ACCT 504 Week 5 Case Study 2 (Internal Control)

Case Study 2

Your Name

For FI504

If the company decides to go public the company must adhere to the new regulations. According to Securities and Exchange Commissionhttp://www.sec.gov/rules/final/33-8238.htm.As directed by Section 404 of the Sarbanes-Oxley Act of 2002, we are adopting rules requiring companies subject to the reporting requirements of the Securities Exchange Act of 1934, other than registered investment companies, to include in their annual reports a report of management on the company’s internal control over financial reporting. The internal control report must include: a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting for the company; management’s assessment of the effectiveness of the company’s internal control over financial reporting as of the end of the company’s most recent fiscal year; a statement identifying the framework used by management to evaluate the effectiveness of the company’s internal control over financial reporting; and a statement that the registered public accounting firm that audited the company’s financial statements included in the annual report has issued an attestation report on management’s assessment of the company’s internal control over financial reporting. Under the new rules, a company is required to file the registered public accounting firm’s attestation report as part of the annual report. Furthermore, we are adding a requirement that management evaluate any change in the company’s internal control over financial reporting that occurred during a fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting. Finally, we are adopting amendments to our rules and forms under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 to revise the Section 302 certification requirements and to require issuers to provide the certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as exhibits to certain periodic reports.

The company should go under an audit of internal control which are new to the company but not new to the business.

The one thing that I see that the company is doing right is that one person is responsible and accountable for each important task in the accounting process. The company is in compliance with the internal control of Establishment of Responsibility. There is no significant benefit of any type to the company other than a more professional appearance with the check writing machine. It is an unnecessary cost of money. The money would be better spent on improving other internal controls such as hiring a second person for the accounting process (separation of duties).

The first and most important violation of internal control is that one person is both the controller and treasurer. This violates Segregation of Duties. One person should not be responsible for all parts of a transaction. This person can get away with fraud. The petty cash procedure is out of control. There are too many hands in it and that is not how you handle petty cash. Written notes are not generally great sources of documents, it should be receipts. This is a violation of Documentation procedures. Checks should not be left out over the weekend no one should be able to access the drawer. This is in violation Of Physical controls. The treasurer and accountant is too busy, this does not exist because there is only one person doing it and the company would have to have two people to meet the internal control The company (President) should verify records periodically as well as discrepancies should be reported to a management level that can take appropriate corrective action. This is a violation of Independent internal verification. The company also violates the Human resource control by not bonding the employees who handle cash. The company does not rotate employees’ duties nor does it require the employees to take vacations.