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In: Accounting

Suggest three key procedures involving internal control of property, plant, and equipment that relate to accounting...

Suggest three key procedures involving internal control of property, plant, and equipment that relate to accounting records.

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Expert Solution

internal control over property, plant, and equipment. Determine the existence of recorded property, plant, and equipment. ... Determine that the valuation or allocation of the cost of property, plant, and equipment is in accordance with generally accepted accounting principles

Internal controls relating to property, plant, and equipment

The auditor studies and evaluates the accounting system and the effectiveness of internal control relating to property, plant, and equipment. The auditor’s study and evaluation of internal control relating to property, plant, and equipment cover the following aspects:

  1. Segregation and rotation of duties.
  2. Authorization of acquisition, transfer, and disposal of property, plant, and equipment
  3. Maintenance and record of documents.
  4. Accountability for and safeguarding of property, plant, and equipment
  5. Independent checks.

Elements of Internal Control over property, plant, and equipment

Physical Controls

1. There must be a register or ledger of property, plant, and equipment to identify a particular asset, the date of purchase, model number, serial number, acquisition cost, expected life, and assignment to any debt instrument.

2. At a minimum, assets must be accounted for annually.

3. A physical inspection should be carried out for those assets that have a high exposure to damage like vehicles, site development equipment, and tools to identify any possible valuation adjustments.

4. Good management teams should periodically review their insurance policies related to the particular assets that have exposure to damage and loss.

Financial Controls

1. A policy should be in a place that sets the requirements for capitalization of an asset, i.e. minimum dollar amount, useful life expectancy, and salvage value.

2. A policy with a corresponding set of procedures should determine the depreciation formula and the frequency of journal entries related to depreciation.

3. An inventory of all fixed assets (see physical controls above) should be conducted on an annual basis to ensure that ghost assets are not being accounted for when they are either missing or unusable.

4. Acquisitions and disposals of assets must be approved by management and then properly recorded to the books of record.

5. Fixed asset ledgers need to be reviewed regularly to confirm the segregation of non-fixed asset purchases to the fixed assets account. The most common error is construction in process expenses being recorded to the fixed assets account.

6. It is a challenge for companies to keep up with ever-changing tax rules that affect asset depreciation methods based on the classification of property but this is crucial to the effective control of fixed assets and property tax reports need to be filed with tax jurisdictions.

7. Segregation of Duties is the requirement for more than one person to complete a task so that the risk of fraud or theft is eliminated. This is essential when carrying out the internal control of fixed assets. For example, the person who sells a fixed asset cannot take payment for the asset.


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