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Accounting and Finance for Managerial Use and Analysis

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Fi504 Case Study 2

Case Study 2


Accounting and Finance for Managerial Use and Analysis

Recommendations for LJB Company:

Requirements for Going Public:

A requirement of all publicly traded companies is to comply with the Sarbanes-Oxley Act of 2002. This means that LJB would be required to maintain a system of internal control. The controls must be reliable and effective, which the executives and Board of Directors must monitor. Also, an outside auditor must confirm that the control systems are sufficient. Although there will be additional work on both designing, testing and auditing of controls if LBJ decides to go public, but the control system may result in money and time saved in the long-term regardless.

Good practices:

LJB Company currently has some good practices I suggest they continue. The use of pre-numbered invoices allows for missing or undocumented invoices to be caught quickly. This practice is considered a documentation procedure under internal controls. Having two managers approve new hires helps ensure a good fit. It's good that the accountant completes bank reconciliation. While using a bank is a form of control for cash, the reconciliation enables LJB to make sure there are no errors between what the bank and what they have on the books.

Areas of Improvement:

There are a number of practices by LJB that don't deter fraud and would need to be changed before considering going public.

Segregation of duties: The duties for handling assets need to be separated amongst multiple employees. Employees that handle cash should not be involved in the bank reconciliation or invoices. Employees responsible for purchasing should not have any payment or reconciliation duties. By segregating duties, there is more than one person involved in the sales and purchasing cycle so that one person cannot be behind a fake transaction or remove cash or purchased assets without it being noticed by another.

Access to assets: All employees should not have access to petty cash. The cash should be locked and those with a key should ensure proper documentation for cash distributed to be sure it is authorized. The person responsible for reconciling the petty cash should do so randomly to deter its abuse.

Indelible ink machine: Printing your own checks is fine as long as you use pre-numbered check stock paper to write the checks. Otherwise you will not know that you have accounted for every check written. Also, this is an area of responsibility that should be segregated. The person responsible for printing the checks should not have the authority to sign them. This will help insure they are not writing checks to themselves. LJB should consider purchasing the indelible ink printer once they have the manpower to have the duties segregated. By using indelible ink, the checks printed will be harder to change once printed, which is a good physical control of cash.

Paycheck Lock-Up: Although the accountant is locking the employee's paychecks over the weekend, he should actually be locking them at all times. Anytime the accountant steps away from their desk and these checks are not locked, sensitive employee information is vulnerable.

Background checks: I recommend that LJB implement the Human Resource control of conducting background checks of all employees before officially hiring. This way they will discover if the potential employee has a past that could negatively impact the company (fraud, theft, other criminal activity)

Passwords: Passwords are a key control preventing employees from accessing data outside of their duties and changing transaction data from initial amounts to cover up errors, fraud or theft. Everyone should have an individual password and not reveal it to another. Changing passwords periodically is a best practice.

I hope that LJB finds this report helpful and that it prepares them for potentially going public.

Fi504 Practice Case Study 2 Internal Controls

In: Business and Management

Fi504 Practice Case Study 2 Internal Controls

SUBJECT: Evaluation of Internal Controls

Mr. Smith,

We have completed our assessment of LBJ Company's system of internal controls. In addition, our firm researched the regulation regarding publicly traded firms in order to provide you with the most current information. Securities and Exchange Commission. "Official U.S. Agency Web Site." Web. 24 September 24, 2011.

Publicly traded corporations are required to implement the guidelines of the Sarbanes-Oxley Act of 2002. This means that publicly traded companies must include a management report on the internal controls of the company. The annual report must include an attestation report from a registered public accounting firm. The executive officers and the board of directors

Wilson 2

of LBJ Company are responsible for implementing and maintaining effective internal controls. Furthermore, the executive officers and board of directors of publicly traded companies must attest to the adequacy of the internal controls of the company. Failure to comply with the standards of SOX subjects LBJ Company, along with the executive officers and board of directors to severe penalties of fines and imprisonment.

The five principles of internal control are the following:

* Establishment of Responsibility

* Segregation of Duties

* Documentation Procedures

* Physical Controls

* Independent Internal Verification

* Human Resource Controls

The accountant's decision to start using pre-numbered invoices is an important component of the Documentation Procedures of Internal Control. Pre-numbered documents helps to ensure a transaction has not been omitted, as well as ensuring that the transaction has not been recorded more than once. We recommend the use of indelible ink to print checks, which is a form of physical control much like the accountant's decision to lock the checks in a safe over the weekend. Using indelible ink prevents the checks from being easily altered, which contributes to the



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