ACCT 504 Case Study 2

Topics: Internal control, Sarbanes–Oxley Act, Auditing Pages: 6 (1940 words) Published: March 15, 2014


Internal Controls:
Requirements and Recommendations
for LJB Company

Prepared For: LJB President

Prepared By:
February 5, 2013

Table of Contents

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

Internal Control Requirements for Publicly Traded Companies……………………...…..3

Current Strengths in Internal Controls……………………………...……………………..4

Current Weaknesses in Internal Controls…………………………………………………6

Summary and Conclusion……………………………………………………………........8

Bibliography……………………………………………………………………………..10

Introduction

LJB Company inquired about new internal control regulations required if they choose to go public. This report will discuss the regulations required by the Sarbanes-Oxley Act of 2002 that address the internal control measures required by publicly traded companies. This report will also comment on the internal controls currently being performed well at LJB Company and provide a recommendation regarding the purchase of an indelible ink machine. The report will conclude with observations of current weaknesses in internal controls and recommendations for improvement. Internal Control Requirements for Publicly Traded Companies

Publicly traded companies in the United States are required to follow rules set forth by the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act requires companies “to maintain an adequate system of internal control” (Kimmel, Weygandt, & Kieso, 2013, p. 337). The Act also lists requirements for officers and boards of directors. Section 302 of the Sarbanes-Oxley Act discusses three requirements for internal controls. One requirement is for signing officers to evaluate internal controls and to report on their findings in the previous ninety days before submitting financial reports (Soxlaw.com, A Guide To Sarbanes-Oxley Section 302). A second requirement is that companies list “all deficiencies in the internal controls and information on any fraud that involves employees who are involved with internal activities” in the financial reports (Soxlaw.com, A Guide To Sarbanes-Oxley Section 302). The third requirement is for companies to report in the financial reports any meaningful changes in internal controls that could negatively impact internal controls (Soxlaw.com, A Guide To Sarbanes-Oxley Section 302). Under the Sarbanes-Oxley Act, “independent outside auditors must attest to the adequacy of the internal control system” (Kimmel, Weygandt, & Kieso, 2013, p. 337). Section 404 of the Sarbanes-Oxley Act discusses the requirements the management in ensuring the adequacy of internal controls and reporting them in financial reports (Soxlaw.com, A Guide To Sarbanes-Oxley Section 404). Section 404 of the Sarbanes-Oxley Act also discusses the need for an independent firm to “attest to and report on the assessment on the effectiveness of the internal control and procedures for financial reporting” (Soxlaw.com, A Guide To Sarbanes-Oxley Section 404). It is important to note that “companies that fail to comply are subject to fines, and company officers can be imprisoned” (Kimmel, Weygandt, & Kieso, 2013, p. 337). LJB Company should be prepared to evaluate internal controls and have the officers sign off on the adequacy and effectiveness of the internal controls. This needs to occur within ninety days of submitting financial reports. LJB Company should also prepare a list of deficiencies in their internal controls and any fraud involving employees involved in internal activities. If there are any material changes to internal controls that could negatively impact the company, LJB Company needs to report these changes in their financial reports. Lastly, LJB needs to have an independent outside auditor attest to the adequacy and effectiveness of the internal controls of the company for the financial reports. Current Strengths in Internal Controls

The use of pre-numbered invoices is one of the strengths in internal...

Bibliography: Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2013). Financial accounting: Tools for
business decision making (7 ed.). Hoboken , NJ: John Wiley & Sons, Inc.
Soxlaw.com. (n.d.). A Guide To Sarbanes-Oxley Section 302. Retrieved February 1,
2014, from Sarbanes-Oxley Act 2002: http://www.soxlaw.com/s302.htm
Soxlaw.com. (n.d.). A Guide To Sarbanes-Oxley Section 404. Retrieved February 1,
2014, from Sarbanes-Oxley Act 2002: http://www.soxlaw.com/s404.htm
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