All publicly trader companies in the USA are required to maintain and have an up to date system of internal controls. Since the LJB Company is wishing to become a public entity, I am glad to be able to assist in this action. First, the rules and regulations must be reviewed and compared to the company and how it can become public. To make the company attractive to buyers, investors, and other capital sources, it is crucial that the corporate organization and governance are well manifested. Corporate executives and the board of directors within a corporation must ensure that these internal controls are effective.
The reliability and efficiency of the internal controls must be directed and supervised by the board of directors and corporate executives (Kimmel 345). Because the LJB Company is a small sized company in regards to the employee number, there should be a re-evaluation of the costs versus the benefits of being a publicly traded company. It would be best to know how the company would deal with stock in this case. A stock report needs to be made and discussed further regarding the number of shares, issuing stock, and stock value for the LJB Company.
To safeguard the assets, enhance the reliability of the accounting records, increase efficiency within the financial operations, safeguard the assets of the company, and ensure proper compliance with the laws and regulations, the Internal Control report is crucial to the company. A controlled environment, risk assessment, activity control, information and communication, and group monitoring should all be a part of the internal control report (Kimmel 349). From the given information, the internal control components of an effective internal control system are not as efficient as they can be.
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Because LBJ is trying to go public in the near future, there are some requirements that must be met in within the internal control system. It is the responsibility of the management on how important ethics are within the organization. Secondly, the management should address the employees on what kind of risks are associated in regards to having unethical activity. One example is fraud. In order tor educe fraud, the management must implement policies and procedures regarding education in what the consequence of the employee and company will be if fraud is detected.
Due to the small number of employees in the LJB Copmany, there is an advantage over competitors. Because employees show long term commitment, there is a loyalty and employee retention. It is also easier to manage the employees and implementing new rules and regulations will be handled in an easier manner. The decision to switch to pre-numbered invoices was a great idea by the accountants and the indelible ink machine purchase was a great investment. These pre-numbered invoices are going to be a great aid in preventing transactions more than once and will be helpful in keeping track of recorded transactions.
It will also help the timeliness of the accounting entries from the employees’ transactions. This will restore the reliability of the accounting records and their accuracy. The use of physical controls like this is crucial in the internal control environment. In addition, the holding of checks in a safe place is in accordance with the principles of internal physical control as well and it reflects the safeguard of assets—which in turn, improves the reliability and accuracy of the accounting records.
Because of the monthly bank reconciliation and sole purchasing of the supplies, the accountant is acting as a treasurer and controller at the same time it seems. This is a violation of the segregation of duties principle (Kimmel 355). Various frauds are possible when this dual role is employed. In order to deliver an effective and controlled system within the internal controls environment, the use of physical custody needs to be separated from record keeping duties. Fraudulent activity will be detected if documentation and independent verification is not employed.
In regards to cash receipts, there should be a designated employee such as a cashier to handle the cash. Also, proper cash recording of receiving and having custody of cash, cash register and over the counter receipts, total deposits of receipts, register receipts, as well as bank deposit slips should be performed daily (as frequent as possible). Lastly, there should be a limited authorized employee number to handle the company cash safes and cash storage in the bank (Kimmel 352). The internal controls of the LJB Company would benefit from authorizing employees that are designated for treasury purposes only.
These individuals would only deal with checks and approve payments while keeping account for the checks with an approved invoice, as well as stamping each approved invoice that has been paid. Secondly, there needs to be a safe or vault that stores the blank checks and it is restricted access to only certain authorized individuals. The machine needs to be printed with indelible ink for the correct amount. Lastly, there needs to be monthly reconciliations of bank and book balances; the company needs to have approved invoices of checks before issuing payment(s).
The internal control principles are based on responsibility of different employees. In the case that all employees have access to the petty cash drawer, it will be impossible to determine who may be responsible for an error if it occurred. It would be recommended that only one person is responsible for this handling. This petty cash should be held in a safe or vault and the person designated for access should report to the supervisor on a weekly basis in regards to the withdrawals therein. Lastly for the LJB Company, to ensure proper employee conduct and ethical conduct, the hiring process is very important for the internal control issue.
The human resources department should control and monitor background checks that are thorough and confidential. The company’s information and security is at risk with the employees, so making sure that the employee value integrity will be crucial in the long-run success of the company. In order to have better physical internal control and human resource control, there needs to be restricted access to computers and information therein. First and foremost, there needs to be an installed software program that blocks certain websites.
Upon hiring, the employee should attain his or her own password and login to have access to the computer. Software also exists that detects the websites accessed and a track record of login at particular times. Once an employee has their own login and password, they are solely responsible for the work they do on that computer. In summary, if all of the above listed suggested practices are taken into account and properly implemented, the LJB Company will thrive as a the publicly traded corporation. References Kimmel. Financial Accounting. 6. VitalSource Bookshelf. John Wiley & Sons.
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