Case Study 6: Ljb Company Audit Report Regarding Internal Control Activity Requirement Evaluation for Initial Public Offering and Indelible Ink Printer Procurement Recommendation
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LJB Company Audit Report regarding Internal Control Activity Requirement Evaluation for Initial Public Offering and Indelible Ink Printer Procurement Recommendation Author: Phillip Stevens, Buck Stops Here Accounting Associates
Securities Exchange Commission Internal Control Requirement Explanation
As part of the Initial Public Offering application process with the Securities and Exchange Commission, companies are required to document and validate their internal control activities including policies and procedures. The internal controls must ensure reliable financial reporting, effective and efficient operations, and compliance with applicable laws and regulations. Safeguarding assets against theft and unauthorized use, acquisition, or disposal is also part of internal control “best practices”.
The Securities Exchange Commission guidelines for internal control activity validation include one or more of the principles: • Segregation of duties requires that different individuals be assigned responsibility for different elements of related activities, particularly those involving authorization, custody, or recordkeeping. For instance, the same person who is responsible for an asset's recordkeeping should not be responsible for physical control of that asset.
• Proper authorization of transactions and activities helps ensure that all company activities adhere to established guide lines unless responsible managers authorize another course of action. Proper authorization also extends to multiple approvers for large capital expenditures and hiring personnel.
• Adequate documentation and records provide evidence that financial statements are accurate. Controls designed to ensure adequate recordkeeping include the creation of invoices and other documents that are easy to use and sufficiently informative; the use of pre-numbered, consecutive documents; and the timely preparation of documents.
• Physical control over assets and records helps protect the company's assets. These control activities may include electronic or mechanical controls (such as a safe, employee identification cards, fences, cash registers, fireproof files, and locks) or computer-related controls dealing with access privileges or established backup and recovery procedures.
Business Practices In Internal Control Activity Compliance
When implementing certain business practices, policies and procedures, LBG Corporation exercised “sound judgment” by incorporating the internal control activities principles mentioned below.
• The current use of pre-numbered invoices will allow the LBG Company to better control and track accounts receivables. This business practices is in line with the adequate document and record internal control principle.
• The LBG Company exercises “best practices” in managing payroll checks as explained in the fore-mentioned internal physical controls principle. Payroll is also managed by a 3rd party vendor, which assures LBG’s compliance with segregation of duties principle. • The LBG Corporation business practice to assure timely reconciliation of monthly banking statements is in compliance with the adequate documents and records internal control principle.
• By having multiple company officers interview and approve the hiring of new employees, the LBG Corporation exercised sound judgment and the segregation of duties principle in their recruitment practices. However, more stringent recruitment selection process that includes criminal background screenings should be considered to help protect and assure proper use of corporate owned intellectual property and assets.
Business Practices Not In Internal Control Activity Compliance
The bullet points listed below are business operation activities not in compliance with the Securities Exchange Commission’s Internal Control guidelines for publically traded companies. Also included are the corrective actions necessary to validate and assure internal control compliance.
• Treasury and Controller positions should be separated into two different positions and related duties should also be appropriately delegated in accordance to the separation of duties internal control principle. Specifically, duties surrounding financial statements creation, review and approval should be evaluated and separated between the Corporate Treasurer and Controller positions to assure integrity of financial statements.
• Ordering and payment of office supplies should be separated between the Corporate Controller, Treasurer or different trusted employee to comply with the separation of duties control principle.
• The petty cash fund requires additional internal controls to mitigate loss and comply with the segregation of duties principle. Recommendations include appointing a custodian of the fund, who is directly responsible for assuring proper authorization of disbursements from the petty cash fund. The custodian should be rotated on a periodic basis for segregation of duties principle. To assure cash is handled in accordance to adequate document and records principle, random audits requiring reconciliation of the fund, should be conducted on a periodic basis. Finally, in line with the physical control principle, the petty cash fund should be locked in a safe and secure place.
• To comply with the physical security internal control principle, the LBG Corporation should implement better internal control activities to track employee access and use of technology resources. Specifically, individual passwords should be assigned to individual employees for audit trail purposes. Additionally, audit trails should be reviewed by human resources personnel on a periodic basis to further assure compliance.
Indelible Ink Printer Recommendation
The procurement of a indelible ink printer is highly recommended and in line with the Physical Control principle. Because the indelible ink printer will be used to print checks that cannot be erased or modified, the printer will protect LBG Corporation’s most liquid asset, cash, currently on deposit in company banking accounts. To assure further compliance and avoid fraudulent use, the indelible ink printer should be stored in a secured area when not in use.