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FI504 – Accounting and Finance
Case Study #2
Evaluation of Internal Controls
Dear Mr. President,
The Sarbanes-Oxley Act of 2002 (SOX) was put in place by the United States government to require publicly traded corporations to have an adequate system of internal control. External auditors must check the internal control system, and specific requirements must be met. There are five primary components of internal control systems: a control environment, risk assessment, control activities, information and communication, and monitoring. LJB Company will need to have a defined structure for all five of these aspects in order to conform to SOX standards, the most important of which is the control activities.
I would like to take a moment to point out the objectives of internal control practices: first, to safeguard the assets of the corporation, improve the reliability of its accounting practices and records, increase the efficiency of the corporation's operations, and ensure that it's following laws and regulations. This can be achieved through the following general principles:
* Establishment of Responsibility
* Segregation of Duties and Segregation of Record Keeping
* Documentation of Procedures
* Physical Controls
* Independent internal verification
* Human Resource Controls
Also it is important to consider when going public is that the costs of being a public company have almost doubled as a result of the Sarbanes-Oxley Act of 2002. Additional disclosures, internal controls, legal counsel, higher audit fees, and other costs are now part of how publicly traded companies must function. Although there will be additional work on designing, testing and auditing of controls if LBJ decides to go public, these same controls result in saved money and time in the long-term.
There are a number of things noted that are recommended practices and that LJB Company should continue to help with internal control processes. One of these...
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