Internal Control Principles In order to have a successful business there should be a strong internal control system put into place. Internal control is defined as the policies and procedures management uses to ensure the reliability of financial reporting, compliance with laws and regulations, and the effectiveness and efficiency of operations (Kimmel 337). The business must safeguard it's assets from employees, the public, and its own management. This report will address the LBJ Company's strengths and weaknesses in its current system of internal control. There are a few steps that need to be understood about internal control (Ratcliffe):
Internal control is a process (a way to get the end result that is wanted)
Internal control is effected by people (actions of employees of the company)
Internal control can be expected to provide only reasonable assurance (not an absolute means) The LBJ Company has executed several principles very well. The continuation of such will help make the company more successful. The implementation other principles is needed, and they will be visited within the report. This report will first address the principles that have been carried very well. Next the report will address the principles that need to be corrected, or needed to be added.
Documentation Procedures This principle is designed to ensure the proper recording of transactions. The company uses pre-numbered invoices which help avoid duplications (Needles 295). If there were duplications this would cause more unnecessary work. For example more time would be needed to track down all duplicated invoices, and time would be used in fielding calls from customers who received duplicated invoices. There is even the possibility of having to provide free services for unsatisfied customers. (Illustration 1)
Illustration 1 (Kimmel 341)
It is highly recommended that the company purchase an indelible ink machine to print company checks. The ink utilized at the moment can be altered, and that could lead to fraudulent activities.
Physical Controls This principle permits access to assets only with management's authorization. It is a good process that two people both interview and approve all of the new hires (Needles 295). One person may see or hear something that the other person doesn't. This process allows the interviewers to compare pros and cons on the possible new hires. (Illustration 2)
Illustration 2 (Kimmel 342)
Segregation of Duties and Independent Internal Verification The organizational plan should separate functional responsibilities (Needles 296). It is to our understanding you have an accountant who serves as Treasurer and Controller. The accountant is carrying out to many duties. There needs to be separation of duties for the accountant, treasurer, and controller. The treasurer should purchase ad pay for the supplies. The accountant should receive and keep the checks in a locked safe, and handle the monthly bank reconciliation. The controller supervises the accountant and treasurer, therefore this position should verify the bank reconciliation (independent verification), and the invoices from the supply purchases. (Illustration 3)
Illustration 3 (Kimmel 343)
Establishment of Responsibility This principle facilitates preparation, establish accountability for assets, and all transactions should be recorded (Needles 295). All handling of petty cash needs to go through the accountant. Petty cash must be signed out by the employees and accountant. At the moment all employees have access to the petty cash, and only have to leave a note which leads to the possibility of theft. On pay day the accountant should leave the checks in