Optimizing Internal Controls Over Fixed Assets: A Step-by-Step Guide

Understanding Fixed Assets in a Company

Fixed assets in an organization represent long-term tangible assets used to produce and deliver products or services and manage daily operations, which benefit from expert financial accounting guidance. Therefore, implementing internal controls over fixed assets ensures proper recording, safeguarding, and accurate reflection in financial statements.

Companies hold fixed assets to provide or produce goods or services, not to sell them in the normal course of business. Consequently, classification as a fixed asset depends on the intended use or purpose of the asset.

In many capital-intensive industries such as manufacturing, power generation, and healthcare, fixed assets often represent the largest item on the balance sheet. However, historically, auditors’ limited scrutiny of fixed assets sometimes caused significant misstatements or financial fraud in company reports.

Although organizations often assume they report fixed assets accurately in year-end financial statements, audits may reveal discrepancies. Hence, performing inventories and reconciliations provides essential internal controls to strengthen accuracy and reliability in financial reporting.

Internal Control Over Fixed Assets

Companies record fixed-asset transactions when acquiring or disposing of assets and allocate related costs to reporting periods through depreciation expense. Thus, implementing effective internal controls over fixed assets helps companies record accurately, authorize properly, and safeguard assets throughout these processes, with support from specialized internal audit experts.

To ensure completeness, key internal controls for fixed-asset acquisition and management include:

• Issuance and approval of purchase orders
• Receipt of assets and preparation of receiving reports
• Receive and verify vendor invoices.
• Subsequently, reconciliation of vendor invoices with corresponding purchase orders and receiving reports
• Authorization and processing of payments to vendors
• Additionally, recording entries in the equipment sub-ledger
• Posting sub-ledger activity to the corresponding general ledger control accounts
• Finally, regular reconciliation of general ledger control accounts

How MBG Can Help in Internal Controls Over Fixed Assets and Audit

MBG assists clients in maintaining effective internal controls over fixed assets and conducting thorough audits. In addition, Services include detailed verification of records, physical inspection, and evaluation of existing control procedures to ensure accuracy and compliance.

Verification of Fixed Assets

This involves examining related records and performing physical verification. Furthermore, MBG cross-checks records against supporting documents and evaluates them for adherence to internal control standards, backed by transaction testing and validation support. Management remains responsible for performing physical verification.

Verification of Records to Maintain Internal Controls Over Fixed Assets

• Initially, MBG verifies opening balances of existing fixed assets using schedules, ledgers, or register balances.
• Next, MBG confirms acquisition of new assets and improvements to existing assets using supporting documents such as purchase orders, invoices, receiving reports, and title deeds.
• MBG verifies self-constructed assets, improvements, and capital work-in-progress using contractors’ bills, work-order records, and independent confirmations.
• Moreover, MBG scrutinizes expense accounts, including Repairs and Renewals, to ensure no capital assets appear incorrectly as expenses.
• Finally, MBG checks fixed assets that were fully depreciated or written off during the year to confirm proper recording in the fixed assets register.

Verification of Retired Assets

For assets that were destroyed, scrapped, or sold, MBG verifies:

• Proper authorization of retirements and adherence to quotation procedures where applicable
• Accurate adjustments in asset and depreciation accounts
• Full accounting of sale proceeds, if any
• Correct recognition of gains or losses in the Profit and Loss Account

Ensuring Completeness of Records

To identify unrecorded retirements or disposals, MBG uses procedures such as:

• Reviewing work orders and physical verification reports for indications of retirements
• Examining major additions to confirm whether old assets were replaced or retired
• Consulting key management and supervisory personnel
• Obtaining written confirmation from senior officials or department managers that all disposals have been recorded
• Verifying ownership of assets like land and buildings through title deeds; if deeds are held by third parties, confirmation is obtained directly through formal requests

Why MBG for Internal Controls Over Fixed Assets and Audit Services

Prospects and clients should consider MBG for internal controls over fixed assets and audit services due to several key strengths:

• Expertise and Experience: MBG has specialized knowledge in internal controls and audit processes. Understanding industry standards and regulatory requirements ensures that fixed asset management aligns with best practices.
• Risk Management: MBG identifies and mitigates risks related to fixed asset management, including fraud, misstatements, and inefficiencies. Existing controls are assessed and improvements recommended where necessary.
• Objectivity: MBG uncovers issues that internal teams may overlook due to familiarity or bias. This impartial approach is essential for a thorough evaluation of internal controls.
• Compliance: MBG ensures fixed asset audits meet all necessary compliance standards, minimizing the risk of penalties.
• Benchmarking: MBG provides benchmarking data, allowing clients to compare practices against industry standards and identify areas for improvement.