Accounting Control

¶ … Advice for the Company on the New Internal Control Requirements Internal control requirements are the policies, mechanisms and procedures that organizations should satisfy to minimize the operational risks. The internal control is very critical to deter employees from implementing fraudulent operations; an organization is required to adhere to the internal system before going public.

Section 404 of the SOX (Sarbanes-Oxley) Act states that internal control is critical for a publicly operating company and internal control system is an auditing and accounting procedure that organizations should employ to achieve an efficient, effective and reliable financial reporting. Overview of the LJB Company operations reveals that the company does not meet the requirements of the Section 404 of the SOX Act. Part of the Section 404 of the internal control system is that the function of the internal auditor should be separated from the work of an external auditor.

In other word, an internal auditor of a company should not perform the same work of external auditor. Overview of the operation of the LJB Company reveals that the company does not implement an effective internal control based on the current company internal operations. Presently, the company accountant performs the work of controller, treasurer, as well as human resources functions. All these functions must be separated based on the requirement of SOX Act.

Typically, it is mandatory for the company management to allow an external auditor to access the internal operations as well as the financial reporting of the company. In essence, the external auditors must attest for the effectiveness of the company internal control system. Moreover, the company is required to publish its internal control reporting in its annual reports to assist the stakeholder evaluating the effectiveness of the company operations.

Thus, it is the responsibility of the management to design the company internal control system to comply with the Section 404 of SOX Act. 2. Advise to the President on what the Company is doing correctly Based on the information provided in the case study, there are some items that the company is doing which are being done in a correct way.

The company is doing the following operations correctly: Use of the numbered invoice: First, the use of the numbered invoice is being done correctly because it assists the company to track the checks that are being issued within the company. Moreover, the number numbered check will assist the company to track the checks issued to other stakeholders such as suppliers and employees.

Checks locked when the accountant is not in office: The decision of the accountant to lock all the checks in the safety lock box when not in office is done correctly because the strategy will prevent the theft of the checks or prevent other person to carry out a potential fraud with the check.

The accountant competing "the monthly ban reconciliation" as well as receiving the checks are also being done correctly because it will assist the company to update the company monthly statements in a correct manner and enhancing the correct reporting. Issue about the Indelible Ink Based on the issue about the indelible ink, the company should buy the indelible ink machine because buying the indelible ink machine will prevent forgery within the company.

Typically, the machine will prevent forgery in the company because the ink cannot be washed away or erased, which will consequently assist the company to implement an effective internal control system. 3. Things that the company is doing wrong Several areas need to be corrected before the LJB Company can become a public company. Typically, the company needs to correct these items to abide by the SEC (Securities and Exchange Commission) regulations and abide to the Section 404 regulation stipulated by the SOX Act.

Areas of Improvement First, the management of the LJB Company needs to segregate duties to comply to the Section 404 of the SOX Act. The SOX Act states that a company should segregate the duties within the company. As being revealed in the case, the accountant is performing several jobs such as performing the work of an accountant, internal auditors and human resources duties.

In compliance to the SOX Act, the company is required to segregate these duties and appoint other individuals to take over the jobs of internal auditors and human resources duties. Moreover, the other individuals should take over the work purchasing and controller so that the each individual in the company will serve as watchdog on others. In essence, the internal auditor and controller should oversee the actions of the accountant. This strategy will assist in complying with the rules and regulations stipulated by the Section 404 of the SOX Act.

Moreover, the management does not carry out the proper authorization of the company transactions. In essence, no auditor to oversee that the transactions carried out within the company are being done correctly. Thus, the company needs to implement the system of check and balance on different aspects of the company operations to prevent frauds. Additionally, the company does not carry out a proper documentation. For example, no employee is overseeing whether the petty cash transactions are being done correctly.

Moreover, the company does not have a documentation to ascertain how the money is being used and what it is being used for. There is also no action to check the activities of the accountant. The company needs to monitor its information and communication systems by setting up the password system to protect the company computer systems. Setting up the password systems will make employees accountable for their action when accessing the company computer systems.

Moreover, using the passwords system will make the company to tack the action of the employees when using the company computer systems and the strategy will assist the company to protect the company information resources. The strategy will also prevent employees to misuse the company computer. Splitting work of employees will assist in enhancing the check and balance systems, which will make the workplace to be more efficient. Moreover, the strategy will enhance more accountability of employee because each employee will be liable for his or her action.

