LJB Company Internal Control Report Review
October 2, 2011
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The management of LJB Company is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system is designed to provide reasonable assurance to the company’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. LJB Company management assessed the effectiveness of the company’s internal control over financial reporting as of 2011. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, we believe that, as of 2011, the company’s internal control over financial reporting is effective based on those criteria. I. New internal control requirements if the company decides to go public Public companies are required by regulations Sarbanes-Oxley Act of 2002 (SOX) among them to formalize control procedures in writing. Privately held companies and other organizations also have an interest in the benefits that result from formalizing and documenting their internal control procedures. Companies must develop sound principles of control over financial reporting and continually assess that the controls are working. The new rules require management to disclose to the public any material weakness identified by management. The report must also state that the company’s independent public accountant who audited the financial statements included in the annual report has attested to and reported on management’s evaluation of internal control over financial reporting. This new attestation requirement under Section 404 expands the scope of the accounting firm’s audit procedures beyond the work required solely to render an opinion on the financial statements. (Protiviti, pg 13-14) Without adequate controls to ensure the proper recording of transactions, the resulting financial data may become unreliable and undermine management’s ability to make decisions, as well as its credibility with shareholders, regulators, and the public.
Starting now, rather than later, not only will help you prepare for the future reporting requirements, but also will help identify areas where controls should be strengthened, or redesigned to be more effective and efficient.
II. What the company is doing right/related internal control principle and whether to buy the indelible ink machine
LJB Company’s President while preparing to take this company public in the future taking the necessary steps to be more efficient at this level. Areas in which the company is doing right are:
* Assessing and Managing Risk - The President is cognizant of current and concerned with new policies and procedures and is taking the necessary steps with department level guidance. And more importantly monitoring and questioning their process that assesses the quality or lack of their internal control system prior to going public. * Controlled Environment – With his establishment of a good relationship with current employees has provided some form of discipline and structure. Which people are motivated to comply with controls rather than to ignore or circumvent them. Monitoring - The President of the company explained their current system of internal controls, thereby assessing the quality and effectiveness over time. * Documentation Procedure (Physical, mechanical, and electronic controls) – Usage of pre-numbered invoices. My firm does recommend that the President purchase the indelible ink machine because it is beneficial to imprint amounts on invoices/checks by machine. * Internal Control to Cash Disbursements- Storing of cash (checks) in safes.
LJB Company is doing well in some areas with slight prevention...
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