'Internal Control Requirements for Publicly Traded Companies\r'

'In a meeting last week, the electric chair of LJB expressed interest of going mans in the near future and asked us about the versed rig ingestments for such(prenominal)(prenominal) action. To become public everyy listed, LJB moldiness(prenominal) practise the Sarbanes-Oxley Act of 2002 (SOX), which requires whole US publicly traded companies to maintain an adequate system of cozy control. Under SOX Section 404, a confederation essential opus on cozy controls over pecuniary reporting in its annual report.\r\nFour key elements moldiness be included in this report (Smith, Ledyard;): 1. narration of responsibility by the attach to way (CEO and CFO) for establishing and maintaining an adequate internal control structure and procedure for financial reporting. 2. Statement identifying the framework practised by forethought to evaluate the effectuality of the confederacy’s internal control over financial reporting. 3. Management’s assessment of the soun dness of internal controls over financial reporting. 4. affirmation by the comp both’s orthogonal auditor on management’s assessment of the trenchantness of the company’s internal controls and procedures for financial reporting. As the president of LJB, he and another(prenominal) executives and board of directors must hold that the internal controls argon start outd and effective. In addition, he must exact self-governing outside auditors to attest to the adequacy of the internal control system. LJB’s strait-laced intrinsic Controls To become publicly listed, LJB must en accredited and maintain an adequate and effective internal control system.\r\nAfter evaluating LJB’s current internal controls, I accommodate frame several positive acts. First, the comptroller of LJB has recently started to use prenumbered invoices, which I consider to be a right close because all companies, including LJB, should establish proper financial back ing procedures. LJB should document movements and events when they occur. The use of prenumbered invoices kitty help to prevent a transaction from being recorded more than once, or conversely, from not being recorded at all (Kimmel, Weygandt, & adenine; Kieso, 2011, p. 341).\r\nIn addition, an effective internal control system should require that all source documents be straightaway forwarded to the explanation department for accounting entries; this helps to ensure cadencely recording of the minutes and contributes at one time to the accuracy and reliability of the accounting records (Kimmel, Weygandt, & antiophthalmic factor; Kieso, 2011, p. 341). So when the controller has asked for buying an ineradicable ink machine to print checks, I believe it will be a wise and necessary purchase. Second, the accountant does a good job of moving all checks into a safe in his authority during weekends.\r\nThis is in compliance with physical controls, which extend to to the safeguar ding of assets and enhance the accuracy and reliability of the accounting records (Kimmel, Weygandt, & axerophthol; Kieso, 2011, p. 342). By moving the checks into the safe, they be secured during nonbusiness hours and not accessible to no one, this prevents potentiality fraud and theft. LJB’s Improper Internal Controls On the other hand, in that location ar several other controls which LJB is not doing properly. First, the accountant is now serving two roles as two treasurer and controller.\r\nThis is a irreverence of sequestration of duties. Different somebodys should be answerable for related activities, however, the accountant is answerable for both supply purchases and earningss for these purchases, and this increases the potential for errors and irregularities (Kimmel, Weygandt, & Kieso, 2011, p. 339). Since the accountant open fire admit orders of supplies without supervisory approval, he whitethorn be tempted to receive kickbacks from suppliers (not say he will); he may pass on remunerations for fictitious invoices since he also has payment authorization.\r\nMoreover, the accountant should not be trusty for both receiving checks and completing monthly slang reconciliations, because since he is the person who allots record memory for LJB, he should be neither responsible for(p) for physical custody of the received checks (which are basically stores) nor contract access to them (Kimmel, Weygandt, & Kieso, 2011, p. 340). Both va bungholecies of segregation of related activities and segregation of record-keeping from physical custody controls see a great potential of fraud for LJB, not mentioning there is a lack of independent internal verification (Kimmel, Weygandt, & Kieso, 2011, p. 343).\r\nSecond, LJB is miss control over its fiddling bills. If all employees wee-wee access to picayune cash, it is a violation of insane asylum of responsibility (Kimmel, Weygandt, & Kieso, 2011, pp. 338-339). In additi on, not only no one is responsible for the petty cash, employees who use the money are only asked to leave a note, this violates the reinforcement procedures controls. Third, the firing hap indicates LJB is doing unworthyly on three controls: human resource controls (Kimmel, Weygandt, & Kieso, 2011, p. 344), physical controls, and establishment of responsibility. LJB did not conduct a original background check on the convicted employee.\r\nIf a thorough background check was performed LJB should had found out that this person was convicted guilty and served time for molesting children. Also, since LJB does not doom individual passwords to employees, it was no surprise that it had difficulty getting the convicted employee’s confession of viewing pornography on company computer. Last, the accountant should not be engaged in interviewing and approving stark naked hires, since he is already responsible for other tasks. Instead, the human resources department should be w inding in the hiring process, along with the president.\r\nRecommendations for Improvement These poor internal controls indicate LJB’s photo to frauds, which not only serve as threats to LJB but also hinder the company’s capability of going public. Nevertheless, actions can be taken to fix such flaws. First of all, LJB should assign contrasting individuals to handle supply purchase and payment tasks. If the accountant is responsible for making orders of supplies, he should receive approvals for these purchases, and should not be granted payment authorization. If he authorizes payments, he should not be made responsible for purchasing supplies.\r\nAlso, since he prepares bank reconciliations, he should not have custody of the received checks; a different individual should be assigned for such task. In addition, for enhanced security, LJB can assign another employee who is independent of the personnel responsible for the activities to conduct independent internal verifi cation. He/she can compare the payment checks to invoices; he/she can also compare entire receipts to bank deposits on a monthly basis to see if there is reconciliation between the cash remainder per books and the cash balance per bank.\r\nIf there is any discrepancy, he/she can report to the management immediately for corrective action (Kimmel, Weygandt, & Kieso, 2011, pp. 343-344). Secondary, LJB needs to set up a petty cash line (not sure one is existed currently) and appoint a flight attendant who is responsible for such fund. Size of the petty cash fund should be determined, expenditures from the fund should be limited and certain types of transactions should not be permitted from the fund. The custodian of the und should have authority to make payments from petty cash that conform to these prescribed policies (Kimmel, Weygandt, & Kieso, 2011, p. 367). Also, for documentation purpose, instead of a note from users of the petty cash, each payment from the fund must be documented on a prenumbered petty cash receipt, signatures of both the custodian and the individual who receiving payment must be on the receipt. If other supporting documents such as an invoice are available, they should be attached to the receipt (Kimmel, Weygandt, & Kieso, 2011, p. 367).\r\nFurthermore, internal control over petty cash fund can be built by (1) having a supervisor make surprise counts of the fund to ascertain whether the stipendiary petty cash receipts and fund cash equal the designated amount, and (2) canceling or mutilating the paid petty cash receipts so they cannot be resubmitted for reimbursement (Kimmel, Weygandt, & Kieso, 2011, p. 369). Lastly, from now on, LJB must conduct thorough background checks on all new hires. Two things can be verified to support the checks: (1) ratification to see whether job applicants actually graduate from the schools they list. 2) Never use the telephone verse for previous employers given on the quotation sheet; always look them up (Kimmel, Weygandt, & Kieso, 2011, p. 344). The human resources department should be held responsible for all background checks. In addition, all employees should be assigned individual passwords for signing into company computers, and these passwords should only be known to the individuals whom they are assigned to. LJB may also consider installing an innovative firewall program on computers which prohibits users from logging in external indecent websites.\r\n'