Internal Financial Controls, under the Companies Act 2013, are Policies and Procedures, adopted by the company for ensuring orderly and efficient conduct of business, and among others, include, “Safeguarding of its Assets”. Let us see the Questions which the Internal Auditor could ask to evaluate the effectiveness of controls relating to Fixed Assets. Responses obtained to these questions will help in the Audit plan for an effective review of Fixed Asset related Controls.
Fixed Asset Record
Is an FA register available? Does it contain individual asset level details? Can we track the original purchase records like Purchase Order and vendor Invoice with the help of the register? Does it contain Gross Block Value of the asset and the date of addition? Does the sum of Gross Block Value of all assets in a category match with corresponding value in the Fixed Asset Schedule, as included in the Financials? How up to date is the FA register? Is the location of each asset recorded somewhere in the system, and inter location movements are captured? How up to date is the data? Can we conduct a random verification of assets? How is depreciation calculated? Can we verify the authenticity of the workings?
Process Review
Pre-Procurement Process: Is there a Capex Budgeting and pre-commitment approval process? Is each proposal reviewed for cost benefit and approved? Is actual Capex against budget for a period analyzed and reviewed? Post installation and usage of the asset for some time, is there a review of gains on asset addition against what was indicated in the Capex proposal?
Procurement Process: How robust are vendor selection, Induction, Bidding and Purchase Order Processes?
Receipt, Storage, Installation & asset movement Process: How good are controls in receipt, storage and payable processes? Is the installation preceded by reference to the original Capex? Is user acknowledgement obtained on installation? Is there a custodian for fixed assets at all the stages, namely, receipt, storage, installation, usage, movement and disposal? Does record keeping enable tracking the assets at all stages? Is there a periodical review of physical condition, utility and obsolescence of high value assets? Is there an asset disposal process including update to the fixed asset record?
Operating Practices on asset movement: Do assets move from place to place? How is it initiated, documented and FA record updated? If statutory approvals like customs authorizations are involved, how are they taken care?
Assets procured and placed under Custom Bonding:
In the case of duty-free imports which are subject to restrictions like being placed under bonding for usage, does the process enable tracing each asset to the Custom Records, made available for inspection by Customs Authorities, and to seek permissions for disposal locally?
Assets procured at the instance of Customers:
In software and services companies, as it normally happens, if a customer has asked your auditee company to procure assets and deploy them in their projects, is there a process in place to capture such transactions, claim reimbursement of the expenditure where that customer offered reimbursement? How is it capitalized in the books, where reimbursement does not directly take place but customer suggested enhancement in billing rate to recover the cost of the asset over the project tenure, or in other permutations like Customer pays for the assets, and wants it to be returned at the end of the project, or leaves it with the auditee company for their use in other projects?
Capitalization of In-house Expenses: Where a company capitalizes internal expenditure, on projects, like in the case of software developed for in-house use, say ERP purchased and implemented with internal efforts, or in the case of manufacturing companies, capacity enhancements through in-house projects, is the process robust to consider all the relevant expenses and nothing else? In the case of utilizing VAT / CEN-VAT Credits, is Capitalization done properly by parking such credits in “Recoverable” accounts instead of taking them to CWIP?
Physical Verification
Is physical verification of Fixed Assets carried out regularly, methodically, and differences between the Asset Record and physical assets, including their location is properly reconciled and updated?
Is each asset tagged with a unique asset ID, generated at the time of its receipt and is identified through the same ID in the Asset Record? Where assets are in large number, spread over many locations, say as workstations in the case of software companies, is a Location Plan (layout) with workstation numbers maintained and such numbers are preserved in the Asset Record? Can we obtain Location-wise list of assets for ease of physical verification? In the case of assets like laptops, which are issued to employees, does the system preserve concerned employee’s email-id andobtains email confirmations periodically? In the case of employee separations does the F&F (Full & Final) settlement process mandatorily obtains confirmation on return of assets held by the employee, before settlement?
Is there any Bar Coding System in use for Asset Tagging, and for physical Verification?
Others
Are relevant Accounting Standards followed? Are assets covered for insurance? How is the information organized for insurance? How are asset values computed for insurance? Is depreciation in Financials accurate? Are retired assets deleted from FA Record? Is there a concept of Cost-center-wise depreciation charge in management reporting? How is it organized? Are leased assets, loaned assets or assets procured at the instance of customers a part of the FA Record? How is the information organized? Is asset information suitably preserved for future expansion plans?
Thank you for your attention
Tulasi S Sastri
FCA,CISA
CAclubindia
