Fi 504 Case Study 2

Topics: Internal control, Internal audit, Cash Pages: 5 (1422 words) Published: July 28, 2012
LJB COMPANY: Internal Control Review


Sarbanes-Oxley Act of 2002 (SOX), enacted on July 29,2002, is a United States Federal law that imposed new rules and regulations for all US public companies.

Under SOX Section 404, all publicly listed corporations are required to maintain an adequate system of internal control. Under SOX, corporate executives and the board of directors are personally responsible for making sure that the internal controls in place are effective and reliable. Independent auditors should also attest to the reliability of the said internal controls. Failure to do so would result to fines and/or imprisonment1.

The following should be included in LJB Company’s annual report if the company decides to go public: * A statement of the management’s responsibility for establishing and maintaining effective internal control * A statement specifying the framework that the management used to evaluate the effectiveness of the company’s internal control * Management’s assessment of the effectiveness of their Internal Control. It must also include any “material weaknesses” currently present. The internal control is only deemed effective once all material weaknesses are properly addressed and solved. * A statement that a registered public accounting firm has issued an attestation report on the management’s internal control .2

If LJB Company decides to go public, it must take into account the cost against the benefits of doing so. The increased standard of internal control requires a lot of funding and will probably require them to add employees in order to keep up with the more stringent demands in financial reporting among other costs.


A. Effective internal controls in place

1. Documentation Control: By using pre-numbered invoices, LJB Company is maintaining an excellent control of documentation by making sure that all documents are accounted for and for providing an audit trail for all their activities. Using pre-numbered invoices would also prevent errors in recording the said transactions in the company’s books.

2. Physical Control: Depositing the unclaimed payroll checks in a safe is a good way of safeguarding the company’s asset. LJB Company should make sure that all valuable materials and negotiable items (such as checks, cash and company credit cards) are properly stored in a safe, vault or a safety deposit box.

B. Indelible Ink Purchase?

LJB Company is already using pre-number invoices, a very effective documentation control. Buying an indelible ink machine is another good investment for the company. Printing check amounts in indelible ink would prevent anyone from tampering with the check and changing the negotiable amount, which would result to a loss for the company.


A. Segregation of Duties & Independent Internal Verification What is in place: LJB Company only has one accountant that serves both as their treasurer and controller. The said accountant purchases and pays for all the supplies. He also receives all the checks and completes the monthly bank reconciliation.

Why it is not effective: Having one accountant perform all the said duties above shows that LJB doesn’t have an effective check and balance process in place. All the duties that their accountant performs are all related activities. This increases the risk for the company since it would be very easy for the accountant, assuming that personal financial problems arise, to manipulate company records and steal money from the company.

Recommendation: LJB Company should ensure that duties are distributed among employees. In terms of paying supplies, there should be a specific person that is in charge of all purchases. After putting in the order, the Invoice should be forwarded to the accountant for proper...
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