CASE STUDY #2
Dear Mr. President
I want to first start off by saying thank you for the opportunity to handle such an important and sensitive matter such as the internal control for the LJB Company. First and foremost I want you to be aware of the requirements of your company if you do decide to go public. The Sarbanes-Oxley Act of 2002 (SOX) which was passed by congress requires all publicly traded U.S corporations to maintain an adequate system of internal control. Corporate executives and boards of directors like yourself must ensure that these controls are reliable and effective. In addition, independent outside auditors must attest to the adequacy of the internal control system. Companies that fail to comply are subject to fines, and company officers can be imprisoned. LJB Company is currently doing some things well that I suggest they continue. The use of pre-numbered invoices allows for missing or undocumented invoices to be caught quickly. This practice is considered a documentation procedure under internal controls. Having two managers approve new hires helps ensure a good fit. It’s good that the accountant completes bank reconciliation. While using a bank is a form of control for cash, the reconciliation enables LJB to make sure there are no errors between what the bank and what they have on the books.
There are a number of practices by LJB that don’t deter fraud and would need to be changed before considering going public. Segregation of duties: The duties for handling assets need to be separated amongst multiple employees. Employees that handle cash should not be involved in the bank reconciliation or invoices. Employees responsible for purchasing should not have any payment or reconciliation duties. By segregating duties, there is more than one person involved in the sales and purchasing cycle so that one person cannot be behind a fake transaction or remove cash or purchased assets without it being noticed by another. Access...
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