Internal Controls

In: Business and Management

Submitted By magnetik
Words 1291
Pages 6

Fraud is a deceptive act committed by an employee for his/her personal gain and causes loss to a company. There are three factors that promote fraudulent activity.
They are:
Opportunity - The ability to commit fraudulent acts freely and without regard to punishment.
Financial Pressure - Financial burdens may compel an employee to commit fraudulent acts.
Rationalization – The rationalization of fraudulent acts for personal justification.

In order to protect a company’s assets against fraud and mitigate risk, Internal Controls must be established and adhered to. Internal controls are the policies, procedures and processes implemented by a company to create dependability and consistency in its accounting records, standardize operational efficiency, and comply with governmental standards.
The following paper introduces governmental regulations, how to begin complying with them and further steps to take to increase internal controls. (Kimmel, Weygandt, & Kieso, 2009, p. 326)

Evaluation and Recommendation

Objective: To evaluate current internal controls adhered to by LJB Company and recommend new internal controls to satisfy mandated governmental requirements recognized by all publicly traded companies in the United States.

Sarbanes Oxley Act of 2002
LJB Company is preparing to become a publicly traded company in the near future. In order to do so, there are governmental conditions that must be accomplished. Of all, the requirements of most importance are those stated in the Sarbanes Oxley Act of 2002 (SOX). Confirmed in SOX, all corporations publicly traded in the United States must maintain sufficient internal control systems that protect a company’s assets from fraud and enhance truthfulness and dependable accounting processes and are certified by external assessors. (Kimmel, Weygandt, & Kieso, 2009, p. 327)
There are 5…...

Similar Documents

Internal Control

...internal control a. What is internal control? Internal control is a process, effected by an entity’s board of directors, management and other personnel, designated to provide reasonable assurance regarding the achievement of objectives in the following three categories: * Reliability of financial reporting * Effectiveness and efficiencies of operations * Compliance with applicable laws and regulations Internal control is design to achieve management objectives in three categories. In financial reporting category, the management objectives are related to producing reliable financial reports and safeguarding assets. In the operations category, same examples of management objectives are maintaining a good business reputation, ensuring a positive return an investment, increasing market share, promoting new products innovation, and using assets effectively and efficiently. In the compliance category, the board of management objective is compliance with the regulation and law that affect the entity. The definition of internal control identifies several important concepts. Internal control provides reasonable assurance, not absolute assurance, that management objectives will be achieved. Because people operate the controls, breakdowns can occur. Internal control can help prevent and detect many errors, but it cannot guarantee that will never happen. Several limitation of internal control system prevents management from obtaining complete assurance that controls...

Words: 859 - Pages: 4

Internal Control

...Internal Control and Risk Evaluation Lola Knaff ACC 542 April 22, 2013 Anita Rodriguez Internal Control and Risk Evaluation The internal control and risk evaluation aspect of accounting is crucial to protect the business’ assets and resources. In addition, for publically traded companies it is mandatory for there to be internal control procedures. “Internal control describes the policies, plans, and procedures implemented by a firm to protect its assets” (Bagranoff, 2008, p. 240). The necessary procedures are in place to ensure the validity and efficiency of the data that the users input into the Accounting Information Software (AIS). The flowcharts reveal the pattern for the accounts receivable, accounts payable, inventory process, and payroll processes. Each process will generate many levels of risk factors that can be reduced by several internal control procedures. According to Hunton, Bryant, and Bagranoff (2004), the assessment of IT risks are by the managers and auditors to determine how to apply resources (p. 51). The cost-benefit analysis is crucial to ensure that the cost of the internal control to reduce the risk does not increase the monetary value of the control. The purpose of the internal control application is to create a smooth operating procedure that does not deter effectiveness and efficiency of the data. Along with the AIS internal controls, there are other controls that will assist in creating a trustworthy working...

Words: 1131 - Pages: 5

Internal Control

...internal control Internal Control BUAC 782 Brendan Conway Shalini Sharma Yi Li Jiayu Shan Xiaoran Wang Introduction As a result of the recent scandals of companies such as Enron and WorldCom, the Sarbanes-Oxley Act (SOX) was enacted to preemptively curb fraudulent financial reporting. Since its enactment, SOX has strengthened requirements of both internal controls and procedures for financial reporting. Internal control is a process where a common goal is achieved by management and personnel to ensure safe guarding assets, as well as the attainment of realistic objectives such as operation, reporting and compliance. (COSO, May, 2013) Strong internal controls assist CEOs and CFOs in meeting their new SOX requirement of personally validating their company’s financial statements for reliability and transparency (Sweeny, 2012) The following presents an overview of internal controls, a real-world example of internal controls in action, and a synopsis of monitoring, which is perhaps the most critical part of a strong internal control system. Five components of internal control The Committee of Sponsoring Organizations (COSO) provides a framework in which to analyze a firm’s internal controls. Below are the five interrelated components of this framework: 1. Control environment - The top management is responsible for setting standards, processes, structure and accountability of the organization, resulting in the establishment of the control...

