Importance of Internal Control for Non-Current Assets
Discuss about the Internal Control for Acquisition.
Internal control is a procedure that is impacted by the company’s management, trustee board and various other persons responsible for providing the reasonable assurance for the attaining the goals of the following
- Compliance with the applicable regulations and laws
- Efficiency and effectiveness of the operations
- Reliability of the financial reporting (Graham, 2015).
Generally, non-current assets are the fixed assets that include plant, equipment, properties. In various organizations the internal control elements are considered as per the guidelines of the standards, if
- Proper approval procedures has been followed for the capital expenses
- Proper insurance coverage has been provided for the exposures of the assets.
- Depreciation has been calculated properly and provided properly for each period
- The useful life and the salvage value have been determined properly, if capitalized (El Ghoul et al., 2015).
In the present competitive business scenario, the organization considers the profitability of the business not just as the revenue function but also for the better management of the resources. Further, the fixed asset generally comprises of a considerable part of total assets in any organization and thus it secures crucial part in the balance sheet. The important and effective management for fixed assets with regard to efficient internal control are as follows
- Safe custody and accountability of the assets – it is very important to maintain the assets safely and a responsible person shall be appointed for the custody of the assets. Establishing the assets accountability will result in the enhanced security level and will assist in reducing the misuse and theft incidence (Ge et al., 2017).
- Tracking of fixed asset – the assets of B Ltd shall keep track of the movable assets for keeping the assets productive and safe. Maintaining the up to date information for the assets and keeping track of the usages, location, maintenance, custodian and insurance will assist the managers to maintain the efficiency, productivity and safety of the assets.
- Management of the asset lifecycle with strong history and audit trail – the management of asset life cycle is the procedure for accounting, monitoring and controlling for the assets throughout the life. Recording and tracking each detail of the asset starting from acquisition to the date of disposal will assist in better management of the data and will help in planning, monitoring and utilization of the asset in better ways.
- Tagging the physical assets – tagging of the assets provides the appropriate and effective control and management of the assets. Tracking of the assets are simple when the fixed assets are tagged with the unique identification number. Apart from this, it assists in speeding up the audit process of physical assets through identification of the assets on the floor with the asset tag (Lisic et al., 2016).
- Conducting the verification of physical assets – for the optimal management of the assets, the asset manager shall carry out the periodical verification of the assets for ensuring the asset’s existence. Through physical verification the managers can carry out the reconciliation of asset with the books. Further, the physical verification assists in identification of the ghost assets that is the asset which is stolen, lost or unusable.
It can be identified from the given case study of B Ltd that the internal control procedure for the disposal and acquisition of the tangible non-current assets for B Ltd with regard to the following aspects
- For acquisition of any new assets the requisition form is required to be approved and completed by departmental manager
- Purchase order is sent to the head office and the suppliers.
- The receiving clerk reconciles the purchased assets with the purchase order and receiving report.
- The departmental manager records the details regarding the acquired assets using the requisition, purchase order and barcode.
- For the purpose of disposal the disposal form is to be completed by departmental manager and is approved by the financial accountant. It is further filed at the head office and thereafter the asset register is updated by the departmental manager.
- The register of the asset is reconciled with the general ledger on monthly basis by the departmental manager
- Depreciation is appropriately calculated by departmental manager.
However, depending on the value of the asset, proper authorization shall be taken from the appropriate authority as the financial accountant can approve for the assets amounting over $ 5,000 and the directors can approve for the assets amounting over $ 10,000.
Under the audit procedure, the test of control is the audit process for testing the control effectiveness that is used by the client company for preventing or detecting the material misstatement. Based on the outcome of the test the auditors may decide upon whether to rely on the client’s control system as the part of auditing activities. Internal controls for the intangible non-current asset are exposed to 2 types of risks. The primary risk is the physical risk that the asset will be damaged, lost or stolen (Ghosh & Tang, 2015). On the other hand, the secondary risks are the financial risk that there will be error in determining the useful life, cost or depreciation. Both the controls are explained below –
The main objective of the physical control is verifying the condition, custody and existence of the asset. The main purpose of the physical control is to verify the existence of asset and it includes –
- Identification of the fixed asset ledger for the particular asset, its date of purchase, serial number, model number, expected useful life, depreciation rate, acquisition cost.
- Whether the asset is verified at least annually and if there is a risk associated with the site development for the equipment or any physical damages.
- Whether the management review the asset periodically with regard to the insurance policies of the assets which are exposed to the loss or damages.
- The assets which are used by various employees are there any log-in and log-out systems or not.
Verifying the existence of the asset is easiest way for the physical control for implementing the actual control on the asset. For the small business like B Ltd. as the business grows, the physical assets may used by the employees for their personal purposes, for instance the technology equipment and vehicles. Therefore, the auditor shall properly check the things that the office assets are not used for personal purposes (Haislip, Peters & Richardson, 2016).Financial controls
The main objective of the financial control is assuring that fixed assets are recorded at accurate value under the financial statement. Financial controls on the fixed assets include the following controls –
- Whether the purchase of the fixed assets are initiated or approved by proper authority
- Whether proper policy is there that requires the capitalization of the asset with respect to its useful life
- Whether the inventory count for all the asset is conducted is carried out at least once in a year or not
- Whether the approval from the management is taken for the disposal of the asset and recorded in the books properly
- Whether the ledgers for fixed assets are regularly reviewed for confirming the segregation of the non-fixed tangible assets purchases to the account of fixed asset. Generally the error committed in recording the expenses related to construction process under the account of fixed assets (Yee et al., 2017).
Further, the policies and procedures for the transfers disposals and acquisitions of the fixed asset shall be checked properly. Further, the useful life of the asset shall be defined clearly and it must be consistent with fixed asset policies of the company. However, the operating units may apply other policies with the prior approval from the company’s finance director. However, the auditor must check that –
- The finance department of each operating unit is maintaining the updated and comprehensive register for the fixed asset and the register shall include the rate of depreciation, cost of the asset, book value of the asset, accumulated and current depreciation rate, custodian and location of the asset (Guo et al., 2015).
- Movement of the fixed asset must be approved as per the limit authority that is in case of B Ltd. the financial accountant can approve for the assets amounting over $ 5,000 and the directors can approve for the assets amounting over $ 10,000.
- Duties and responsibilities must be segregated among the custodians of the assets, verification authority, maintenance authority and approving authority for the movement of the asset (Clinton, Pinello & Skaife, 2014).
- Difference, if any among the book records and physical count shall be investigated thoroughly prior to approving any adjustments and the matter shall be further investigated and reported to the head office.
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El Ghoul, S., Guedhami, O., Lennox, C. S., & Pittman, J. (2015). External versus internal monitoring: The importance of multiple large shareholders and families to auditor choice in Western European firms.
Ge, W., Li, Z., Liu, Q., & McVay, S. E. (2017). When does internal control over financial reporting curb resource extraction? Evidence from China.
Ghosh, A., & Tang, C. Y. (2015). Auditor resignation and risk factors. Accounting Horizons, 29(3), 529-549.
Graham, L. (2015). Internal Control Audit and Compliance: Documentation and Testing Under the New COSO Framework. John Wiley & Sons.
Guo, J., Huang, P., Zhang, Y., & Zhou, N. (2015). The effect of employee treatment policies on internal control weaknesses and financial restatements. The Accounting Review, 91(4), 1167-1194.
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Yee, C. S., Sujan, A., James, K., & Leung, J. K. (2017). Perceptions of Singaporean internal audit customers regarding the role and effectiveness of internal audit. Asian Journal of Business and Accounting, 1(2), 147-174.
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