Question

Wilson Enterprises is a midsize manufacturing company with 120 employees and approximately $45 million in sales. Management has established a set of processes to purchase fixed assets, described in the following paragraphs:

When a user department determines that it may be necessary to purchase a new fixed asset, the departmental manager prepares an asset request form. When completing the form, the manager must describe the fixed asset, the advantages or efficiencies offered by the asset, and estimates of costs and benefits. The asset request form is forwarded to the director of finance. Personnel in the finance department review estimates of costs and benefits and revise these if necessary. A discounted cash flow
 analysis is prepared and forwarded to the vice president of operations, who reviews the asset request forms and the discounted cash flow analysis, and then interviews user department managers if she feels it is warranted. After this review, she selects assets to purchase until she has exhausted the funds in the capital budget.

When an asset purchase has been approved by the VP of operations, a buyer looks up prices and completes a purchase order. The purchase order is mailed to the vendor, and a copy is forwarded to accounts payable. The fixed asset is delivered directly to the user department so that it can be installed and used as quickly as possible. The user department completes a receiving report and forwards a copy to accounts payable. If the invoice, purchase order, and receiving report match, payment is approved and cash disbursements prepares and mails a check. The accounts payable department updates the accounts payable
 subsidiary ledger and the fixed asset spreadsheet file.

 

Required:

a. Identify any internal control strengths and weaknesses in the fixed asset processes at Wilson. Explain why each is a strength or weakness.

b. For each internal control weakness, describe improvement(s) in the processes that you would recommend to address the weakness.

 

Answer 1

a.

STRENGTHS
There is a process to identify benefits and costs for new asset requests.
There is an independent review of costs and benefits of proposed assets by the finance department.
A discounted cash flow analysis is undertaken before purchase.
There is a pre-established capital budget.
A high level manager must approve asset purchases.
Payment is not made until the PO, receiving report, and invoice are matched.
The accounts payable department updates the accounts payable subsidiary ledger and fixed asset records.
 
WEAKNESSES
A set of levels of approval, dependent on the amount of the asset, have not been established.
The VP of operations may not necessarily need to exhaust all funds. If there are not enough asset proposals with acceptable cost-benefit, then it would be better to not spend all funds.
Buyers should receive bids on assets, especially those assets with very high purchase price.
Assets are always delivered to a user department, rather than receiving.

b.

Establish higher levels of managerial approval for assets with higher costs.
Establish a policy that assets must meet some minimum level of discounted cash flow return before the purchase can be approved.
Establishing a bid process for assets that exceed a certain dollar amount.
When practical, fixed assets should be delivered to receiving for count and inspection. This may not be possible for fixed assets such as those that must be installed at the user location.

 This may not be possible for fixed assets such as those that must be installed at the user location.