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Internal Controls Case - Sarbanes-Oxley Act of 2002

Essay by   •  November 1, 2012  •  Research Paper  •  1,290 Words (6 Pages)  •  1,249 Views

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Introduction

Under Sarbanes-Oxley Act of 2002, all public traded U.S. corporations are required to keep an ample system of internal controls. Business executives and boards of directors must make sure that these controls are dependable and valuable. As with any business, the change of going from a private company to a public company requires some widespread planning and research. It is recommended that with LJB being a relatively small sized company in terms of its employees should reassess the costs versus the benefits of being a public traded company. If LJB decides to issue stock it would be wise to answer the following questions: (1) How many shares are going to be approved for sale, 2) How to issue the stock, and 3) What value is going to be given to the stock? The content of this internal control report is based on the related methods and measures adopted within an organization to safeguard its assets, enhance the reliability of its accounting records, increase efficiency of operations, and ensure compliance with laws and regulations. The major independent components/variables of the internal control system should include (Kimmel, Weygandt & Kieso, 2011):

1. Control environment

2. Risk assessment

3. Control activities

4. Information and communication

5. Monitoring

Internal Controls

What has been observed is that not all the components of a successful internal control system are there in the control components of the company. Now if LJB decides to go public in the near future, there are going to be some new internal control requirements that they need to be aware of. Here are a few of the internal control components:

Internal Control Component 1: Management/Leadership in the Control Environment

The most basic component of the internal control system is the company management/leadership in the control environment (Kimmel, Weygandt & Kieso, 2011). In my opinion, it is the accountability of top management to make it clear that the business standards reliability and that dishonorable action should not be put up with. This should clearly point out the tone at the top.

Internal Control Component 2: Leading/Managing Control Actions

The second component of the internal control system is the company leading/managing its control actions (Kimmel, Weygandt & Kieso, 2011). The control actions are the strength of character of the business's attempt to tackle the dangers it may face, such as deception. In order to decrease the amount of deception, management must propose a course of action to deal with the detailed dangers faced by the business. Since LJB is a comparatively small business in terms of the number of employees, it gives them a benefit over their opponents in the industry. Not only does it show the confidence you have with your long-term employees, but it also builds up reliability and employee preservation. With a smaller business, it will be easier to set new prospects and execute new policies all the way through the business. The accountant's new choice to control the pre-numbered invoices was a great idea and the purchase of a permanent ink machine would be an outstanding asset for the business.

Pre-numbered invoices would help avoid a transaction from being documented more than once, or on the other hand, from not being documented at all. Second, the control system requires that employees quickly advance resource papers for accounting entries to the accounting department. This control measure will help to make certain that there is suitable recording of the transactions and gives it straight to the accurateness and dependability of the accounting records. Permanent ink machine will help keep the business organized as well as simplified for all of the accounting duties.

Internal Control: Physical

The use of physical controls is vital to the business. The accountant's performance of observing the checks in a safe in their workplace is in agreement with the physical controls standard. This reflects the protection of assets and improves the accurateness and dependability of the accounting records.

Internal Control: Segregation of Duties

It has also been observed that the business is violating the principle of control activity of segregation of duties. The accountant is performing

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