SUGGESTED CONTROLS TO MITIGATE THE POTENTIAL RISK (Internal Audit)

Transcription

1 Unit: Subject: Sarbanes-Oxley Act Review - Fixed Assets Cycle Title: Risk and Control Identification Year end: Acquisition of Fixed Assets Recorded fixed asset acquisitions represent fixed assets acquired by the organisation (validity). Fixed assets represent assets to which the entity has legal rights. Only valid items are capitalised. All fixed asset acquisitions are recorded. (completeness) Recorded fixed asset acquisitions do not represent fixed 101 assets acquired by the organisation. Expense items may be incorrectly capitalised. Not all fixed asset acquisitions are recorded. 102 Written capitalisation-expense policies: Guidelines for capitalising versus expensing acquisitions should be established. Periodic review by management of assets captured to assets recorded on the fixed assets register. Physical asset verification to asset register. Authorisation of Capex forms in terms of the Limits of Authority including a review of the cost centre, cost element, Capex number, asset value and description of the item. Periodic independent inspection of fixed assets are conducted. The results are agreed to fixed asset records and differences timeously investigated, explained and resolved. Acquisitions of fixed assets are not incorrectly expensed. Acquisitions may be incorrectly expensed. The 103 understatement of purchases of capital goods will lead to the understatement of liabilities and assets. Overstatement of income is also likely as a result of failing to depreciate the asset which has not been recorded. Adequate policies are in place to ensure the clear distinction between items to be capitalised as fixed assets and items (below certain amounts) to be expensed. Periodic reviews of the repairs and maintenance account are conducted for any significant items which should have been capitalised. Fixed asset acquisitions are accurately recorded. (accuracy) Fixed asset acquisitions are allocated correctly. (classification) Fixed asset acquisitions are not accurately recorded: Fixed 104 asset accounts may be misstated, depreciation amounts may be incorrect as a result of this. Incorrectly recorded assets may also be difficult to identify physically at a later stage. Detailed fixed asset records are maintained and updated directly from source purchase documentation (e.g. supplier invoice, contract etc). Review by management of source documentation to loaded data in order to verify the accuracy of the data captured. Fixed assets recorded in the wrong asset or expense Each asset record is allocated to a specific asset class in 105 accounts. Misclassification of fixed assets to conceal SAP. Master data for an asset class is defined once at the unauthorised purchases (possibly for the benefit of employees client level. Asset classes determine the depreciation method or third parties). utilised. Asset recordings are scrutinised for correctness. Authorisation of Capex forms in terms of the Limits of Authority including a review of the cost centre, cost element, Capex number, asset value and description of the item. Fixed asset acquisitions are recorded in the appropriate period. (proper period) Fixed asset acquisitions are not recorded in the appropriate 106 period. Asset register is not updated promptly. Fixed assets purchases are recorded at the date of receipt (per GRN). The accounting manual gives detailed instructions for recording fixed assets on the date of acquisition. Assetrelated transactions before and after the end of an accounting period are scrutinised and/or reconciled to ensure complete and consistent recording in the appropriate accounting period.

