Audit of Fixed Assets

Audit of Fixed Assets Points for Discussion • Accounting of FA (AS -10) • Audit of FA Statutory Audit- CARO Compliance Internal Audit & Management...
Author: Colin Gordon
2 downloads 0 Views 2MB Size
Audit of Fixed Assets

Points for Discussion • Accounting of FA (AS -10) • Audit of FA Statutory Audit- CARO Compliance Internal Audit & Management audit Controls on FA Practical Challenges in Modern Business Improvements in Asset controls

ACCOUNTING FOR FIXED ASSETS (AS-10)

• • • • •

Meaning of Asset Applicability Components of Cost Valuation of Assets in specific cases Retirement & Disclosure

Meaning Fixed Assets: Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. Examples:Land Building Plant and Machinery Furniture etc.

Applicability Applicability:This accounting standard is not applicable for the following items:Forests, Plantations, and similar regenerative resources. Wasting assets like minerals , oil, and natural gas. Expenditure on real estate development. Live stock.

Components of Cost Historical Cost: The historical cost of acquired fixed assets consists of the following Purchase price Import duties and other non-refundable taxes Any directly attributable cost of bringing the asset to the working condition for its intended use like:site preparation , delivery and handling cost , professional fees etc.

Valuation of Assets in specific cases Type of Assets

Method of valuation

Self Constructed Asset

Cost of construction after eliminating internal profits

Assets under exchange

a) Fair Market Value of the asset given or b) Fair Market Value of the asset acquired Which ever is more evident

Joint Ownership

To the extent of its share

Valuation of Assets in specific cases Type of Assets

Method of valuation

Assets under Hire Purchase

Cash Value including interest

Several assets for consolidated price

Fair basis as determined by Competent Valuers

Repairs

Only if they increase the future benefits from the existing asset beyond its previously assessed standard of performance.

Retirement & Disposal • An item of fixed asset is eliminated from the financial statements on disposal. • Assets retired from active use and are held for disposal - are stated at the lower of a) net book value and b) net realisable value and are shown separately in the financial statements. • Any expected loss is recognised immediately in the profit and loss statement.

Audit of Fixed Assets

Stages of controls on FA in its life cycle

Considerations • Statutory Audit • Internal Audit • Management Audit

Statutory Auditor

Statutory Audit • Material Item in the Balance Sheet • Material Item in the Profit & Loss Account • Comment in CARO

Matters to be commented in CARO

Sale of substatial assets

Proper Records

Physcial Verificati on

Matters to be commented in CARO • Maitenance of Proper Records [Paragraph 4(i)(a)] • Physical verification of assets and recording of descrepancies in the books of accounts ; [Paragraph 4(i)(b)] • Substatial disposal and its impact on Going concern ; [Paragraph 4(i)(c)]

Maitenance of Proper Records [Paragraph 4(i)(a)] The term 'Proper Records' not defined. However, the FAR should contain the following. (i) Sufficient description of the asset to make identification possible; (ii) Classification, e.g., plant and machinery, office equipment, etc; (iii) situation; (iv) quantity, i.e., number of units; (v) original cost; (vi) year of purchase; (vii) adjustment for revaluation (viii) date of revaluation, if any; (ix) rate(s)/basis of depreciation or amortisation, as the case may be; (x) depreciation/amortisation for the current year; (xi) accumulated depreciation/amortisation; (xii) particulars regarding impairment; (xiii) particulars regarding sale, discarding, demolition, destruction, etc

Practical Issues- FAR Acceptability of FAR in Electronic Form Fully Depreciated Assets Intangible Assets Self Constructed Assets Assets received free of cost Location details for movable assets Employee Assets

Practical Challenges- Electronic Register • Acceptance of register in elctronic form - Permitted only when the following conditions are satisfied. • (i) The controls and security measures in the company are such that once finalised, the fixed assets register cannot be altered without proper authorization and audit trail. • (ii) The fixed assets register is in such a form that it can be retrieved in a legible form (i.e. it can be read on the screen or a hard copy can be taken).

