Case Study 2 Internal Control Recommendations

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Internal Control Recommendations This memorandum is being presented to inform you of new internal control requirements should your company decide to go public, internal controls currently being utilized by your company, areas that require the implementation of internal controls in your company, and recommendations for improvement. If your company decides to go public, you need to be aware of the requirements under the Sarbanes-Oxley Act of 2002 (SOX). Under this act, publicly traded U.S. companies are required to maintain an adequate system of internal controls, ensure these controls are reliable and effective, and have independent outside auditors verify the adequacy of the internal control system. Failure to meet these requirements can result in fines and even imprisonment. The six principles of control activities that need to be followed are: 1) Establishment of responsibility; 2) Segregation of duties; 3) Documentation procedures; 4) Physical controls; 5) Independent internal verification; 6) Human resource controls. Currently your company is implementing an internal control of documentation procedures by using pre-numbered invoices. Using pre-numbered documents prevents transactions from being recorded more than once, or from not being recorded at all. In addition, I do recommend the purchase of an indelible ink machine. Use of an indelible ink machine will allow any checks to be imprinted with amounts, preventing employees from changing the amounts after the initial recording of the transaction. There also needs to be an establishment of responsibility for printing checks on the indelible ink machine so that checks cannot be printed by just any employee. Currently you have one accountant serving as Treasurer and Controller, and under these two roles the same person is responsible for related activities. Under the internal control of segregation of

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