2 Employees and management are provided with the information they need to control the capital expenditure process. Cost overruns and non-budgeted costs are controlled. Asset acquisitions are authorised in accordance with Board's criteria. (authorisation) The number of employees authorised to approve capital asset purchases are limited. Asset acquisitions are adequate and appropriate to serve the purposes for which they are acquired. No formalised budgets are communicated to cost centre 107 holders which could result in budget overruns. Non-budgeted costs might not be formally approved through a Capex. Asset acquisitions should be made in accordance with 108 Company approval limits and the Capex policy. 109 Asset acquisitions may not be suitable to fulfil the purposes for which they have been acquired e.g. plant capacity may be inadequate. Unsuitable or unauthorised assets may be acquired. Unnecessary property, plant or equipment is acquired resulting in unused or idle capacity. Asset acquisition and related financing agreements are reviewed by management (including consideration of the capital expenditure budget), before being authorised. When actual expenditures exceed authorised amounts, the excess is appropriately approved. Capital expenditure and leasing proposals are prepared for review and approval by responsible officers. Review and approval of all capital expenditure requests takes place by a senior independent person/s: Fixed asset requests for purchases are approved in accordance with the Limits of Authority. (e.g. Board approval is obtained for significant capital asset projects and acquisitions above a certain amount.) Authorisation of Capex forms includes a review of the cost centre, cost element, Capex number, asset value and description of the item. The number of employees authorised to approve capital asset purchases is limited. Designated individuals who may initiate capital asset transactions and the limits of their authority are clearly defined. Written approval is required for all capital asset projects and acquisitions. Capital budgets are compared to actual expenditures on a monthly basis and significant differences analysed, investigated and reported. Most capital expenditure is anticipated in advance, comparing budget to actual amounts can help detect misuse of funds. All acquisitions are made after a thorough viability study has been handed in as motivation for the acquisition. These documents are attached to the Capex, reviewed, authorised and kept on file. Clearly documented policy statements has been developed setting forth asset acquisition criteria for the review and approval of proposed capital expenditure. Management consults with other Mills to obtain unused assets prior to purchasing assets. No payments for acquisitions of assets are effected without correct approval. (See Expenditure Cycle). All acquisitions are made after a thorough viability study has been handed in as motivation for the acquisition. These documents are attached to the Capex, reviewed, authorised and kept on file. The cost of asset acquisitions meets the company's criteria for meeting the investment. The cost of the acquired assets may not meet the company's 110 criteria for meeting the investment. Documented policy statements have been developed setting forth assets acquisition criteria such as review and approval of proposed capital expenditure, acceptable inventory and service levels, economic analysis and justification. Capital Expenditure Requests exceeding a predetermined limit are supported by a cost-benefit exercise. Tax allowances are correctly applied. 111 Taxation allowances may not be correctly applied. Not all valid tax allowances may be claimed. Investment decisions may be made based on incorrect financial information (i.e. not taking allowances into account). Company Tax Department review and approval of useful life and depreciation or amortisation method for each property addition over a stated amount. The useful lives established for tax purposes for various classes of properties and equipment must fall within guidelines published by the relevant tax authorities.

3 Appropriate supporting documentation is retained for fixed assets. Acquisition documentation may be lost or otherwise not 112 communicated to appropriate personnel. Capex forms are pre-numbered, authorised and reviewed. Any missing documents are investigated and resolved. Route copy of purchase orders for capital expenditure to personnel who process fixed assets. Reconcile fixed asset additions with capital expenditure authorisation. Company assets can be adequately identified for inventory purposes. Asset tags are used to control and monitor inventory. 113 Acquired assets may not be adequately described. Assets are All assets should be tagged. It should be possible from not identifiable. Assets are not tagged correctly. Asset reference to the tag to determine the asset serial number, location may be misstated. location, description of the asset and its name. Predetermined group assets identification techniques have been documented and adhered too. Depreciating Fixed Assets Depreciation charges are valid. (validity) Depreciation and amortisation charges are computed and recorded accurately (accuracy). Depreciation charges are correctly allocated (classification). All depreciation charges are recorded in the appropriate period. (completeness and proper period) The depreciation method and useful life used for depreciating individual or classes of assets are established in compliance with company and policies and with GAAP (locally and internationally). (validity) Depreciation charges are invalid. 