Case Study 2- Internal Controls

Only available on StudyMode
  • Download(s) : 77
  • Published : May 19, 2013
Open Document
Text Preview
Content

Introduction…………………………………………………………………………...3

Public Offering….….….………………….………………….…………….…………3

Getting it Right………………………….………………….…………………………4

Things to Ponder…………….………….………………….…………………………5

Conclusion……………………………………………………………………….......7

References……………………………………………………………………….......8  
Introduction
LJB Company wishes to move forward and become a public entity. Good corporate governance within an organization may make a company more attractive to potential buyers, investors, and other capital sources. Under SOX Section 404, all publicly traded U.S. corporations are required to maintain an adequate system of internal controls. Corporate executives and boards of directors must ensure that these controls are both reliable and effective.

Public Offering
The transformation of going from a private to public requires some extensive planning and preparation. It is recommended that LJB, being a relatively small sized company, should reevaluate the costs versus the benefits of becoming a publicly traded company. If the decision is made to issue stock, it would be wise to first complete an internal control report as well as answer the following questions: (1) How many shares should be authorized for sale?

(2) How should the stock be issued?
(3) What initial value should be assigned to the stock?
The content of this internal control report is based on 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. The major independent components of the internal control system should always include: •Control environment

Risk assessment
Control activities
Information and communication
Monitoring
It’s been noted that not all the components of an effective internal control system are present within the control components of this company. If LJB decides to go public in the near future there are some internal control requirements to be aware of. The most basic component of an internal control system should be the company’s management within the control environment. It is the responsibility of top management to make it clear that the organization values integrity and that unethical activity will not be tolerated. The second component of the internal control system is ensuring that the company managing its control activities. The control activities are the backbone of the company’s effort to address the many risks it may face. In order to reduce the occurrence of fraud, management must design policies and procedures to address the specific risks faced by the company.

Getting it Right
LJB Company is a relatively small company. This gives the company an advantage over any competitors in the industry. There is a low turnover rate of employees. This shows trust and confidence in your long-term employees, and it also promotes loyalty and employee retention. With a smaller organization it will be easier to set new expectations and implement new rules throughout the company without as many growing pains that could be seen with larger companies. The accountant’s recent decision to switch to pre-numbered invoices was a great idea, and the purchase of an indelible ink machine will also be an excellent investment. Pre-numbered invoices will help to prevent a transaction from being recorded more than once, or conversely, from not being recorded at all. Second, the control system requires that employees promptly forward source documents for accounting entries to the accounting department. This control measure will help to ensure timely recording of the transaction and contributes directly to the accuracy and reliability of the accounting records. Indelible ink machine will help organize as well as simplify the accounting duties. In addition to procedural controls the use of physical controls is essential. The accountant’s act of keeping the...
tracking img