LJB Company, a local distributor, has asked your accounting firm to evaluate the
ID: 2387032 • Letter: L
Question
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 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. The President expressed his frustration because both he and the accountant both interview and approve all of the new hires.
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 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 that is being violated along with a recommendation for improvement. (20 points)
You must prepare a formal report for the partner to distribute to the President so no abbreviations or short-hand answers.
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indelible ink machine to print checks
indelible ink machine
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
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 pub
Inform the President of any new internal control requirements if the company decides to go public
what is an indelible ink machine
1 Inform the President of any new internal control requirements if the company decides to go public (7 points)
indelible ink machine for checks
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 applicab
indelible ink machine and internal control
Explanation / Answer
While it is excellent that LJB Company places so much faith and trust in its long term employees, it is in clear violation of the internal control principle and is running significant risks by not including more oversight and checks and balances in accounting and cash management system. First of all, that they have one accountant who plays the role of both Treasurer and Controller is an area of great risk. The Controller and Treasurer are meant to play opposite roles in which they provide oversight and checks and balances to the other. The two positions should be filled by separate employees, and this change should be implemented as soon as possible. In the current setup, the one accountant has too much power over the process, making it easy and tempting for him/her to commit fraud. On top of this, the cash drawer principle also leaves the company vulnerable to fraud and manipulation of funds. For example, even if a company employee were to act independently, an employee could easily remove a substantial amount of unauthorized funds, and it would be difficult, if not impossible, to find who did it as any of the company employees could have been culpable. An example of the problems that arise from the anonymity that company employees have within the organization, is clearly exemplified in the case of the worker who was fired for viewing pornography on the company computer. Not only does this introduce risks of damaging corporate reputation, and download viruses/trojans/malware, but it also highlights how the lack of individual user accounts and accountability makes it so that one employee can hide their malicious actions with the guise of anonymity. Summary of Recommendations 1) To introduce a culture of corporate responsibility, the CEO should begin to implement individual user accounts for its computers, as well as a formal cash withdrawal system, that requires that company employees register themselves with another person or a computer system to withdraw cash. 2) The role of the one accountant who acts as Treasurer and Controller must be separated into two so as not to violate the internal control principle, and in order to minimize the likelihood of fraud. 3) The checks should not just be left at the accountant's office, as this gives ample opportunity for someone to simply take the checks in between when it is delivered and picked up. 4) The accountant taking checks home over the weekend is a security issue as well as introduces more opportunity for fraud. This practice must be stopped and more safeguards put in place. 5) The accountant also being involved in the interview process for new employees is disturbing because of the level of control he has over critical aspects in the company's day to day business. If he were to hire an accomplice, he could easily use that individual and his position in order to manipulate accounts and withdraw significant funds from the company before he is ever caught. 6) On a minor note, more rigorous background checks of employees can be recommended before hire.
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