201 Depreciation charges are not correctly calculated and 202 recorded. Assets and other deferred cost accounts may be charged with incorrect amounts. Overheads rates used to value fixed assets may be incorrect due to incorrect assumptions with respect to allocations and classification of fixed costs. If depreciation is misstated, asset book values may not be fairly stated. Sales prices for assets may be established based upon incorrect data. Investment decisions may be made based on incorrect financial information. Misclassification of depreciation may affect depreciation and 203 taxation amounts. Not all depreciation charges are recorded in the appropriate 204 period. The anticipated useful life of an asset may be incorrectly set, 205 establishing an unreasonable period during which cost is amortised or depreciated. The wrong method may be used to depreciate an asset. i.e. RBB vs SL, RBB vs Sum-of-the- Digits, etc. Depreciation charges are dictated by the fixed asset accounting policy. Only the fixed asset accountant has access rights to change the depreciation period. Fixed asset accountant assesses whether the asset classification is appropriate. Depreciation exception items (in terms of expectations established by management) are consistently identified, monitored, and corrected. Standard programmed algorithms perform depreciation calculations in SAP. Depreciation and other calculations performed by the SAP system are regularly reviewed for accuracy. Depreciation exception items (in terms of expectations established by management) are consistently identified, monitored, and corrected. Prior to asset disposition all transactions should be reviewed, verified and approved by management. Fixed asset accountant assesses whether the asset classification is appropriate. Computation, reporting, and classification guidelines for asset related transactions have been documented. Reconciliation of depreciation run and FI- AM is performed monthly. Depreciation charges are reviewed by management including consideration of recording in the appropriate accounting period. Specific individuals have been designated to consider changes in methods of depreciation or life cycle of the asset in general. Assigned responsibility exists for periodic independent review of the reasonableness of useful lives assigned to fixed assets and the methods of depreciation. Defined economic life cycles and methods of depreciation for various classes of assets for financial reporting purposes exist. Established policies regarding depreciation methods and asset life cycles exist, are communicate to appropriate personnel, and periodically review to ensure continued appropriateness. Depreciation detail is reviewed for accuracy and compliance with policies and procedures. Company Tax Department review and approval of life and depreciation or amortisation method for each property addition over a stated amount.

4 Adjustments to fixed assets processed are correctly calculated and recorded (accuracy) Adjustments to fixed assets are valid. (validity). Adjustments to fixed assets are properly authorised in accordance with company policy. (authorisation) Adjustments processed are calculated or recorded 206 inaccurately Invalid adjustments are processed. Adjustments may be 207 recorded to conceal fixed asset inventory differences. Adjustments are not authorised. 208 Supervisory review, verification and approval of adjusting entries are conducted. Management reviews reconciled adjustments made to identify any unauthorised changes. Adjustments are authorised in accordance with the Limits of Authority and reviewed for authorisation. Adjustments to fixed assets are processed promptly (proper period). Adjustments are not processed in the appropriate period. 209 Asset-related transactions, before and after the end of an accounting period are scrutinised and/or reconciled to ensure complete and consistent recording in the appropriate accounting period. Cut-off and closing procedures and schedules are developed and followed. Disposal and Transfer of Fixed Assets Recorded fixed asset disposals are valid. (validity) Recorded fixed asset disposals do not represent actual 301 disposals. Clear criteria, in writing, exist for the identification and disposal/transfer of damaged, obsolete, or unneeded fixed assets. Management review of additions and disposals are performed by DHO. Pre-numbered disposal documentation is completed, authorised, processed and kept on file. All fixed asset disposals are recorded. (completeness) Fixed asset disposals and scrapping of old and obsolete Periodic independent checks from fixed asset records are 302 assets not recorded. Equipment is disassembled and used for conducted to ensure that the assets physically exist, especially spare-parts and parts used do not conform to quality those that could be disposed of without a noticeable effect on standards set out by the company. operations. Written approval on a pre-numbered standard form is obtained and authorised by management. Disposal and transfer of assets and their related adjustments are accurately recorded in the relevant asset accounts and Fixed Asset Registers. (accuracy) Fixed asset disposals are promptly recorded (proper period). Fixed asset disposals are not accurately calculated and 303 recorded (including incorrect value when disposing of the asset) Fixed asset disposals are not recorded in the appropriate 304 period. Asset Register is not updated timeously. The asset accountant reviews the authorised disposal form and checks calculations and processing. Periodic controlling/accounting review of the fixed asset register (in conjunction with cost centre heads) (inter alia) to identify assets that have been disposed/scrapped. Assetrelated transactions before and after the end of an accounting period are scrutinised and/or reconciled to ensure complete and consistent recording in the appropriate accounting period. Periodic review and verification of disposal and transfers are made by independent supervisory personnel. The transfer and disposal of assets are appropriately approved by management. (authorisation) 305 Assets disposals are not made in terms of the company policy. Assets may be sold, transferred or retired without management's knowledge. Asset disposals or transfers may not be communicated to appropriate personnel. Assets may be disposed of at inappropriate prices. A formal policy is in place for authorising and reporting on fixed asset disposals, sale and lease-backs. All recorded disposals of fixed assets are approved by management. No property is allowed to leave the premises without the written approval of a specified executive on a pre-numbered standard disposal form. A physical check takes place of all fixed assets leaving the premises to the aforementioned document. Pre-numbered fixed asset disposal and transfer authorisation forms are reviewed and missing documents investigated. Comparison of critical details of each requested sale or other disposals with established criteria. Review of significant contracts (e.g. contracts for sales of land) by legal counsel. All assets being disposed of are compared to market related items and depreciated value checked.

