Having lesser number of employees gives an advantage to LJB. The firm builds a long term relationship with its employees and which suggests loyalty and low employee retention. If the employees are less it is also easier to set new rules and implement. The decision of indelible ink machine is a great idea. Pre-numbered invoices would help the firm to record the transaction only once and will record all the transactions. This will also ensure timely recording of the transactions which will further result in accuracy and reliable accounts. The use of physical control is also very essential for the firm. The accountant’s act of keeping the checks in a safe custody in his office is a Physical controls principle. This reflects safeguarding of assets and also enhances the accuracy & reliability of the accounting records.
LJB is violating the principle of segregation. The accountant who works as a controller and treasurer doing the company’s maximum work right from purchasing, making payments doing bank reconciliation, recruiting etc. when one persons manages so many things the probability of making an error increases. Also, there can be various frauds and one may not be aware what went wrong. The three principles of internal control segregation are missing and we suggest that the company should implement these principles documentation, independent internal verification and recordkeeping from physical notebook. This will deliver a proper effective system of internal controls. Any attempt, error or fraudulent activity will be detected easily.
Some of the Internal controls for cash receipts the company should include are:
- Only one person should handle the cash may be appointing a cashier who maintains all the records and should be responsible for any error.
- A proper recording of all the remittance advices, bank deposits etc.
- Daily counts of receipts and daily comparisons of total receipts with total deposits
Some of the internal controls for cash disbursement the company should include are:
- Having one or specified individuals such as the treasurer authorized to sign the checks;
- Assigning the duties of approving items for payment, recording the payment and paying the items to different individuals;
- Using pre numbered checks and accounting for all checks, with each check supported by an approved invoice; after payment, stamping each approved invoice paid;
- Storing blank checks in a safe custody with access restricted and only authorized personnel should have the access, and using a machine with indelible ink to imprint amounts on checks;
- Comparing each check with the approved invoice before issuing the check, and making monthly reconciliations of bank and book balances; and
- Bonding personnel who handle cash, requiring employees to take vacations, and conducting background checks.
The principle of responsibility is missing in the firm maintain petty cash. As its mentions that all its employees have access to the petty cash in a desk drawer and are asked to only place a note if they use any of the cash. In this case if any errors occur it will be tough to determine who is culprit. An important principle of internal control is to give responsibility to specific trust worthy employees. Only One person should be given to control petty cash and keeping a log of it. At the end of the week or day the supervisor can reconcile it. A proper recording of inflows and outflows has to maintain by that employee.
Human resource control activity also plays a vital role in internal control system. In the case we can see that the company has not done a background check for its employee before recruiting them. Through background check the company is not risking the company’s security as well as information. A hired employee should be give a computer and a separate login id and password. This will help the company to track the employee’s login timing and track their activities individually. The company should also have a strong web control policy which restricts them to visit inappropriate sites from work place; all these will help the company to formulate a proper human resource control and internal control of the firm.
The company should include all the above mentioned point in order to have a sound internal control before they goes to public.
References:
- Financial Accounting, 4Th Ed by By Wevgandt, Weygandt/kieso/kimmel page no.354
- Understanding Internal Controls A Reference Guide for Managing University Business Practices
- Financial Accounting: Tools for Business Decision Making - Google Books
- Hospitality financial accounting by Jerry J. Weygandt (2005)
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