Essay on Case Study 2 - Internal Control

736 Words May 30th, 2012 3 Pages
Case Study Two
Name
Accounting and Finance
02Feb2011

Dear President of LJB Company,
(1) If the LJB Company should decide to become a publicly traded company, a few internal controls should be implemented to comply with the Sarbanes-Oxley Act (SOX).
* Management will need to provide periodic quarterly reports to evaluate the effectiveness and reliability of LJB’s internal controls over financial reporting procedures.
* Management should certify the accuracy and fairness of presentation of their financial statements.
* Independent auditor(s) outside of LJB will need to attest to management’s assessment of said internal controls. Additionally, non-audit services between these two parties (LJB and said independent auditor)
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I recommend that these checks remain physically secured at all times (by the accountant, or by delaying delivery to the accountant until he reaches his office).
* Due to the unorthodox honor system of dealing with petty cash, any single employee can withdraw a substantial amount of petty cash in relative anonymity. This violates two Internal Control Principles: Physical Control and Establishment of Responsibility. It violates the Physical Control Principle because the petty cash is easily accessible with no form of physical protection of theft, and it violates the Establishment of Responsibility Principle because no single person is in charge of the Petty Cash Fund (rather everyone is). This can be remedied by assigning a custodian to be responsible for the fund, as well as creating a secure area to store said funds.
* These previous points additionally bring up another weakness, though not actually part of the Internal Control Principles. Though it seems to be LJB’s unofficial policy to trust long-term employees, when a desirable opportunity to commit fraud/theft arises, it becomes at the discretion of the employee to commit these acts for their personal benefit.
* Another weakness is LJB’s lack of individual passwords which allows personnel to anonymously use the company computers and databases. This lack of individual accountability will prevent most attempts to track suspicious employee activities on company…

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