| LJB Company Internal Control Report Review | October 2, 2011| [Type the document subtitle]| The management of LJB Company is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system is designed to provide reasonable assurance to the company’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. LJB Company management assessed the effectiveness of the company’s internal control over financial reporting as of 2011.

In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, we believe that, as of 2011, the company’s internal control over financial reporting is effective based on those criteria. I. New internal control requirements if the company decides to go public Public companies are required by regulations Sarbanes-Oxley Act of 2002 (SOX) among them to formalize control procedures in writing.

Privately held companies and other organizations also have an interest in the benefits that result from formalizing and documenting their internal control procedures. Companies must develop sound principles of control over financial reporting and continually assess that the controls are working. The new rules require management to disclose to the public any material weakness identified by management. The report must also state that the company’s independent public accountant who audited the financial statements included in the annual report has attested to and reported on management’s evaluation of internal control over financial reporting.

This new attestation requirement under Section 404 expands the scope of the accounting firm’s audit procedures beyond the work required solely to render an opinion on the financial statements. (Protiviti, pg 13-14) Without adequate controls to ensure the proper recording of transactions, the resulting financial data may become unreliable and undermine management’s ability to make decisions, as well as its credibility with shareholders, regulators, and the public.

Starting now, rather than later, not only will help you prepare for the future reporting requirements, but also will help identify areas where controls should be strengthened, or redesigned to be more effective and efficient. II. What the company is doing right/related internal control principle and whether to buy the indelible ink machine LJB Company’s President while preparing to take this company public in the future taking the necessary steps to be more efficient at this level. Areas in which the company is doing right are: Assessing and Managing Risk – The President is cognizant of current and concerned with new policies and procedures and is taking the necessary steps with department level guidance. And more importantly monitoring and questioning their process that assesses the quality or lack of their internal control system prior to going public. * Controlled Environment – With his establishment of a good relationship with current employees has provided some form of discipline and structure. Which people are motivated to comply with controls rather than to ignore or circumvent them.

Monitoring – The President of the company explained their current system of internal controls, thereby assessing the quality and effectiveness over time. * Documentation Procedure (Physical, mechanical, and electronic controls) – Usage of pre-numbered invoices. My firm does recommend that the President purchase the indelible ink machine because it is beneficial to imprint amounts on invoices/checks by machine. * Internal Control to Cash Disbursements- Storing of cash (checks) in safes. LJB Company is doing well in some areas with slight prevention of fraudulent acts.

Taking the necessary steps to increase efforts of compliance and control is beneficial to any organization. III. What the company is doing wrong/ related internal control principle and recommendation for improvement Assessing the effectiveness of the LJB Company’s current internal control over financial reporting as of 2011, my firm has identified several areas of weakness. The following information will highlight areas for immediate improvement. 1. Establishment of Responsibility -Control is most effective when only one person is responsible for a given task.

Establishing responsibility includes the authorization and approval of transactions Areas of concern: Hired one accountant but this position operates in a dual role – Treasurer and Controller. He is authorized to purchase supplies as well as pays for the purchases. The company does not assign individual passwords. President and the accountant both interview and approve all of the new hires. Recommendation: LJB Company may need to budget for additional employees. Hire or promote an employee to assist with either Treasurer or Controller responsibilities.

I am aware that for some smaller businesses these duties tend to overlap but as LJB Company plans to go public in the future intake and expenditures will increase rapidly. Incorporating now at this level will provide for a smoother transition as the company grows. A company’s treasurer often serves as the CFO’s right-hand person, supervising the day-to-day financial, cash-flow, accounting and budgetary issues of a company. Controllers generally are responsible for all financial reporting done by a corporation.

They write the reports themselves or oversee the preparation of documents, including filing requirements for the Securities and Exchange Commission, and other legal documents for regulatory agencies, such as annual reports. (Bianco, 2011) Use of identifying passcodes enables the company to establish responsibility by identifying the particular employee who carried out the activity and eliminate deception. This way whichever employee needs to access the petty cash desk drawer must use their confidential passcode. A note as an I. O. U is never considered an acceptable means of recording of a type of company transaction.

Hiring a Human Resources manager to handle the recruiting and on boarding process. The hiring manager can still participate with the interviewing process. This will allow the President and the Accountant to perform and execute their responsibilities more effectively. 2. Segregation of Duties – Segregation of duties is indispensable in a system of internal control. The rationale for segregation of duties is that the work of one employee should, without a duplication of effort, provide a reliable basis for evaluating the work of another employee.

Area of concern: Accountant should not be authorized to purchase all of the supplies as well as pay for these purchases. He also receives the checks and completes the monthly bank reconciliation. Recommendation: When one individual is responsible for all of the related activities, the potential for errors and irregularities is increased. Having one person authorized to order and another perform issuance of payment. This way provides an adequate check and balance process decreasing opportunity for mishandling of company finances. Record Keeping Separate from Physical Custody – The custodian of the asset is not likely to convert the assets to personal use if one employee maintains the record of the assets that should be on hand and a different employee has physical custody of the assets Area of concern: Accountant picks up paychecks and leaves them in his office for pick-up. Recommendation: Accountant may still pick up paychecks but should establish a proper recording and distribution process for payroll checks as opposed to “leaving them in his office”.

Signing receipt of checks to respective department managers for distribution should be implemented. * Documentation Procedure – Documents provide evidence that transactions and events have occurred. Source documents for accounting entries should be promptly forwarded to the accounting department to help ensure timely recording of the transaction and event. Area of concern: All employees have access to the petty cash in a desk drawer and are asked to only place a note if they use any of the cash. Recommendation:

By requiring signatures on detailed documents, the company can identify the individual(s) responsible for transactions or event. These transactions should be documented immediately upon occurrences. 3. Physical, Mechanical, and Electronic Controls – Physical controls relate primarily to the safeguarding of assets. Mechanical and electronic controls safeguard assets and enhance the accuracy and reliability of the accounting records. Area of concern: Accountant leaves checks in his office. All employees have access to the petty cash in a desk drawer.

Recommendation: Checks of any nature should never be left exposed or unattended. At all times they must be in the possession of the payee or securely locked away in a company authorized safe or vault. Pass key must be established for petty cash drawer and authorized signature or initials must be provided upon accessing drawer. 4. Independent Internal Verification – Independent internal verification involves the review, comparison, and reconciliation of data prepared by employees. Area of concern: Viewing of pornography on a company computer. Recommendation:

Employing or assigning your IT department to establish surf control and inform employees that their internet activities will be monitored. Monitoring of site visits will bring awareness to inappropriate sites access can be denied. 5. Human Resource Controls – Bonding of employees who handle cash Rotating employees’ duties and requiring employees to take vacations. Conduct thorough background checks Area of concern: Everyone has access to access to petty cash. The company does not assign individual passwords. Employee background is of concern (after being hired) oth he and the accountant both interview and approve all of the new hires. Recommendation: Bonding employees is much like having an insurance policy that will reimburse the company if an employee steals money. Every employee must be prompt to establish a personal identification codes for accessing company computers. Whomever is the hiring manager (if there is no Recruiter on site) This is an important and inexpensive measure any business can take to reduce employee theft and fraud is to conduct thorough background checks before employee begins on boarding process.

President can approve all the new hires after the checks have been performed – this will eliminate frustration, time, money and deception. In conclusion Implementing the above recommendations should provide assurance to LJB Company’s that the internal control system in place is simultaneously being preventive in deterring the instance of errors and fraud and detective by identifying undesirable occurrences after the fact. Work Cited Bianco, D. (2011).

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