LBJ has desired an external audit of their internal audit controls. They want to know what they are doing correctly and how that helps their internal controls. They also want to know what they are doing incorrectly or poorly, how to improve it and how that will improve their internal controls. Internal controls are important for a company to be successful and mandatory for a company to go public.
LBJ is a small, growing company. It has room to improve on its internal controls. There are certain controls they need to start in order to comply with procedures and policies required of public companies if they do intend to go public. These controls are numerous; the important ones in need of immediate attention are listed later. LBJ is not without controls, some are there, some need to be improved. The procedures that are already in place and how they help LBJ in controlling its procedures are listed. LBJ is missing many internal controls that will help ensure it is protected against lose and lawsuits. The controls that need to be implemented and the areas they help improve are listed.
Every public firm needs to follow the Sarbanes-Oxley Act (SOX). The SOX Act requires that a company keep an adequate system of internal controls. For the purposes of going public, the important controls that need to be implemented are control activities. The five control activities that are recommend to be implemented immediately by LBJ are:
• Physical controls – Restrict physical and data access to employees that is not required for their job. Keep all materials safeguarded from unnecessary eyes and hands.
• Establish Responsibility - Limiting access to only those who are authorized and identifying those personnel.
• Employment Check – Run a background check on each employee and get the necessary employees bonded.
• Separate Duties - The work of one employee should check to ensure the work of another employee is correct and accurate.
• Verify Processes – Randomly check the work of employees by another employee who is independent of the work. Have a policy for reporting inaccuracies.
Current Internal Controls
While there are many things that LBJ will need to alter promptly, there are a few things they are already doing that a very beneficial for internal controls. These are:
• Pre-numbered Checks – This is an adequate records keeping function.
• Checks kept in a safe – This is a good physical control procedure that helps keep checks from being stolen or lost.
• Writing down petty cash transactions – This is start of adequate record keeping. The record should be kept by one employee who is responsible for the petty cash. These records should also be checked by a second employee to ensure accuracy.
The addition of an indelible ink machine will be another step to improving internal controls. The machine will create a better control for internal verification.
Controls to be Improved
The areas that LBJ needs to improve upon are:
• Lack of separation of duties. The accountant controls asset handling, record keeping, and transaction approval. Hiring new