Internal Control Essay
It is with great pleasure that we can provide you information and advisement on internal controls that will assist LJB Company with going public. We understand that you have communicated your concerns and expect that this report will assist you with deriving conclusions. This report will: 1. Inform you of any new internal control requirements in reference to going public. 2. Advise and make recommendations on what the company is doing right. 3. Advise and make recommendations on what the company is doing wrong.
1. Inform the President of any new internal control requirements if the company decides to go public.
The interest of the company going public will be having a successful outcome, if all the required tests are properly administered. The Sarbanes Oxley Act of 2002, requires the CEO and CFO to certify in periodic filings with the SEC the accuracy of the financial statements and the effectiveness of the company’s internal controls over financial reporting. The outside auditor is required to audit certain companies’ internal controls over financial reporting on an annual basis.
There are phased-in compliance dates for these requirements for certain smaller company filers. Companies in the IPO process and newly public companies are not required to provide either a management assessment or an auditor attestation report until they file their second annual report with the SEC. While companies in the IPO process are not required to comply with these regulations, in order to prepare for these certifications and audit, it is important to establish, document and monitor compliance of internal controls as early as possible.
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.
The company has been doing well by having long term employees which shows that you have a great work environment. The trust put into employees will strengthen a company. It is noticeable that an establishment of responsibility is set in place. The accountant is responsible for a variety of high priority tasks. The indelible ink machine will be a great benefit to have. Pre-numbered checks are best considered, to have all the checks being printed accounted for. It also gives a source of documentation and accountability.
It eliminates the chance for common errors, such as duplication. Paychecks should be kept in a safe box in the office for only a designated person or persons to have access to. This ensures that physical, mechanical and electronic controls are met. Employees shouldn’t have such easy access to the petty cash. There should be a cashier or each employee should rotate this duty in order to monitor and keep documentation on who took what and when. Employees in turn should receive a transaction slip.
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.
Although, the company has faith in its long term employees, there are some things are handled poorly. The segregation of duties principle is being violated by allowing the accountant to serve as the Treasurer and the Controller. Although, the trust is there for this individual, it poses a risk for an employee to commit fraud. Allowing checks to be left in his office unsupervised and unsecured, it presents an opportunity for theft. This violates the physical, mechanical, and electronic controls principle. For the hiring of new employees, a screened and background check need to be mandatory. It allows the hiring process to be properly considered to prevent the company form harm. This is a violation of independent internal verifications principle.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 4 January 2017
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