1. Inform the President of any new internal control requirements if the company decides to go public. (7 points)
Ans: The management of LJB Company is responsible for maintaining adequate internal control over financial reporting. The new internal control requirements that should be adhered to are as below:
The company should be in compliance with Sarbanes-Oxley Act Regulations. The business should conduct an internal audit and should follow the SEC, GAAP and IFRS procedures to record all transactions. LJB Company will benefit a lot by formalizing and documenting their internal control procedures. Companies must develop sound principles of control over financial reporting and assess regularly that the controls are working.
The new rules require management to disclose to the public any material weakness identified by management. The outside auditor is required to audit certain companies’ internal controls over financial reporting on an annual basis. While companies in the IPO process are not required to comply with these regulations immediately, but in order to prepare for certifications and audit, it is important to establish, document and monitor compliance of internal controls as early as possible.
As per the section 404 of the Sarbanes-Oxley Act of 2002, Companies subject to the reporting requirements of the Securities Exchange Act of 1934, other than registered investment companies, have to include in their annual reports a report of management on the company’s internal control over financial reporting. (Sources: http://www.sec.gov).
2. Advise the President of what the company is doing right (they are doing some things well) and also recommend to the President whether or not they should buy the indelible ink machine. When you advise the President, please be sure to reference the applicable internal control principle that applies. (13 points)
Ans: Though, the company has a very positive environment and has a lot of faith in their long-term employees, the managers of the company should still monitor some of the practices e.g. writing or processing of checks, handling petty cash etc. LJB Company needs to have a good segregation of duties amongst the employees for better work management and ownership. Accountant plays the role of being the treasurer and controller both which may not be desirable if the company is deciding to go public. Here are a few things that the business is doing positively in accordance with the Sarbanes-Oxley Act and GAAP regulations:
President has been attending the interview
The president and the company has been following ethical practices and took a swift action as he fired one of his employees for viewing pornography on the company’s computer
There is loyalty and trust with long term employees
Pre-numbered invoices are used for accounting
I would suggest that the business should go ahead and purchase the indelible ink machine because it would help them to keep track of the checks by having documentation and proof of cash transactions and events. An indelible check unit would help automate the accounting department by making it more efficient.
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