Accounting 504 Case Study 2

Keller Graduate School of Management
Prepared by: Samara Ellison
Prepared for: Professor Hicks
3 April 2013

To: LJB Company President
From: Samara Ellison, Accounting Firm
Subject: Evaluation of LJB Company’s Internal Control Structures
Date: 3 April 2013

Hello LJB Company President:

First, I would like to thank you for hiring my accounting firm to evaluate LJB’s internal controls system. This report will inform you of any new internal control requirements required for LJB to go public, advise you of what the company is doing right, recommend that LJB purchase an indelible ink machine, and advise you what areas the company can improve.

Introduction

After observation LJB’s operations,
It would be easy for the accountant to commit fraud, and he/she would likely not be caught because of the current lack in segregation of duties. Likewise, the accountant should not be assigned to both purchasing and receiving supplies. Theft would go unnoticed because one employee was accountable for inter-related duties with no outside supervision or witness. The accountant should not be responsible for receiving the checks and completing the monthly bank reconciliation. The employee responsible for record keeping should neither receive checks or have access to funds or be the custodian. Receiving checks needs to be assigned to a different employee. The cash custodian needs to be separated from accounting duties also. Whoever is assigned to be the custodian of assets should not have access to accounting records
Control Activities: Physical Controls
Physical control activities also need improvement. I recommend changes in paycheck procedures for LJB. With the current system, an employee can mistakenly or purposefully pick up someone else’s paycheck. If the accountant is assigned to distribute the paychecks, he/she needs to keep them within sight or locked up and distribute them as individuals collect them. Using direct deposit would streamline this process and lessen the workload of the accountant who is already overloaded. Management should write the check for the accountant because writing one’s own check violates internal