Words: 2385 - Pages: 10

Internal Control

...Annals of the University of Petroşani, Economics, 11(1), 2011, 187-196 187 INTERNAL CONTROLS IN ENSURING GOOD CORPORATE GOVERNANCE IN FINANCIAL INSTITUTIONS KOSMAS NJANIKE, MARGARET MUTENGEZANWA, FUNGAI B. GOMBARUME * ABSTRACT: This paper assessed factors that influence the internal controls in ensuring good corporate governance in financial institutions in developing economies with special reference to Zimbabwe. The research paper assessed how lack of internal controls affected good corporate governance and aimed to bring out elements of good corporate governance. It emerged that failure to effectively implement internal controls contributed significantly to poor corporate governance. The study discovered that internal control system overrides and the issue of “fact cat” directors also contributed to poor corporate governance. The study recommended that there is need for the board of directors to guarantee an organizational structure that clearly defines management responsibilities, authority and reporting relationships. There is also need to ensure that delegated responsibilities are effectively carried out to ensure compliance with internal controls of the financial institution concerned. KEY WORDS: internal controls; corporate governance; ethical behaviour. JEL CLASSIFICATION: G21, G28; G30; G38. 1. INTRODUCTION The year period December 31 2003 to December 31 2004 witnessed the collapse of a number of financial institutions in Zimbabwe. This period witnessed...

Words: 4547 - Pages: 19

Internal Control

...Introduction: In recent decades, there has been a rising focus on management corporate behaviour, ethical responsibilities, and internal controls due to the increasing number of corporate fiascos. The Arthur Andersen scandal was one of many conducted worldwide and an example of how things can go wrong in the public sector. This report will briefly describe the Arthur Andersen scandal, analyze the major failure elements that led to the scandal, and finally provide recommendations that could have been implemented to prevent these issues. Overview, Issues, and Recommendations: The Arthur Anderson Scandal was mainly related to Enron’s scandal and fallout. The accounting firm was responsible for completing the audited financial statements of the company and was convicted of obstructing justice, after it shredded documents relating to Enron’s Audit and scandal. Many fiascos led to Andersen’s fallout. This included unethical practices, poor internal controls, and dysfunctional behaviour of corporate managers. - Unethical practices: o Shredding Enron’s audit documents and files on hand. o The use of Special purposes entity (SPE) in Enron’s accounting for projects. (False profits, and hide losses and unfavourable information from Enron’s financials) - Poor internal controls: o No Segregation of duties and conflict of Interest  The Manager responsible for making decisions regarding client’s financials is the same manager directly involved in the profitability of the...

Words: 529 - Pages: 3

Internal Control

...Internal Controls LJB Company Name Submitted to ACCT504 Accounting & Finance: Managerial Use & Analysis School: Submitted: Executive Summary This report provides an analysis and evaluation of the internal controls at the LJB Company and what is required before going public. We will touch base on IT Governance, Sarbanes-Oxley and COBIT, highlight items that LJB is doing right as well as those items LJB is doing wrong and a few improvements along the way. Company Overview LJB Company is a distributor of equipment for the surrounding areas. LJB is said to be a relatively lean organization which means that the company looks for ways to eliminate any unnecessary resources to operate at expected levels. LJB is looking to go public in the future. Internal Controls / IT Governance / Sarbanes-Oxley What are internal controls? The internal controls for any business consist of policies and procedures designed to provide management with reasonable assurance that the company achieves its objectives and goals. For any organization, public, private or governmental, there are benefits to using internal controls. * To ensure the confidence of the organizations’ constituencies (boards, employees, patients, donors, and students). * To assure there are checks and balances wherever there’s opportunity for mistakes or miscommunications. * To mitigate information technology risk protecting confidential records. * To help monitor assets of...

Words: 2475 - Pages: 10

Internal Control

...SEPTEMBER 30, 2014 ACC504 INTERNAL CONTROL DR. MICHAEL ABNER PREPARED BY NELLY OYANE Table of Contents Introduction I. Internal Control Requirements II. What the Company is Doing Correct III. What the Company is Doing Incorrect Conclusion References Introduction LBJ Company is presently conducting a decision to go public or not and with that they will also be familiar with their internal controls inside their systems, particularly with regard to Accounting and Human Resources and the way it will affect them and their workers and of course the way they operate. There have been some encouraging and bad issues arise regarding their internal controls. Nevertheless, LBJ Company needs to be recognized for what they are doing right, but must also need to address matters that are harmfully affecting them and their business and will remain to damagingly impact them if they choose to go public, which will negatively drive down the cost of their shares etc. This case study will examine these matters and make recommendations for what LBJ Company can do to strengthen their internal controls. I. Internal Controls Requirements Inform the President of any new internal control requirements if the company decides to go public. Internal controls are mechanisms, policies and procedures used to decrease and control operational risk. In order to prevent employees from...

