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Acct 504 Case Study 2

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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 using pre-numbered invoices. He is also requesting an indelible ink machine to start printing their checks on, but the President of LJB company is unsure if this purchase is necessary. On payday, the accountant picks up the checks and takes them to his office for employees to pick up. Before the accountant leaves for the weekend, the checks are secured in a safe in his office. The President is also a bit embarrassed. He just had to terminate one of his employees for viewing pornography on one of the company’s computers. The company had difficulty getting the employee to admit it was him because they do not assign individual passwords to their employees. It was also later discovered that the employee was a convicted felon and had served time for molesting children.
Internal Control Requirements Internal controls are methods put in place by a company to ensure the integrity of financial and accounting information, meet operational and profitability targets and transmit management policies throughout the organization (“Internal Controls,” n.d.). The Sarbanes-Oxley Act of 2002 has put together regulations public companies must adhere by. This act was passed by Congress to protect investors from the possible fraudulent accounting activities committed by companies. Section 302 mandates that senior management certify the accuracy of the reported financial statement. Section 404 requires that management and auditors establish internal controls and come up with an adequate system to report these controls. This section is costly due to the high amount of money it takes to establish these internal controls. It is expensive to implement and maintain them “(Sarbanes-Oxley Act of 2002,” n.d.).
What the Company is Doing Right There are a number of things the company is currently doing right in regards to their wanting to go public. The first is that the accountant has recently started using pre-numbered invoices. This is a very good example of adequate records. Accounting records provide the details of business transactions. By using pre-numbered invoices, the accountant is ensuring the completeness of processing and proper transaction cutoff. It is also a good demonstration of ways to prevent theft and inefficiency. If there is even just one invoice missing, it is a good indication that transactions might have been omitted from processing (Harrision Jr, Horngren & Thomas, 2013). Another good internal control the company is already implementing is that the accountant moves the checks to the safe before he leaves. This is a very good example of limited access. By securing the checks in the safe, the accountant is taking the extra steps to protect confidential employee information that only authorized individuals should have access to (Harrision Jr, Horngren & Thomas, 2013). In regards to the indelible ink machine the accountant is requesting in order to start printing their checks on it, I would advise the President to make the purchase. This would only add on to the good internal controls they have in place in regards to adequate records. By purchasing the indelible ink machine, you are ensuring that there are hard copy documents to support these transactions. It can also prevent theft and inefficiency because the company will be making and issuing the checks themselves so if a fraudulent check were to come through, the company and accountant would know instantly (Harrision Jr, Horngren & Thomas, 2013).
What the Company Needs to Improve Unfortunately, there are a number of things the company is doing incorrectly and require immediate improvement should they decide to officially go public. The first is that they need to separate duties. The accountant should not be responsible for purchasing supplies and paying for these purchases. This is a poor example of not only limited access, comparison and compliance monitoring and separation of duties, but proper approvals as well. The account should only make purchases after management approval. This will decrease the possibility of internal theft (Harrision Jr, Horngren & Thomas, 2013). Another thing that needs to be changed is the hiring process. The accountant should not be in charge of interviewing and hiring new employees. This is a poor proper approval process. In order to improve this process, LJB company needs to create a human resources department that will not only handle personnel decisions such as hiring, but also decisions regarding termination and pay adjustments (Harrision Jr, Horngren & Thomas, 2013). A third practice the company has poorly in place is in regards to their petty cash. This is a poor example of limited access. To better improve their petty cash handling and practice, access should be limited to those persons or departments that have custodial responsibilities. In other words, petty cash should be limited to persons in the treasurer department. This will decrease the possibility of internal theft and increase efficiency (Harrision Jr, Horngren & Thomas, 2013). Another poor practice in place has caused the President of LJB company some embarrassment. It was also difficult to get the individual to confess to viewing the pornography on the company computer due to there not being user identification and passwords in place. This demonstrates a poor limited access practice. To better their practice of limited access and prevent further embarrassment, especially if they decide to go public, the company should require all employees to have a unique username and password. This will allow the company to monitor their computers more closely and prevent something like this from happening again (Harrision Jr, Horngren & Thomas, 2013). Also with the embarrassment came the fact that a background check was not conducted before the employee in question was officially hired. This is a poor example of smart hiring practices. To better this practice, the company should require that background checks be conducted on all perspective job applicants. Not only will this protect the company from things such as internal theft and fraud, but it will also prevent future embarrassment (Harrision Jr, Horngren & Thomas, 2013).
Conclusion
This concludes my study of LJB company’s system of internal controls. I do recommend the purchase of the indelible printer, as it will only be an asset to the company and their practices. The company also has some good internal controls in place currently, but should they decide to become a public company, there are a number of things that will need to be changed. These changes will not come easy and will take time, so I do not see the company going public for a minimum of a year, if not longer.

References
Harrision Jr., W.T., Horngren, C.T., & Thomas, C.W. (2013). Financial Accounting. Retrieved from VitalSource for Devry University.
Internal Control. (n.d.). In Investopedia. Retrieved August 10, 2014, from http://www.investopedia.com/terms/i/internalcontrols.asp
Sarbanes-Oxley Act of 2002 (n.d.). In Investopedia. Retrieved August 10, 2014, from http://www.investopedia.com/terms/s/sarbanesoxleyact.asp

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