We would like to thank you for the opportunities you have provided us in evaluate the internal control systems of your company. As you know, internal control systems are paramount securing the assets of any company or organization. In your case Control System will play an important role in limiting the risk of fraud or asset misappropriation. Understanding how to segregate duties among your employees will help enhance transparency and keep your company fiscally healthy.
Based on my review of the LJB Company’s control system before the company go public in the future, please see my recommendations based on the information that I have analyzed regarding new internal control requirement: * Control environment: A sound control environment is created by management through communication, attitude and example. This includes a focus on integrity, a commitment to investigating discrepancies, diligence in designing systems and assigning responsibilities. * Risk Assessment: This involves identifying the areas in which the greatest threat or risk of inaccuracies or loss exist. To be most efficient, the greatest risks should receive the greatest amount of effort and level of control. For example, dollar amount or the nature of the transaction (for instance, those that involve cash) might be an indication of the related risk.
* Monitoring and Reviewing: The system of internal control should be periodically reviewed by management. By performing a periodic assessment, management assures that internal control activities have not become obsolete or lost due to turnover or other factors. They should also be enhanced to remain sufficient for the current state of risks. * Information and communication: The availability of information and a clear and evident plan for communicating responsibilities and expectations is paramount to a good internal control system. * Control activities: These are the activities that occur within an internal control system. These are fully described in the next section.
I noticed that LJB value and recognize their long term employees by rewarding them with additional responsibilities. This shows that the employees are highly valued. There are also some physical controls in place to secure company checks from being mishandled or stolen. Documentation procedures are being used as well.
I also noticed that the accountant is using pre-numbered invoices for the company’s transactions. It was also mentioned to me that the accountant wants to purchase an indelible ink machine in order to print company checks. This is not viable decision, since this violates the Segregation of duties in the internal control. The internal control states, “The responsibility for record keeping for an asset should be separate from physical custody of that asset.” Even though the accountant is a well-known and valued employee. Definitely the fraud triangle factors must be avoided, Opportunity, Financial Pressure, and Rationalization. The employee may be tempted to create and use the checks for his own personal gain and no one else would know about it. I strongly suggest that you do not authorize the purchase of the ink machine at this time.
I would also like to take this opportunity to inform you of the things that I see that are poorly managed within in the organization. The accountant is playing the role of the Treasurer and Controller, which is a violation of the Establishment of Responsibilities control, and the Independent Internal Verification. These controls say that the company should assign responsibilities to specific employees providing reasonable assurance that a facility’s objectives will be achieved.
The internal control structure should be under ongoing supervision by management to determine that it is operating as intended. The Independent Internal Verification should involve the review of the data prepared by employees. Segregation of Duties is also being violated because the accountant has the responsibility of purchasing supplies and paying for the purchases. He also receives checks and completes the monthly bank reconciliation. When the work of one employee should without a duplication of effort, provide a reliable basis for evaluating the work of another employee.
It is a good start as a document procedure that the accountant recently started using pre-numbered invoices, and all documents should be accounted for. Pre-numbering helps to prevent a transaction from being recorded more than once, or conversely, from not being recorded at all. Lastly I highly recommend the implementation of physical controls like the petty cash, limiting employee access by passwords and recording all the transaction. Physical Control will safeguard assets and enhance the accuracy and reliability of the accounting record.
Kimmel. Financial Accounting, 6th Edition. John Wiley & Sons.
Washington State Office of Financial Management’s guide to internal control and auditing.