Discuss the fundamental risk and control issues associated with fixed assets that are different from raw materials and finished goods

Answer 1

AUTHORIZATION CONTROLS. Because fixed assets are requested and employed by end-users asset acquisitions should be formal and explicitly authorized. Each transaction should be initiated by a written request from the user or department. In the case of high-value items, there should be an independent approval process that evaluates the merits of the request.

SUPERVISION CONTROLS. Because capital assets are widely distributed around the organization, they are more susceptible to theft and misappropriation than inventories that are secured in a warehouse. Therefore, management supervision is an important element in the physical security of fixed assets. Supervisors must ensure that fixed assets are being used in accordance with the organization's policies and business practices. Assets should not be removed from company premises without explicit approval.

INDEPENDENT VERIFICATION CONTROLS.
1 . Periodically, the internal auditor should review the asset acquisition and approval procedures to determine the reasonableness of factors including: the useful life of the asset, the original financial cost, proposed cost savings as a result of acquiring the asset, the discount rate used, and the capital budgeting method used in the analysis.
2 . The internal auditor should verify the location, condition, and fair value of the organization's fixed assets against the fixed asset records in the subsidiary ledger.
3 . The depreciation charges calculated by the fixed asset system should be reviewed and verified for accuracy and completeness. Miscalculated depreciation can result in the material misstatement of operating expenses, reported earnings, and asset values, and may result in the premature disposal of otherwise serviceable assets.