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Lesson#31
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TESTING THE NON-CURRENT ASSETS
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TESTING THE NON-CURRENT ASSETS
Control objectives
The control objectives are to ensure that:
(i) Non current assets are correctly recorded, adequately
secured and properly maintained
(ii) Acquisitions and disposals of non current assets are
properly authorized
(iii) Acquisitions and disposals of non current assets are for
the most favorable price possible
(iv) Non current assets are properly recorded, appropriately
depreciated, and written down where necessary.
Control Procedures over Non Current Assets:
(i) Annual capital expenditure budgets should be prepared by
someone directly responsible to the board of
directors.
(ii) Such budgets should, if acceptable, be agreed by the board
and put in the minutes.
(iii) Applications for authority to incur capital expenditure
should be submitted to the board for approval
and should contain reasons for the expenditure, estimated cost,
and any non current assets replaced.
(iv) A document should show what is to be acquired and be signed
as authorized by the board or an
authorized official.
(v) Non current assets manufactured or constructed by the
company itself should be separately identifiable
in the company's costing records and should reflect direct costs
plus relevant overhead but not
include any profit. This might apply where, for example, a
building company constructs its own office
block.
(vi) Disposal of non current assets should be authorized and any
proceeds from sale should be related to the
authority.
(vii) A register of non current assets should be maintained for
each major group of assets. The register
should identify each item within that group and contain details
of cost and depreciation.
(viii) A physical inspection of non current assets should be
carried out periodically and checked to the non
current asset register. Any discrepancies should be noted and
investigated.
(ix) Assets should be properly maintained and adequately
insured.
(x) Depreciation rates should be authorized and a written
statement of policy produced.
(xi) Depreciation should be reviewed annually to assess the need
for changes in the light of profits or losses
on disposal, new technology etc.
(xii) The calculation of depreciation should be checked for
accuracy.
(xiii) Non current assets should be reviewed for the need for
any write-down.
TESTS OF CONTROLS
(i) Check authorization of purchase to board minutes, capital
expenditure budgets and capital expenditure
form.
(ii) Check authorization for disposals of significant assets.
(iii) Confirm existence of non current asset register which
adequately identifies assets and comments on
their current condition. Ensure register reconciles to nominal
ledger.
(iv) Test evidence of reconciliation of register to physical
checks of existence and condition of assets.
(v) Check authorization of depreciation rates, and particularly
changes in rates.
(vi) Examine evidence of checking of correct calculations of
depreciation.
CONCLUSION
The testing of controls is established whether they are working
effectively. So, by this stage, the auditor will
know whether a
systems approach
is to be used - focusing on the accounting
systems supplemented by a
reduced amount of substantive testing, or a
verification approach
with full substantive testing. |
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