LJB Company, a local distributor, has asked your accounting firm to evaluate their system of

internal controls because they are planning to go public in the future. The president wants to be
aware of any new regulations required of his company if they go public, so he met with a
colleague of yours at a local restaurant. The president of the company explained the current
system of internal controls to your colleague. Your colleague has since been promoted to a tax
position so she has passed on the information below so you can generate recommendations for
the partner at your accounting firm to share with the president of LJB Company.
Since LJB Company is a relatively lean organization, they have a lot of faith in their long-term
employees. They have one accountant who serves as treasurer and controller, which streamlines
many of their processes. In this dual role, he purchases all of the supplies and pays for these
purchases. He also receives the checks and completes the monthly bank reconciliation. The
accountant also interviews and approves of all the new hires. The accountant is so busy that the
company handles petty cash a bit differently. All employees have access to the petty cash in a
desk drawer and are asked to only place a note if they use any of the cash.
The accountant has recently started using pre-numbered invoices and wants to buy an indelible
ink machine to print their checks. The president is waiting to hear from you if this is a necessary
purchase before authorizing.
On payday, the checks are picked up by the accountant and left in his office for pick-up. Before he
leaves for the weekend, he will move the checks into a safe in his office.
The president is still quite embarrassed because he had to fire one of his employees for viewing
pornography on a company computer. He later found out this individual was a convicted felon
who served time for molesting children. The company had a hard time getting the employee to
admit it was him because the company does not assign individual passwords.

Required:
Based on the above information, prepare a Word document to address the following.
1. Inform the president of any new internal control requirements if the company decides to
go public. (7 points)
2. Advise the president of what the company is doing right (they are doing some things
well), and also recommend to the president whether or not they should buy the indelible
ink machine. When you advise the president, please be sure to reference the applicable
internal control principle from your textbook that applies. (13 points)
3. Advise the president of what the company is doing wrong (they are definitely doing some
things poorly). Please be sure to include the internal control principle from your textbook
that is being violated along with a recommendation for improvement. (20 points)

1.

If the company decides to go public the company must comply with the Sarbanes-Oxley
Act of 2002 (SOX). SOX restructured the corporate governance in the United States after
the incident of Enron and WorldCom. SOX created new requirements for accounting and
auditing for a public traded company For example: All publicly traded companies must
provide an internal control report by the management and by an external auditor.
(Harrison 235-236)
According to the SarbanesOxley Section 404, the management is required to provide
internal control report on the annual report of the company. The report must confirm the
responsibilities of the managers to maintain an adequate internal control structure for the
preparation of the accurate financial statements. This report also should assess the
effectiveness last fiscal years internal control structure and procedures. (Wikipedia,
2014).
If the company decided to go public, all of this internal control structures requirement
must be met.
2.
The company is maintaining a good internal control on some aspects. For example the
employees salary checks are kept in a safe when the accountant is away from his office
on the weekend. This relates to the Limited access principle. Keeping the checks in a
safe will protect from the theft and limit the access to it. Only designated person will be
able to access it.
The using of pre-numbered invoice is another good internal control practice. This relates
to the Adequate records principle. The company needs to maintain adequate records for
each and every transaction of the company. Pre-numbered invoices will assure
completeness of processing and proper transaction cutoff, and prevent theft and
inefficiency. Any gap in the pre-numbered invoices will indicated that a transaction might
be omitted from the invoices. (Harrison 239)
Buying an indelible ink machine to print checks will be a good internal practice for the
company. This will prevent fraud i.e. writing the checks by anyone and theft. But the
company has to make sure only the designated person has the access to that. This relates
to the Limited access principle.
3.
The company is practicing some poor internal control in some aspects. These poor
internal control practices should be improved for better internal control structures.
The company cannot have faith on anyone without having proper documents. It doesnt
matter how senior the employee is. For example the cashier must bonded to protect the
company from the petty theft. The accountant should not work as treasurer and controller.
The accounting department should not handle cash at any cost. With access to cash and
records the person might theft company money. A company needs to separate three major
duties: asset handling, record keeping, and transaction approval. (Harrison 238). Also
each person must have clear job description. While hiring, the company needs to explain

what will be the persons responsibilities clearly and that person should be assigned only
to those responsibilities. Another practice that this company must follow is that
background checks of the each employee while hiring. Every employee must go through
a thorough background check before getting the job in the company which will ensure no
convicted felon will work in the company and thus reduce the risk of fraud and theft.
These aspects of internal control relate to the Smart hiring practices and separation of
duties principle.
A department or a person should not be able to complete a transaction from beginning to
and end without cross checked by a third party. The accountant should not work as
treasurer and controller and do the monthly bank reconciliations. The treasurer
department should be responsible for depositing all the cash and checks. The controller
department should be responsible for recording all transaction from customers. A third
person should the bank reconciliations. Also at the end of each accounting period the
company should do an audit by internal and external auditors. These aspects of internal
control relate to the Comparisons and compliance monitoring principle.
The company should maintain adequate records of every transactions of the company.
The employees should not be allowed to use company cash only with notes. The
company should maintain proper paperwork for cash taken by employee in advance. This
aspect of internal control relate to the Adequate records principle.
All employees should not have the access to the cash which is kept in a desk drawer in
this company. Only the cahier and the treasurer department should have access to the
cash. Also cash should keep in a safety locker box that is only accessible by assigned
person and deposit the bank should be made regularly. The checks should be handled the
same way. The company should also restructure its IT structure to restrict the access of
each person based on his responsibilities. Every employee should have his/her own
password and his/her access should be limited. These aspects of internal control relate to
the Limited access principle.
The account should not conduct interview and approved new hires. There should be a
separate human resource department to perform these activities. This aspect of internal
control relate to the proper approvals principle.

Harrison, Walter T., Charles Horngren, C. William Thomas. Financial

Accounting, VitalSource for DeVry University, 9th Edition. Pearson
Learning Solutions, 02/2013. VitalBook file.
SarbanesOxley Act: http://en.wikipedia.org/wiki/Sarbanes
%E2%80%93Oxley_Act