Words: 1458 - Pages: 6

Internal Control

...What is internal control? Why is internal control important in organizations? Internal controls are processes established by a business or organizations board of directors, management and other personnel to provide reasonable assurance for that businesses objectives in effectiveness and efficiency, reliability of financial reports and compliance with laws and regulations. Internal controls are used to safeguard businesses assets. They help a to establish guidelines within a business and makes sure that everyone within that business follows those guidelines and procedures. Internal controls are important because without them a business would be more susceptible to fraud. Internal controls are used to prevent people from stealing from a business and to make sure all the rules are followed. Feedback: Internal control is a system of policies and procedures designed to help an organization run more efficiently and effectively. Without strong internal control, an organization is much more susceptible to various forms of risk which can compromise its operations and its financial reporting. What are the four basic purposes of internal control? Give an example of each one. The first purpose of internal controls is to safeguard assets. Internal controls should protect your assets such as cash. One internal control that helps with protection of assets is the segregation of duties, another is sequential numbering of checks or locking checks in a safe place. The second purpose is to...

Words: 4780 - Pages: 20

Internal Control

...Guide to Internal Control Over Financial Reporting The Center for Audit Quality prepared this Guide to provide an overview for the general public of internal control over financial reporting (“ICFR”). The Guide explains what public company ICFR is and describes management’s responsibility for implementing effective ICFR. The Guide also discusses the responsibilities of the audit committee to oversee ICFR and of the independent auditor to audit the effectiveness of the company’s ICFR. A Guide to Internal Control Over Financial Reporting P reparing reliable financial information is a key responsibility of the management of every public company. The ability to effectively manage the company’s business requires access to timely and accurate information. Moreover, investors must be able to place confidence in a company’s financial reports if the company wants to raise capital in the public securities markets. Management’s ability to fulfill its financial reporting responsibilities depends in part on the design and effectiveness of the processes and safeguards it has put in place over accounting and financial reporting. Without such controls, it would be extremely difficult for most business organizations — especially those with numerous locations, operations, and processes — to prepare timely and reliable financial reports for management, investors, lenders, and other users. While no practical control system can absolutely assure that financial...

Words: 4333 - Pages: 18

Internal Control

... the available chance to make use of. Risk assessment: 1、Current situation First of all, Rosemary had to decide if she should fire Kate or not. Let us make an assessment. The risk of forgiving her: She may steal money again and break rules, even destroy the club. The risk of firing her: lose a valuable instructor and Kate’s marketing efforts, even friendship. Comparing the risk of these two actions, we think the result of forgiving her is better and we can control the risk easily. To avoid this problem, we think Rosemary should forgive Kate and hire a non-instructor to become manager who can manager finance and monitor instructors specially and build a membership system. 2、New Risk ①Risk If we hire a manager, the new problem and risk will arise. How can we avoid or solve them? We made another assessment. Because it is a small entity, so I think the risk mainly exists in the external, like operation, together with making tricks. External Operational risks: 1. Steal money 2. Instructors train client secretly and get reward directly 3. The new manager won’t swipe the card and then let clients in, and get money from client directly. 4. The manager puts the money in her/his own pocket and cooks the books. 5. The manager and instructor collude with client, give client a discount and share the money. Internal risk: 6. The instructors want to leave. ②Risk level According to the level of damage, we divided these risks into 3 kinds: serious problems, important...

Words: 1850 - Pages: 8

Internal Control

...Natasha Todd January 8, 2011 Internal Controls Internal Controls are certain procedures that are put into place to help control the money in a business and keep track of all of the accounting, assigning different people within the workplace to keep track of things so everything turns out right in the end. The two primary goals to primary controls are to protect a company's assests and to keep all records within the business accurate and reliable. By following particular procedures wih the Sabarnes-Oxley Act this helps create a formalized standard list for all companies to follow to make sure that internal controls are being watched over closely. By contiunually making sure the controls are working and sending in outside auditors this helps with internal controls and with safeguarding a companies assets which all came from the Sabarnes-Oxley Act of 2002. Many corporations follow the Sabarnes-Oxley Act and some will not even do business with someone who does not followit because of how much they believe in it. If a company were to announce any deficiencies in internal controls they could definately see a fall in the price of stock because it could be a huge sign that something fishy is going on within the company and the accounting field. If something shows up that raises any eyebrows than people will back off of investing within the company just in case someone within the company has done something scandalous and to protect themselves. By remaining...

