Internal Control

Good corporate governance within an organization may make a company more attractive to
potential buyers, investors, and other capital sources. Under Sarbanes-Oxley, all public
traded. Corporations are required to maintain an adequate system of internal controls.
Corporate executives and boards of directors must ensure that these controls are reliable
and effective. As with any business, the transformation of going from a private to public
requires some extensive planning and preparation. It is recommended that Company being
a relatively small sized company in terms of its employees should re-evaluate the costs
versus the benefits of being a public traded company. If Company decides to issue stock it
would be wise to answer the following questions

How many shares should be authorized for sale?

How to issue the stock?
What value should be assigned to the stock?

Components of internal control

The content of this Internal Control report is based on the related methods and measures
adopted within an organization to safeguard its assets, enhance the reliability of its
accounting records, increase efficiency of operations, and ensure compliance with laws and
regulations. The major independent components/variables of the internal control system
should include:

Control environment
Risk assessment
Control activities
Information and communication
Monitoring

It has been observed that not all the components of an effective internal control system are
present in the control components of a company. If Company decides to go public in the
near future there are some new internal control requirements to be aware of. The most
basic component of the internal control system is the company management/leadership in
the control environment. In our opinion, it is the responsibility of top management to make
it clear that the organization values integrity and that unethical activity will not be tolerated.
This should clearly indicate the tone at the top. The second component of the internal
control system is the companys effort to address the risks it may face, such as fraud. In
order to reduce the occurrence of fraud, management must design policies and procedures
to address the specific risks faced by the company.

Since company is a relatively small company in items of number of employees, this gives it
an advantage over its competitors in the industry. Not only does it show the faith you have
in your long term employees, but it also develops loyalty and employee retention. With a
smaller organization it will be easier to set new expectations and implement new rules
throughout the organization. The accountants recent decision to switch to pre-numbered
invoices was a great idea, and the purchase of an indelible ink machine will be an excellent
investment. Pre-numbered invoices will help to prevent a transaction from being recorded
more than once, or conversely, from not being recorded at all. Second, the control system
requires that employees promptly forward source documents for accounting entries to the
accounting department. This control measure will help to ensure timely recording of the
transaction and contributes directly to the accuracy and reliability of the accounting records.
Indelible ink machine will help organize as well as simplify the accounting duties. Use of
physical controls is essential. The accountants act of keeping the checks in a safe in his
office is in accordance with the physical controls principle. This reflects the safeguarding of
assets and enhances the accuracy and reliability of the accounting records.
It has been observed that the company is violating the principle of control activity of
segregation of duties. The accountant is acting as the Treasurer and controller. In this dual
role, he purchases all of the supplies and pays for these purchases. He also receivers the
checks and completes the monthly bank reconciliation. Various frauds are possible when
one person handles related activities.
Use of the three principals of internal control segregation of record-keeping from physical
custody, documentation and independent internal verification is recommended. This will
deliver an effective system of internal controls. Any attempt at fraudulent activity will be
detected unless there is collusion among the employees.
Internal controls over cash receipts should include:

Designating only personnel such as cashiers to handle cash

Assigning the duties of receiving cash, recording cash and having custody of cash to
different individuals
Obtaining remittance advices for mail receipts, cash register tapes for over the
counter receipts, and deposit slips for bank deposits
Using company cash safes and bank values to store cash with access limited to
authorized personal and using cash registers in executing over the counter receipts
Making independent daily counts of register receipts and daily comparisons of total
receipts with total deposits
Bonding personnel who handle cash and requiring them to take vacations.

Internal controls over cash disbursements include:

A. Having only specified individuals such as the treasurer authorized to sign checks
B. Assigning the duties of approving items for payment, paying the items, and recording
the payment to different individuals
C. Using pre numbered checks and accounting for all checks, with each check
supported by an approved invoice; after payment, stamping each approved invoice
paid
D. Storing blank checks in a safe or vault with access restricted to authorized personnel,
and using a machine with indelible ink to imprint amounts on checks
E. Comparing each check with the approved invoice before issuing the check, and
making monthly reconciliations of bank and book balances, and
F. Bonding personnel who handle cash, requiring employees to take vacations, and
conducting background checks.
The principle of establishing responsibility does not appear to be strictly applied by
company in petty cash handling. All employees have access to the petty cash in desk
drawer and are asked to only place a note if they use any of the cash. In the scenario it
might be impossible to determine who is responsible for the error. An essential principle
of internal control is to assign responsibility to specific employees. Therefore it is
recommended to establish responsibility of only one person for a petty cash control.
Petty case should be in a safe box and one person should be in charge of keeping a log
and a supervisor should reconcile it at least once a week. Also, petty cash has to be
entered in the system for replenishing the funds.
The hiring process is the most important and inexpensive measure for human resource
control activities. The companys human resource department conduct thorough
background checks. By conducting thorough background checks they are not risking the
companys information/security. After getting hired each employee should have their
own computer login, such as identifying pass codes that keep track of employees who
log in a particular time. Also, the company should block all websites that are not
appropriate to view at work. By having their own log in they cant blame other people
for what activity they are involved in. The president or any other employee designated
by the company should be the only ones able to access all sites. This will allow the
company to have better human resource control and physical internal control.

The nitty gritty of controls

Each major accounting system should have control objectives and control procedures. The auditor
can then perform tests of control to ensure the controls are working.

Control objectives what objectives are the internal controls seeking to achieve
Control procedures the procedures that should be in place to ensure that the
control objectives are achieved
Tests of control audit work performed to generate evidence as to whether the
controls are operating

The objectives of controls in the revenue cycle are to ensure that:

This is a summary of the sales cycle, showing the possible problems and the related
controls:

sales are made to valid customers

sales are recorded accurately
all sales are recorded
cash is collected within a reasonable period.