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LBJ Company Internal Control

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.

Solution Preview

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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