How to strengthen internal controls over fixed assets of the company?

Introduction to Fixed Assets and Their Importance

Fixed assets, in an organization, represent the long-term tangible assets used to produce and deliver its products or services and to manage its operations, and effective internal controls over fixed assets ensure that these assets, held for providing or producing goods or services and not meant for sale in the normal course of business, are accurately recorded, monitored, and classified depending upon the use to which they are put or intended to be put.

Significance of Internal Controls over Fixed Assets

In many capital-intensive industries such as manufacturing, power generation and healthcare, fixed assets represent the largest item on the balance sheet. Historically, fixed assets have received little audit scrutiny and, as a result, some major financial frauds have been perpetrated through significant misstatements of fixed asset balances in the financial statements of public companies.

When asked if fixed assets are represented accurately in year-end financial statements, most organizations will answer “yes.” However, audits may yield a different answer. Although many organizations do not perform an inventory of current fixed assets and a corresponding reconciliation, these steps provide an essential internal controls over fixed assets for the financial reporting of fixed assets.

Moreover, fixed assets need attention to ensure the organization’s records are accurate and internal controls over fixed assets provide effective oversight. As with other asset classes, best practices enhance proper accounting, valuations, and financial reporting.

Key Internal Control Procedures for Fixed Asset Transactions

Fixed-asset transactions typically represent the acquisition and disposal of assets and the allocation of related costs to reporting periods through depreciation expense. The internal controls over the acquisition of fixed assets include the following:

• Issuance and approval of a purchase order
• Receipt of assets and preparation of a receiving report
• Receipt of an invoice from a vendor
• Reconciliation of the vendor invoice to the related receiving report and purchase order
• Authorization of the payment of the vendor invoice
• Issuance of a check for payment of the vendor invoice
• Posting of the entry in the equipment sub-ledger
• Posting of the equipment sub-ledger activity to the related general ledger control accounts
• Reconciliation of the general ledger control accounts

Verification of Fixed Assets and Records

How MBG can help clients in maintaining internal controls over fixed assets:

MBG can help clients through the following ways:

Verification of Fixed Assets:

• This consists of examination of related records and physical verification.
• Verify the records with reference to the documentary evidence and by evaluation of internal controls.
• Physical verification of fixed assets is also a responsibility of the management.

Verification of Records:

• The opening balances of the existing fixed assets is verified from records such as the schedule of fixed assets, ledger or register balances.
• Acquisition of new fixed assets and improvements in the existing ones is verified with reference to supporting documents such as orders, invoices, receiving reports and title deeds.
• Self-constructed fixed assets, improvements and capital work-in-progress is verified with reference to the supporting documents such as contractors’ bills, work-order records and independent confirmation of the work performed.
• Scrutinizing expense accounts (e.g., Repairs and Renewals) to ascertain that new capital assets and improvements have not been included therein.
• Where fixed assets have been written-off or fully depreciated in the year of acquisition/construction, we examine whether these were recorded in the fixed assets register before being written-off or depreciated.

Fixed Assets Retired (Destroyed, Scrapped, or Sold):

In respect of fixed assets retired, i.e., destroyed, scrapped or sold, we examine:

• Whether the retirements have been properly authorized and appropriate procedures for invitation of quotations have been followed wherever applicable.
• Whether the assets and depreciation accounts have been properly adjusted.
• Whether the sale proceeds, if any, have been fully accounted for.
• Whether the resulting gains or losses, if material, have been properly adjusted and disclosed in the Profit and Loss Account.

Procedures to Ascertain Missing or Retired Assets

It is possible that certain assets which were destroyed, scrapped or sold during the year have not been recorded. The we may use the following procedures to ascertain such omissions:

1. Review work orders/physical verification reports to trace any indicated retirements.
2. Examine major additions to ascertain whether they represent additional facilities or replacement of old assets, which may have been retired.
3. Make enquiries of key management and supervisory personnel.
4. Obtain a certificate from a senior official and/or departmental managers that all assets scrapped, destroyed or sold have been recorded in the books.
5. The ownership of assets, like land and buildings should be verified by examining title deeds. In case, the title deeds are held by other persons, such as solicitors or bankers, confirmation should be obtained directly by the we through a request signed by the client.

MBG’s Approach to Internal Control and Fixed Asset Audit

Prospects or clients should consider reaching out to MBG for internal control and audit services related to fixed assets for several key reasons:

Expertise and Experience:

• MBG have specialised knowledge and experience in internal controls over fixed assets and audit processes.
• We understand industry standards and regulatory requirements, ensuring that fixed asset management aligns with best practices.

Risk Management:

• MBG help identify and mitigate risks associated with fixed asset management, including fraud, misstatements, and inefficiencies.
• We can assess existing controls and recommend improvements.

Objectivity:

• MBG can help uncover issues that internal teams might overlook due to familiarity or bias.
• This objectivity is crucial for a thorough evaluation of internal controls.

Compliance:

• MBG help potential prospects in ensuring that fixed asset audits meets all necessary compliance standards, reducing the risk of penalties.

Benchmarking Fixed Asset Management Best Practices

We can provide benchmarking data, helping clients compare their practices against industry standards and identify areas for improvement.