Internal Control - Case Study Example

Case Study: Internal Control Table of Contents Table of Contents 2 Introduction 3 LJB Company: Going Public 3 Question 1 3Question 2 4Question 3 4Summary and Conclusion 5Introduction Internal control in auditing and accounting is defined as the process that assures the objectives of an organization are achieved in operational efficiency and effectiveness, policies and regulations, compliance with laws, as well as reliable financial reporting (Trenerry, 2009). It is a broad concept that entails everything which controls an organization’s risks.

At organizational level, objectives of internal control relate to compliance with laws and regulations, timely feedback on achievement of strategic and operational goals, and reliability of financial reporting. This paper will cover internal control requirements for a company, which decides to go public. The second concern to be addressed will be advice on the right things the company is doing and recommendation on a pending decision. Finally, the paper will address the things that the company is doing wrong and recommend ways of improvement.

LJB Company: Going Public The action of taking a company public is considered as one of utmost importance. Remarkably, such an action has to be taken by the Chief Financial Officer in consultation with the Chief Executive Officer and the board. Going public comes with its own challenges and changes to the enterprise.Question 1 The internal control requirements for LJB Company will change considerably with the decision to go public. As a small enterprise or a local distributor, senior management is involved in multiple responsibilities, which changes once the company goes public.

One of the new internal controls will be separation/segregation of duties or assertions categorization (Whittington & Pany et al., 2004). Financial activity will have to be divided on clear boundaries to avoid overlapping duties. A single person will separate authorization of transactions, record keeping, and custody roles to prevent error or fraud. Another new control requirement will be the performance of internal audits verified by external auditors as stipulated under the Sarbanes-Oxley Act.

This is under the principle of independent review.Question 2 LJB Company has an accountant, which is good for financial aspects of internal control. The accountant is tasked with retention of records by maintaining documents to substantiate transactions, which is being done at LJB as well. The accountant is also rightfully tasked with the duty of receiving checks and completing the monthly bank reconciliation. It would be advisable to buy the indelible ink machine to keep track of the pre-numbered invoices.

This will result in accuracy in terms of the principle of record keeping. Numbering the checks will be a means of tracking checks reducing instances of fraud. The accountant does right to keep checks into a safe in his office that is in accordance with the principle of asset records and custody (Trenerry, 2009).Question 3 It is not prudent for LJB Company to have one person handling a couple of duties that would otherwise be done by several people. The accountant in the company handles far too many responsibilities that could easily occasion errors.

The internal control principle of responsibilities dictates that the company has to have segregation of duties for efficiency and better accountability (Trenerry, 2009). There are duties that should be handled by the Public Relations manager like hiring and firing as well as payment of employees. Companies must have clearly established responsibilities. The petty cash at the company is handled casually and a system should be put in place to ensure no room for fraud. The principle of responsibility for related transactions and that of record keeping dictates that records of money are kept in the appropriate books and signed against by concerned parties (Trenerry, 2009).

The company should have a petty cash voucher and all cash to be kept by him not a free for all access.Summary and Conclusion Companies need to review their internal controls on a regular basis. Internal control is a basic tool for measuring, monitoring, and directing the resources of an organization. A successful company takes into account the internal control principles of responsibilities, asset records and custody, insurance and bonding, record keeping, independent review, technological controls, and responsibility for related transactions (Trenerry, 2009).

ReferencesTrenerry, A. R. (2009). Principles of internal control. Sydney, N.S.W.: UNSW Press.Whittington, R., Pany, K. & Whittington, R. (2004). Audits of internal control for public companies special supplement for use with principles of auditing and other assurance services. Boston: Mcgraw-Hill.