5 Disposals of fixed assets to other group companies are appropriately controlled. Disposal of fixed assets is permitted only in accordance with company policy. Assets are not disposed of that could be used in other company / group operations. Disposal of physical assets is permitted only in accordance with company policy: e.g. assets are not sold to a party that will use them in a manner detrimental to the company. All asset disposals comply with appropriate government regulations. Asset transfers within the group may not be appropriately 306 controlled. Assets may be lost, stolen or converted to private use. 307 Assets may be disposed of that could be used in other 308 company / group operations. Assets may be sold to a party that will use them in a manner 309 detrimental to the company. Transfer or sale of assets may not be made in accordance 310 with regulatory requirements resulting in fines and penalties. Transfer of assets valued over R1 million to affiliate companies are approved by the Board. Transfers of assets within the company, are done at Net Book Value ("NBV") and transportation costs and costs to set-up are only capitalised to the extent of the useful life of the asset being transferred. The responsibilities for authorising the removal of assets, contracting for salvage, and subsequent receipt of payment should be segregated. Periodic review and verification of disposal and transfers should be made by independent supervisory personnel. Physical asset verification takes place periodically. Sales do not take place without consultation with the other Mills to ensure maximisation of group assets. Clearly written statements of criteria e.g. Property may not be sold to competitors. All statutory requirements such as tax legislation and the Companies Act are complied with. Procedures for disposal of salvage or surplus property, including segregation and special handling of dangerous/hazardous equipment and controls to ensure salvage and surplus do not utilise costly storage space. Procedures for legal department review and approval of contracts prior to execution. Profits or losses on the disposal of assets should be Assets and related accounts may be charged or credited with accurately and promptly classified and reported. (accuracy and 311 incorrect amounts. Accounting classifications may be classification) incorrect. Correct accounting for Capital Gains Tax on disposals of assets. Incorrect accounting for Capital Gains Tax on disposals of 312 assets. In SAP, standard programmed algorithms perform the calculation of the profit or loss upon disposal of an asset. The profit or loss upon disposal of an asset is independently recalculated. Gains and losses from the disposition of assets are computed in accordance with GAAP and the Tax act. Management of Fixed Assets Fixed Asset Maintenance Records Fixed asset maintenance records are updated timeously. (proper period) Records of fixed asset maintenance activity are accurately maintained. (accuracy) If maintenance activities are not recorded timely, duplicate 401 maintenance activities may be performed; this, in turn, might adversely affect the resources available for maintenance projects. An inaccurate or incomplete asset maintenance history 402 register may result in inappropriate decisions about repair versus replacement of fixed assets. Asset maintenance schedules are prepared, updated, and monitored by management, and activity per the asset maintenance schedule is reconciled to the asset maintenance history register regularly. Maintenance activity is recorded on pre-numbered sheets/work orders; numerical sequence of such forms is accounted for. Asset maintenance activities are edited and validated upon data entry; exceptions are investigated and resolved. Changes to the asset maintenance history register are compared to source documents to ensure that they were input accurately. Management periodically reviews asset maintenance activities, per the asset maintenance history register, to ensure compliance with management's objectives. Safeguarding of Fixed Assets