In the United States, all corporations planning to go public have to maintain an adequate internal control system. There are also some fraudulent human beings who can rip off a company if it's not well protected internally. Some of the internal controls that the company should consider before going public include broad planning and preparation The company has been right in trusting their employees. The handling of cash should be separated from the record keeping of cash. LJB company seems to have had more left out principles that the applied ones. it is important to apply new technological controls and often perform reviews.
Internal Control
In the United States, all corporations planning to go public have to maintain an adequate internal control system. LJB is a small company that does local distribution and wants to go public. The president has decided to get an independent audit firm to carry out the assessment while identifying its areas of weakness. In case failure is reported by this audit firm, it could be fined or the officers could go to prison. Internal controls help in detecting any errors in the report from accounts and also protect assets. This also helps in efficiencies as law and order is followed by the company operations (Tysiac 2012).
There have been human errors that are caused by over working or wrong assumptions by members of staff. There are also some fraudulent human beings who can rip off a company if it's not well protected internally. This allows the law to enforce external auditors before the company goes public to ensure there are no risks involved. It is vital that the auditors report fully on the effectiveness and reliability of those controls set up by the company so that the public can build trust in its financial statements. While some companies feel that the external auditors are expensive, they should realize the cost of internal controls does not weigh more than the benefits. Dishonest employees are some of the human factors that can bring down a company.
Some of the internal controls that the company should consider before going public include broad planning and preparation (Tysiac 2012). Internal control principles should fully be applied in order to safeguard the company. Having faith in the long-term employees is important. However, precautions are vital especially in accounting to avoid temptations. Human error through fatigue, negligence or misjudgment may happen in such a company. Having only one accountant who serves as treasure and the controller is risky and that's why assisting officer would be important. That way the responsibilities will be shared in case of any cash lost. The purchasing officer should be different from the accountant to avoid any bias in allowing bidding. The control of cash flow will also be an important internal control. Pay checks should be dispatched instantly to the employees. A committee should also be set up to interview and check the credibility of the employees. Using an indelible ink machine is an internal control method that helps control documents. Human fraud is common in companies hence the importance of internal control audit.
The company has been right in trusting their employees. This is usually a motivation for the members of staff and it normally enhances their output. The principal of bonding employees has been well applied in this particular case. The accountant is a company's asset considering how he multi-tasks. He is responsible for purchases, payments, checks, and bank reconciliation. By purchasing the ink machine, the principle of applying new technological controls will have been adhered to. Lastly by calling the external auditors, LGB will be applying the principle of performing regular and independent reviews. Nevertheless, only few principles have been applied and a lot has to be adjusted.
This company has been wrong in many areas, and they need to be corrected. For example they have ignored the principle of establishing responsibilities by giving the accountant almost all the major duties in the office. They have also failed in maintaining adequate records by over working the accountant. The principle of separating record keeping and custody of assets has failed. This is because the accountant is personally handling everything and it is wrong. There is also the principle of dividing responsibility for related transactions that has not been applied (Cosmin 2011).
The handling of cash should be separated from the record keeping of cash. The company should make sure that the receipts are promptly deposited in a bank. Cash payments should be paid through the check systems for security purposes. The cash itself should be deposited in the bank and not in the office. Cash receipts should be controlled by comparing them to the cash register. The person signing the check should be different from the one authorized and also the one keeping records. All these are precautions to fraud. The document flow should also be monitored making sure that all concerned officials get to check them. A petty cash journal can be made to control the cash flow too.
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