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LBJ Company Internal Control

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You have a client, LBJ Company, with a lean organization and these practices:
- Accountant purchases all of the supplies and pays for these purchases.
- Accountant receives the checks and completes the monthly bank reconciliation.
- All employees have access to petty cash and are asked to only place a note if they use any of the cash.
- Accountant picks up paychecks and they are left in his office for pick-up. Before he leaves for the weekend, he will move the checks into a safe in his office.
- Accountant has recently started using pre-numbered invoices.
- The president is considering buying an indelible ink machine to print their checks.
- The president expressed his frustration about a recent hire who was a felon because both he and the accountant both interview and approve all of the new hires.

Explain the impact on internal controls if a company decides to "go public."
What is the company doing right? Should they buy the indelible ink machine?
What is the company is doing wrong? Make recommendations for improvement.
Be sure to reference the applicable internal-control principles.

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Explain the impact on internal controls if a company decides to "go public."

Public companies, as the result of the passing of Sarbanes Oxley Act of 2002, are required to document their controls, test the documented controls and have their external auditors test their testing of controls and write a report about the effectiveness of controls surrounding financial reporting. So, there will be additional work on both designing, testing and auditing of controls if you decide to go public. This expense will be incurred annually for both the internal work and the external audit, likely more than doubling the cost of financial reporting.

What is the company doing right? Should they buy the indelible ink machine?

The classic five control activities that help to prevent or find and correct errors, intentional or unintentional, are segregation of duties, authorization, documenting transactions, limiting access and ...

Solution Summary

Your tutorial is 538 words and discusses the cost and impact of going public, indicates the four good practices, and lists 7 weak practices along with ideas for improvement.

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LJB Company: Evaluate the system of internal controls

Case Study 2 -Internal Control

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.

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.

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.

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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