Words: 753 - Pages: 4

Internal Control

...Memo To: John Clarks; President of LJB Company From: Certified Public Accountant Date: 1/22/2012 Re: LJB Internal Control Analysis Dear John, In regards of your company going public, you must be informed that under the Sarbanes Oxley Act all publicly traded U.S. corporations are required to maintain an adequate system of internal control. These internal controls are reliable and effective and if your company fails to comply, it will be a subject to fines, and company officers can be imprisoned. There are five primary components of internal control which must be applied when going public: • A control environment. This will be the responsibility of top management including your effort to make it clear that the organization values integrity and that unethical activity will not be tolerated. • Risk assessment. Your company must identify and analyze the various factors that create risk for the business and must determine how to manage these risks. • Control activities. This activity helps in reducing the occurrence of fraud and your management team must design policies and procedures to address the specific risks faced by the company. • Information and communication. The internal control system must capture and communicate all pertinent information both down and up the organization, as well as communicate information to appropriate external parties. • Monitoring. Internal control systems must be monitored periodically for their adequacy. Significant deficiencies...

Words: 1212 - Pages: 5

Internal Control

... impact on internal controls. Economic, industry and regulatory environments change and entities' activities evolve. Mechanisms are needed to identify and react to changing conditions. Control Activities Control activities are the policies and procedures that help ensure management directives are carried out. They help ensure that necessary actions are taken to address risks to achievement of the entity's objectives. Control activities occur throughout the organization, at all levels, and in all functions. They include a range of activities as diverse as approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets and segregation of duties. Control activities usually involve two elements: a policy establishing what should be done and procedures to effect the policy. All policies must be implemented thoughtfully, conscientiously and consistently. Information and Communication Pertinent information must be identified, captured and communicated in a form and time frame that enables people to carry out their responsibilities. Effective communication must occur in a broad sense, flowing down, across and up the organization. All personnel must receive a clear message from top management that control responsibilities must be taken seriously. They must understand their own role in the internal control system, as well as how individual activities relate to the work of others. They must have a means of communicating significant...

Words: 572 - Pages: 3

Internal Control

...STATE OF MINNESOTA OFFICE OF THE STATE AUDITOR SUITE 500 525 PARK STREET SAINT PAUL, MN 55103-2139 REBECCA OTTO STATE AUDITOR (651) 296-2551 (Voice) (651) 296-4755 (Fax) (E-mail) 1-800-627-3529 (Relay Service) Statement of Position The Importance of Internal Controls Internal controls are designed to protect a local government unit from loss or misuse of its assets. Internal controls also ensure that all transactions are properly authorized and the information contained in financial reports is reliable. This Statement of Position will provide public officials and employees with practical answers to some of the questions most frequently asked about internal controls. What is the purpose of internal controls? Internal controls help safeguard funds, provide efficient and effective management of assets, and permit accurate financial accounting. Internal controls cannot eliminate all errors and irregularities, but they can alert management to potential problems. How much will this cost? The cost of internal controls should never exceed their expected benefit. When adopting polices and procedures on internal controls, maintain a balance between what is needed to ensure public confidence and to maintain the integrity of the financial systems with the cost of providing the control in terms of money, time, and efficiency. Many simple and cost-effective internal control procedures are available. Does someone need to review...

Words: 1225 - Pages: 5

Internal Control

...LJB Company Mr. President 1. According to the Public Company Accounting Oversight Board (PCAOB), Sarbanes-Oxley’s new requirement for internal controls if your company decides to go public is on the annual report; your company must report internal controls over your financial reporting. This report should include: • Statement of responsibility by management of the company (such as the President and CFO) for establishing structure and procedures for financial reporting. • Statement identifying the framework used by management to evaluate the effectiveness of the company’s internal control over financial reporting. • Management of assessment of the effectiveness of internal controls over financial reporting. • Attestation by the company’s external auditor on management’s assessment of the company’s effectiveness of the company’s internal controls and procedures for financial reporting. 2. It is very good that your accountant has started to use pre-numbered invoices. This way, you can always know if any checks are missing. This follows the documentation procedure of the internal control process. I would recommend the buying of the indelible ink machine. According to the principles of internal control applied to cash disbursements; physical, mechanical, and electronical controls are important to safeguarding your assets and enhancing the accuracy and reliability of the accounting records. Physical, mechanical, and electronical controls for cash disbursements...

Words: 721 - Pages: 3