Case Study 2
ACCT 504
Group A
December 2, 2012

LJB Company Internal Controls Evaluation
For the President of the company
Prepared by Group A Accounting Firm
December 2, 2012

Table of Contents:

I. Introduction – Stating the Issue II. Body of the Report – LBJ Company Findings and Analysis III. Summary and Conclusions – Findings Communicated to the President and Recommendations IV. Work Cited – References to support Recommendations

Introduction:
The purpose of this document is to discuss the internal controls and why the principle activities are important for a business to operate effectively. Our goal is to make the necessary recommendations and evaluate the system for future planning. We hope to uncover any issues that will prevent the company’s productivity. We’ll submit our recommendations to correct and improve the current system in place. In conclusion we’ll present our analysis to the President along with the recommendations needed to implement a better system of internal control.
Issues:
There’s an issue with too much responsibility placed on one employee. The accountant serving as the controller and treasurer creates a problem with documentation as you don’t have anyone to verify cash and revenue is accounted for correctly. It’s too easy for one employee to manipulate the books in his favor without a clear segregation of duties. The accountant is leaving checks in his office during the week exposing sensitive information and increasing the risk of theft in the office without securing the checks prior to leaving for the weekend. Access to petty cash is not regulated effectively due to lack of security and poor documentation. There’s a lack of human resource presence in order to complete a competent interview process and extensive background checks on all employees prior to employment. The infrastructure of the company has high security risk due to no password protection for computer use.
Recommendations:
LJB Company is a lean organization which allows for low operating cost. This will help the business as it plans for the future going public. The long-term tenure of employees’ keeps attrition low and production consistent eliminating the need to hire and train staff on a frequent basis. Our first recommendation is to establish responsibility among current employees and provide training when needed separating the duties of accountant, treasurer, and controller. This will keep accountability high for each employee responsible and increase system of checks and balances. Our second recommendation is to establish physical control over petty cash allowing one employee to handle cash on hand and another employee to complete the documentation of checks on the balance sheet. Out third recommendation is to hire a third party human resource company for independent internal verification providing an external interview process and extensive background check for all employees prior to the approval from the President to hire. Our last recommendation is to upgrade the infrastructure implementing password protection on all company computers to monitor fraud and improper usage during company time. This can be controlled through the human resource department as well.
Summary:
We feel that LJB Company has a good opportunity to go public in the future granted they implement the necessary recommendations provided from our previous analysis of their current internal control system. Once these corrections have been made we suggest LJB move forward with purchasing the indelible ink machine to print their checks in order to reduce the cost it would incur granted they worked with an outside company. Given the long-term tenure of the employees and the low operating cost these recommendations will improve the overall effectiveness of the company while increasing their integrity which will be valued by its employees and customers.
Work Cited:
Financial Accounting: Chapter 7 – Fraud, Internal Control, and Cash, Pages 338-345