Internal Control Audit of Fixed Assets

This assignment focuses on auditing internal controls related to fixed assets within a company structure. It emphasizes the importance of policies and procedures governing acquisitions, disposals, and movement of fixed assets. The auditor's responsibilities include verifying asset registers, approving transactions based on authority levels, segregating duties, reconciling book records with physical counts, and reporting discrepancies. The assignment highlights key control points and audit procedures to ensure the accuracy and reliability of fixed asset information.

Running head: AUDITING THEORY AND PRACTICE
Auditing theory and practice
Name of the student
Name of the university
Author note

1AUDITING THEORY AND PRACTICE
Table of Contents
QUESTION 1.............................................................................................................................2
Internal control for acquisition and disposals of the tangible non-current assets......................2
QUESTION 2.............................................................................................................................4
Suggestion for internal control testing procedure of the system................................................4
Reference....................................................................................................................................8

2AUDITING THEORY AND PRACTICE
QUESTION 1
Internal control for acquisition and disposals of the tangible non-current assets
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 –

3AUDITING THEORY AND PRACTICE
 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.

4AUDITING THEORY AND PRACTICE
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.
QUESTION 2
Suggestion for internal control testing procedure of the system
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

5AUDITING THEORY AND PRACTICE
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 –
Physical control –
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).

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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).

7AUDITING THEORY AND PRACTICE
 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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Reference
Clinton, S. B., Pinello, A. S., & Skaife, H. A. (2014). The implications of ineffective internal
control and SOX 404 reporting for financial analysts. Journal of Accounting and
Public Policy, 33(4), 303-327.
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.
Haislip, J. Z., Peters, G. F., & Richardson, V. J. (2016). The effect of auditor IT expertise on
internal controls. International Journal of Accounting Information Systems, 20, 1-15.
Lisic, L. L., Neal, T. L., Zhang, I. X., & Zhang, Y. (2016). CEO power, internal control
quality, and audit committee effectiveness in substance versus in form. Contemporary
Accounting Research, 33(3), 1199-1237.

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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.