If the President can carry out these changes, the management will be able to prevent frauds and theft within the workplace. The improvement will assist the company to abide by the rules and regulations of the SOX Act, which will prevent the company from receiving unnecessary fines. 1.

Cash Budget Preparation of the cash budget for May and June CASE STUDY 3: Cash Budget Template EXPECTED CASH COLLECTIONS SCHEDULE FROM CUSTOMERS: Credit Sales May June April 65,800 May 26,850 62,650 June Total Cash Collections 92,650 62,650 "SCHEDULE FOR EXPECTED PAYMENTS FOR PURCHASE OF INVENTORY" Inventory purchases May June April 117,000 May = april purchases =$195,000 x 60% May 54,000 81,000 May = May purchases = $135,000 x 40%; June = May purchases =$135,000 x 60% June 25,200 June = June purchases =$63,000 x 40% Inventory Purchases Total Payments 171,000 106,200 LBJ Company Cash Budget For the total two months of May & June May June Cash balance $20,000 $24,500 Add: Receipts Collections from customers 92,650 85,150 Sale of plant assets 33,000 Sale derived from new common stock 50,000 Cash sales 75,000 57,000 Total receipts 200,650 192,150 Total Available Cash 220,650 216,650 Less: Disbursements Purchases of inventory 171,000 106,200 Operating expenses 15,000 15,000 Administrative & selling expenses 10,150 10,150 Equipment purchase 19,000 Dividends 20,000 Total disbursements 196,150 170,350 "Excess (deficiency of available cash over disbursements)" 24,500 46,300 Financing Borrowings Repayments Ending cash balance $24,500 46,300 2.

Three sections in a Cash Budget The three sections of the cash budget are as follows: Cash Disbursements Section Cash Receipts Section, and Financing Section. The information included in each section is as follows: A cash disbursement section reveals all the payment that the company makes within a fiscal year, whether the payments is related to the operation or not.

For example, payments for raw materials, payments to suppliers, payments for purchasing of inventory or merchandizing, overhead costs and direct labor, cash purchase for plant assets & investments and operating expenses payment, income and interests taxes, payment of cash dividends and payments for the stock repurchase are displayed in the cash disbursement section. The cash receipts section reveals all the cash receipts expected from the company's cash sources that include major source of revenue as well as other revenue sources.

For example, the cash receipts from the company cash sales, dividends' cash receipt, cash collection or received from customer for credit sales, proceeds from plant assets sales, cash receipts that a company receives, and a company stocks issuance are all included in the cash receipt section. On the other hand, the financing section reveals all the borrowing that the company is required to cover. The section also shows all the repayment of money borrowed with the interest rates.

Importance of cash Budget to the Company Cash is very critical for a company survival. A company needs to plan its cash needs to ensure that the company meets its cash operating needs. In essence, a cash budget is very essential for a company because it reveals the company projected cash flow for a fiscal year.

By understanding the cash amount a company will generate and spend during a fiscal year, the company can make an effective planning in its operations, which will assist the company to maintain an effective business operation. "Five basic Principles of Cash Management" "Five basic principles of cash management" to have the chance of having adequate cash are as follows: 1. First, a company should accelerate the speed of collection of receivables. By speeding up the collection process, a company will be able to have adequate cash for its business operations.

However, an organization must be very careful when collecting receivables because forcing customer to pay very early can make customer to switch to the competitors. However, the company can entice customers to pay very early by offering discounts for customers who pay on time. (Kimmel, Weygandt, Donald). 2. Moreover, the company should keep the inventory at a very low level. In essence, large inventories will make a company to tie up cash and it will lead to high costs of operations because of the higher holding and storage costs.

Keeping a minimal inventory level will assist the company to free the inventory for the profitable ventures. Thus, a company should use the past historical records to forecast the total number of product to keep in the inventory within a fiscal year, the strategy will assist the company to keep minimal level of inventory at all times. 3. A company should also monitor its payments of its liabilities.

The company should ensure that it does not pay its liabilities very too earlier because the action may lead to a reduction in a cash balance. However, it is still very critical for a company not damage its credit relationships and rating by prolonging the payments of its liabilities. 4. Planning the timing of the major expenditures. A company capital investment is very critical.