¶ … Advice for the Company on the New Internal Control Requirements
Internal control requirements are the policies, mechanisms and procedures that organizations should satisfy to minimize the operational risks. The internal control is very critical to deter employees from implementing fraudulent operations; an organization is required to adhere to the internal system before going public. Section 404 of the SOX (Sarbanes-Oxley) Act states that internal control is critical for a publicly operating company and internal control system is an auditing and accounting procedure that organizations should employ to achieve an efficient, effective and reliable financial reporting.
Overview of the LJB Company operations reveals that the company does not meet the requirements of the Section 404 of the SOX Act. Part of the Section 404 of the internal control system is that the function of the internal auditor should be separated from the work of an external auditor. In other word, an internal auditor of a company should not perform the same work of external auditor. Overview of the operation of the LJB Company reveals that the company does not implement an effective internal control based on the current company internal operations. Presently, the company accountant performs the work of controller, treasurer, as well as human resources functions. All these functions must be separated based on the requirement of SOX Act.
Typically, it is mandatory for the company management to allow an external auditor to access the internal operations as well as the financial reporting of the company. In essence, the external auditors must attest for the effectiveness of the company internal control system. Moreover, the company is required to publish its internal control reporting in its annual reports to assist the stakeholder evaluating the effectiveness of the company operations. Thus, it is the responsibility of the management to design the company internal control system to comply with the Section 404 of SOX Act.
2. Advise to the President on what the Company is doing correctly
Based on the information provided in the case study, there are some items that the company is doing which are being done in a correct way. The company is doing the following operations correctly:
Use of the numbered invoice: First, the use of the numbered invoice is being done correctly because it assists the company to track the checks that are being issued within the company. Moreover, the number numbered check will assist the company to track the checks issued to other stakeholders such as suppliers and employees.
Checks locked when the accountant is not in office: The decision of the accountant to lock all the checks in the safety lock box when not in office is done correctly because the strategy will prevent the theft of the checks or prevent other person to carry out a potential fraud with the check.
The accountant competing "the monthly ban reconciliation" as well as receiving the checks are also being done correctly because it will assist the company to update the company monthly statements in a correct manner and enhancing the correct reporting.
Issue about the Indelible Ink
Based on the issue about the indelible ink, the company should buy the indelible ink machine because buying the indelible ink machine will prevent forgery within the company. Typically, the machine will prevent forgery in the company because the ink cannot be washed away or erased, which will consequently assist the company to implement an effective internal control system.
3. Things that the company is doing wrong
Several areas need to be corrected before the LJB Company can become a public company. Typically, the company needs to correct these items to abide by the SEC (Securities and Exchange Commission) regulations and abide to the Section 404 regulation stipulated by the SOX Act.
Areas of Improvement
First, the management of the LJB Company needs to segregate duties to comply to the Section 404 of the SOX Act. The SOX Act states that a company should segregate the duties within the company. As being revealed in the case, the accountant is performing several jobs such as performing the work of an accountant, internal auditors and human resources duties. In compliance to the SOX Act, the company is required to segregate these duties and appoint other individuals to take over the jobs of internal auditors and human resources duties.
Moreover, the other individuals should take over the work purchasing and controller so that the each individual in the company will serve as watchdog on others. In essence, the internal auditor and controller should oversee the actions of the accountant. This strategy will assist in complying with the rules and regulations stipulated by the Section 404 of the SOX Act.
Moreover, the management does not carry out the proper authorization of the company transactions. In essence, no auditor to oversee that the transactions carried out within the company are being done correctly. Thus, the company needs to implement the system of check and balance on different aspects of the company operations to prevent frauds.
Additionally, the company does not carry out a proper documentation. For example, no employee is overseeing whether the petty cash transactions are being done correctly. Moreover, the company does not have a documentation to ascertain how the money is being used and what it is being used for. There is also no action to check the activities of the accountant.
The company needs to monitor its information and communication systems by setting...
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