Practical chellenges- Quantity/Location

Land

Survey numbers conveyance

and

by

deeds

of

Electrical installations

Factory buildings, plant, service departments, township buildings, etc

Patents, trade marks and designs

Purchase agreements or the letters granting patent

Vehicles

Reference to the registration books

Development of property

Buildings or plant for which development work is undertaken

the

Physical verification [Paragraph 4(i)(b)] Points to be considered Reasonble intervals

Once in 3 years

Responsibility

Management. However, auditor shall satisfy himself that the PV was done

Method of verification

Reasonable to suit the circumstances

Material discrepancies

Properly dealt with in the books of accounts

Management Representation Letter

Mandatory

Substantial Disposal - Impact on Going concern [Paragraph 4(i)(c)]

• The term 'Substatial' is not defined Auditor to apply his professional judgement

• Audit procedures a) Discussion with the Management b) Review of Minutes of meetings c) Review of Subsequent events

Audit Complications  Imporper recording of Addtions  Improper recording of Disposals  Ascertaining the actual date of capitalisation  Subjectivity in Categorisation of assets (Shelters for security, Printers, Tanks etc)  Lack of technical expertise  Complex calculations of depreciation (SLM to WDV)  Physical verification & Its reconciliation with FAR

Internal Audit & Management Audit

Control in FA Traditional Control Controls in Modern Business

Traditional Controls • • • •

Preparing an Asset Register Accounting of FA Computation of Depreciation Reporting in Financial Statement

FA Controls in Modern Business environment • Tracking Asset Locations • Movement history • Analyzing Maintenance, Repair & downtime history • Understanding Asset and Component attributes; • Accessing Insurance and legal contracts • ROI (Employee, Shareholders, Govt )

Challenges- Internal Audit & Management Audit • Challenges in Accounting and Recording • Challenges in Physical Verificaton • Challenges in Reconciliation

Challenges in Accounting and Recording • Policy changes - Capex Vs.Opex • No Unitisation of assets - No Quantity details • Improper recording of Sale/Demolition

• Improper recording of Donations and e-waste • • • • •

Non avaialbility of Source Documents No uniformity in catagerisation of assets (Lab & IT ) Treatment of assets procured for specific projects Bulk Capitalisation Improper recording of transfer of assets at free of cost

Challenges in Physical Verification • • • •

Assets in IT Industry Assets in Construction Industry Assets in Telcom Industry Assets in Manufacturing Company

IT Industry  Significant Volume  High Mobility  Connected to Live Servers/ Electrical Installations  Frequent exchange of assets (Refresh policy)  Restrictions on Physical Access  Employee Assets  Assets at remote locations

Construction Industry Mobility of Assets Difficulty in Physical Verification- Assets on move Change in Registration Numbers of Vehicles Improper Records - Not structred Frequent use of Leased Assets

Telcom Industry Complexity in identifying the assets - very technical in nature Assembling of assets at clients location (No comparison with Invoice / delivery challan) Mobility of the assets - Hand held divices (Example Surf FFA etc) Position of the Physical Assets - (Assets in Box) Assets at Vendor locations

Manufacturing Industry • Age of the assets • Physcial condition of the asset

Reconciliation • Lack of technical expertise in identification of asset • Non availability of Asset Identification numbers for recording the impact of unreconciled assets • No record of assets received at Zero Value • Assets charged off to revenue (Ex: Monitors) • Categorization of assets - Bulk Capitalisation • Assets surrendered under exchange • Assets gone out of the company for repair etc.

Improvements

Improvements • Use of advanced applications like SAP / Oracle etc. • Use of RFID (Radio Frequency Identification) • GPRS compatible Sensors in movable assets • Advanced Net work software • Increase in the frequency of Physical verification and Its reconciliation with the FAR • Storing of documents in Electronic form • Maintenance of Log Books for movable assets • Cross referencing of assets with Financial Records (Assets numbers on physical assets)

Photograph of sample assets

Surf board 3/4/2014

FFA

QRD

38

Assets connected to live systems

3/4/2014

39

LAB

Stores

PV - in Scientific manner

RFID Tag

RFID Scanners