Question

Select the best answer:

To assure accountability for fixed asset retirements, management should implement an internal control that includes:

a) Continuous analysis of miscellaneous revenue to locate any cash proceeds from the sale of plant assets.

b) Periodic inquiry of plan executives by internal auditors as to whether any plant assets have been retired.

c) Utilization of serially numbered retirement work orders

d) periodic observation of plant assets by the internal auditors

Answer 1

The best answer is c) Utilization of serially numbered retirement work orders

Serially numbered retirement work orders provide a systematic means of assuring that units of plant and equipment are not retired without authorization by management. Retirement work orders also provide the accounting department with the information necessary to record the retirement of equipment in the accounting records. The alternative procedures suggested are not satisfactory. Some retirements of plant asset do not involve cash receipts. The inquiries and observations by internal auditors would come after the fact of asset retirements.

Management of most manufacturing organisations usually scope in PPE as a risk area during their annual audit due to its materiality. A combination of controls testing and substantive testing is usually adopted when obtaining audit assurance on PPE.

A combination of controls testing and substantive testing is usually adopted when obtaining audit assurance on PPE.

Within the business cycles selected for testing during a particular period, the principal business activities and the sub processes are tested.

Acquiring fixed assets

Recorded fixed asset acquisitions represent fixed assets acquired by the organisation.

An item of property, plant and equipment is to be recognised as an asset if, and only if:

• It is probable that future economic benefits associated with the asset will flow to the entity; and
• The cost of the asset to the entity can be measured reliably.

Depreciating fixed assets       

Depreciation charges are valid.

The parts (components) of each item of property, plant and equipment that are to be depreciated separately;

• The cost or valuation of each separately depreciable component;
• The estimated residual value of each separately depreciable component;
• The length of time during which each separately depreciable component will be commercially useful to the entity; and
• The most appropriate depreciation method for each separately depreciable component.

Disposing of fixed assets

Recorded fixed asset disposals represent actual disposals.

Fixed asset disposals are recorded in the appropriate period.                                  

Managing fixed assets

Records of fixed asset maintenance activity are accurately maintained.

Financial information is not presented in a misleading way and all information that is necessary for fair presentation and compliance with professional standards or legal requirements is disclosed.

Maintaining fixed asset register and/or master file

Only valid changes are made to the fixed asset register and/or master file. Where internal controls are strong, Auditors may reduce the planned level of substantive assurance. This is usually the case and that is why it is desirable for entities to ensure that internal controls are very in design and also very efficient and effective in operation.

Internal Controls to be followed by auditor
An auditor should review the system of internal controls relating to PPE, particularly the following:
(a) Control over expenditure incurred on PPE acquired or self- constructed-An effective method of exercising this control is capital budgeting, which, apart from ensuring proper authorisation of the expenditure incurred, also shows, in general, how effectively such expenditure is being controlled through periodical comparisons of actuals with budgeted figures. It also ensures that amounts expended do not exceed the amounts authorised, and controls allocation of expenditure between capital and revenue in the case of self constructed assets.
(b) Accountability and utilisation controls-Accountability over each PPE (or each class or component of PPE (in the case of companies following the relevant Revised AS)) is established, among other things, by maintaining appropriate records. This facilitates control over custodianship of such assets, for example, physical verification by the management or establishment of procedures relating to disposal of PPE. On the other hand, utilisation controls ensure that the individual PPE have been properly used for meeting the objectives of the entity.
(c) Information controls-These controls ensure that reliable information is available for calculating and allocating depreciation, recording disposals or retirements, preparing tax returns, establishing the amount of insurance coverage, filing insurance claims, controlling repairs and maintenance charges or expenses incurred for inspection to assess the condition of the asset, replacement cost of specific parts, useful life of assets or specific parts, eg, specified number of hours of use, etc.
(d) Safeguarding of assets-These controls ensure that the assets owned by the entity are safeguarded and any loss on damage/destruction of such assets are made good, through for example, insurance of assets, warranties, etc. The entity may have a process by which responsibility to safeguard the assets could be identified to specific personnel.