting firm to evaluate their system of internal controls because they are planning to go public in the future. The president wants to be aware of any new regulations required of his company if they go public, so he met with a colleague of yours at a local restaurant. The president of the company explained the current system of internal controls to your colleague. Your colleague has since been promoted to a tax position so she has passed on the information below so you can generate recommendations for the partner at your accounting firm to share with the president of LJB Company. Since LJB Company is a relatively lean organization, they have a lot of faith in their long-term employees. They 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. 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......

Words: 912 - Pages: 4

Premium Essay

Acct 504 Case Study 2

...LJB Company’s Table of contents: Introduction………………………………………………………………………………3 New Internal Control Requirements……………………………………………………4 Positives & Negatives…………………………………………………………………….4 Recommendation on Ink Machine………………………………………………………5 Summery & Conclusion.………………………………………………………………….5 Work Cited………………………………………………………………………………..6 Introduction The purpose of this report is to show the importance of internal controls for LJB Company if it’s decided that the company will go public. Through out the document three major topics will be address. The first being, a reviewing of new internal control requirement before the company goes public. Secondly, an overlook of the positive & negative policies that affects internal control and its procedures, along with recommendations for the negatives. Finally, an advisement on whether or not the company should buy the indelible ink machine. New Internal Control Requirements New requirements have been placed since 2002 for all publically traded US companies and their internal controls, as stated by Walter T. Harrison, Charles T. Horngren, and C. William Thomas in their book Financial Accounting, VitalSource for DeVry University (p. 236). Congress passed the Sarbanes-Oxley Act (SOX) to address and ease the concerns of the public ever since the scandal of Enron and WorldCom. In order to comply with the SOX act the following requirements must be followed: * Public companies must have an internal control report......

Words: 687 - Pages: 3

Premium Essay

Acct. 504 Case Study 2 Internal Control

...Week 5: Case Study 2 Internal Control To: President of LJB Company, Thank you for selecting our firm to provide your company with an evaluation of your organizations internal control system. Internal control systems are vital in securing your organizations assets, it will limit the risk of fraud as well as misuse of your assets. Comprehending how to separate duties among your employees will aid in improving transparency as well as keep your company financially strong. Before the company decides to go public it is important to know that all publicly traded companies are required to maintain a system of internal controls and procedures for financial reporting in accordance with the Sarbanes-Oxley Act of 2002 (SOX) (Harrison, Jr., Horngren, & (Bill)Thomas, 2013). It is the responsibility of your managers to ensure that there are reliable and active controls in place, and auditors from outside the company must assess and state the soundness of the company’s internal controls. (Harrison, Jr., Horngren, & (Bill)Thomas, 2013) The purpose of this act is to reduce potential corporate fraud by mandating specific procedures for financial reporting. Internal Control Requirement Internal control has five components and it is recommended the LBJ Company to adopt the following components in order to meet the SOX Act. The five Internal control components are: Control environment – Is the foundation for all other components of internal control, providing discipline......

Words: 915 - Pages: 4

Free Essay

Acct 504 Week 5 Case Study 2 Internal Control Ljb Company

...ACCT 504 Week 5 Case Study 2 Internal Control LJB Company Click Link Below To Buy: http://hwcampus.com/shop/acct-504/acct-504-week-5-case-study-2-internal-control-ljb-company/ Or Visit www.hwcampus.com Case Study 2 – Internal Control- Due by Sunday of week 5 LJB Company, a local distributor, has asked your accounting firm to evaluate their system of internal controls because they are planning to go public in the future. The President wants to be aware of any new regulations required of his company if they go public so he met with a colleague of yours at a local restaurant. The President of the company explained the current system of internal controls to your colleague. Your colleague has since been promoted to a tax position so she has passed on the information below so you can generate recommendations for the partner at your accounting firm to share with the President of LJB Company. Since LJB Company is a relatively lean organization, they have a lot of faith in their long-term employees. They 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. He also receives the checks and completes the monthly bank reconciliation. 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......

Words: 941 - Pages: 4

Free Essay

Acct 504 Week 5 Case Study 2 Internal Control Ljb Company

...ACCT 504 Week 5 Case Study 2 Internal Control LJB Company Click Link Below To Buy: http://hwcampus.com/shop/acct-504/acct-504-week-5-case-study-2-internal-control-ljb-company/ Or Visit www.hwcampus.com Case Study 2 – Internal Control- Due by Sunday of week 5 LJB Company, a local distributor, has asked your accounting firm to evaluate their system of internal controls because they are planning to go public in the future. The President wants to be aware of any new regulations required of his company if they go public so he met with a colleague of yours at a local restaurant. The President of the company explained the current system of internal controls to your colleague. Your colleague has since been promoted to a tax position so she has passed on the information below so you can generate recommendations for the partner at your accounting firm to share with the President of LJB Company. Since LJB Company is a relatively lean organization, they have a lot of faith in their long-term employees. They 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. He also receives the checks and completes the monthly bank reconciliation. 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......

Words: 941 - Pages: 4