If the decision is made to issue stock, it would be wise to first complete an internal control report as well as answer the following questions: (1) How many shares should be authorized for sale? (2) How should the stock be issued? (3) What initial value should be assigned to the stock? The content of this internal control report is based on the related methods and measures adopted within an organization to safeguard its assets, enhance the reliability of its accounting records, increase efficiency of operations, and ensure compliance with laws and regulations.
The major independent components of the internal control system should always include: •Control environment •Risk assessment •Control activities •Information and communication •Monitoring It’s been noted that not all the components of an effective internal control system are present within the control components of this company. If LJB decides to go public in the near future there are some internal control requirements to be aware of.
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The most basic component of an internal control system should be the company’s management within the control environment.
It is the responsibility of top management to make it clear that the organization values integrity and that unethical activity will not be tolerated. The second component of the internal control system is ensuring that the company managing its control activities. The control activities are the backbone of the company’s effort to address the many risks it may face. In order to reduce the occurrence of fraud, management must design policies and procedures to address the specific risks faced by the company. Getting it Right LJB Company is a relatively small company.
This gives the company an advantage over any competitors in the industry. There is a low turnover rate of employees. This shows trust and confidence in your long-term employees, and it also promotes loyalty and employee retention. With a smaller organization it will be easier to set new expectations and implement new rules throughout the company without as many growing pains that could be seen with larger companies. The accountant’s recent decision to switch to pre-numbered invoices was a great idea, and the purchase of an indelible ink machine will also be an excellent investment.
Pre-numbered invoices will help to prevent a transaction from being recorded more than once, or conversely, from not being recorded at all. Second, the control system requires that employees promptly forward source documents for accounting entries to the accounting department. This control measure will help to ensure timely recording of the transaction and contributes directly to the accuracy and reliability of the accounting records. Indelible ink machine will help organize as well as simplify the accounting duties.
In addition to procedural controls the use of physical controls is essential. The accountant’s act of keeping the checks in a safe in his office is in accordance with the physical controls principle. This reflects the safeguarding of assets and enhances the accuracy and reliability of the accounting records. Things to Ponder It has been observed that the company is violating the principle of control activity of segregation of duties. The accountant is acting as the treasurer and controller. In this dual role, he purchases all of the supplies and pays for these purchases.
He also receives the checks and completes the monthly bank reconciliation. Various frauds are possible when one person handles related activities. These duties must be segregated to multiple personnel. Use of the three principles of internal control segregation of record-keeping from physical custody, documentation and independent internal verification is recommended. This will deliver an effective system of internal controls. Any attempt at fraudulent activity will be detected unless there is collusion among the employees. Internal controls over cash receipts should include: a)designating only personnel such as cashiers to handle cash; (b)assigning the duties of receiving cash, recording cash, and having custody of cash to different individuals; (c)obtaining remittance advices for mail receipts, cash register tapes for over-the-counter receipts, and deposit slips for bank deposits; (d)using company safes and bank vaults to store cash with access limited to authorized personnel, and using cash registers in executing over-the-counter receipts; (e)making independent daily counts of register receipts and daily comparisons of total receipts with total deposits; and (f)bonding personnel who handle cash and requiring them to take vacations. Internal controls over cash disbursements include:
Having only specified individuals such as the treasurer authorized to sign checks; (b)assigning the duties of approving items for payment, paying he items, and recording the payment to different individuals; (c)using pre-numbered checks and accounting for all checks, with each check supported by an approved invoice; after payment, stamping each approved invoice ‘paid’; (d)) storing blank checks in a safe or vault with access restricted to authorized personnel, and using a machine with indelible ink to imprint amounts on checks; (e)comparing each check with the approved invoice before issuing the check, and making monthly reconciliations of bank and book balances; and (f)) bonding personnel who handle cash, requiring employees to take vacations, and conducting background checks. The principle of establishing responsibility does not appear to be strictly applied by the company in the handling of petty cash. 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. In this scenario if someone commits theft it might be impossible to determine who is responsible. An essential principle of internal control is to assign responsibility to specific employees.
Therefore it is recommended to establish responsibility of only one person for a petty cash control. The petty cash should be in a safe or lockbox and only one person should have access, this person should also be in charge of keeping a log. A supervisor or manager should reconcile petty cash at least once a week. Also, petty cash has to be entered in the system for replenishing the funds. The hiring process is the most important and inexpensive preventive measure for human resource control activities. The company’s human resource department conducts thorough background checks. By conducting these background checks they are not risking the company’s information security.
After getting hired each employee should have their own computer login or identifying pass code that keeps track of employees when they log in. By having individual own log-ins accountability is established. Also, the company should block all websites that are not appropriate to view at work. The company needs a full-time IT staff (person) who can monitor and enforce information assurance compliance. Conclusion In evaluating LJB Company to determine readiness for an initial public offering (IPO), it has been noted some areas that are already in compliance and some areas that must be corrected before moving forward. The Sarbanes-Oxley Act was drafted to protect employees and investors. The egislation was created to address accounting deficiencies and hold hey employees (specifically the Chief Executive Officer CEO and the Chief Financial Officer CFO) criminally and civilly accountable for the financial reporting of their company.