Accounting Case 2 Essay

TO: President of LJB
PREPARED BY: In evaluating the internal controls of LJB Company as it prepares to transition into becoming publicly traded, the company must first recognize that all of its internal control standards will be enforced by the Sarbanes-Oxley Act of 2002. This regulation requires U.S. corporations to maintain an adequate system of internal control. Companies that fail to comply with the determinations provided in the Sarbanes-Oxley Act are subject to fines and company officers can also be imprisoned. If LJB Company follows the financial guidelines of Sarbanes-Oxley Act, investors will also be more likely to do business with their company, therefore increasing the company’s profit margin. Internal controls consists of all 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 (John Wiley & Sons, Inc., p. 337). Internal control has five(5) components that LJB Company must follow as it prepares to become publicly traded:

1. A Control Environment
Top management is responsible for making it clear that the organization values integrity and that unethical activity will not be tolerated. The President should not feel embarrassed for firing the employee who was caught viewing pornography on one of the company’s computers. This falls under unethical activity which should not be tolerated and in turn, should call for immediate termination of the employee which was effectively completed by the President. The President should also contact their IT Department and ensure that they provide individual user information to every employee in the company which will prevent the uncomfortable burden of having to determine who accessed unethical information on a company’s computer if this were to have another occurrence. Use of identifying passcodes enables the company to establish responsibility by identifying the particular employee who carried out the activity (John Wiley & Sons, Inc., p. 338). The President should incorporate this system to all computer users as soon as possible.

2. Risk Assessment
Companies must identify and analyze the various factors that create risk for the business and must determine how to manage these risks. One factor that can create risk for the company is the fact that everyone has access to the petty cash where the employee simply has to write a note of how much money they took out of this account. How does the accountant or the company know if the petty cash is being used on office items? Therefore, the company should limit the responsibility of the petty cash account to one person or only department heads and assure that all petty cash requests are approved via a request voucher prior to each purchase. Employees should then provide receipts at the end of each week to account for those purchases. Internal control over a petty cash fun is strengthened by: 1) having a supervisor make surprise counts of the fund to confirm whether the paid petty cash receipts and fund cash equal the fund amount and 2) canceling or mutilating the paid petty cash receipts so they cannot be resubmitted for reimbursement (John Wiley & Sons, Inc., p. 351).

3. Control Activities
To reduce the occurrence of fraud, management must design policies and procedures to address the specific risks faced by the company. Control is most effective when only one person is responsible for a given task (John Wiley & Sons, Inc., p. 338).The six principles of control activities include:1. Establishment of responsibility.2. Segregation of duties.3. Documentation procedures.4. Physical controls5. Independent internal verification6. Human resource controls One policy that LJB Company should take into consideration when hiring its employees is to complete a criminal background check after the potential employee has turned in their employment application.

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