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Capital Expenditure Review Work Program

Project Team (list members):Project Timing: Planning Fieldwork Report Issuance (Local) Report Issuance (Worldwide) Date Comments

Introduction and Background This work program will assist to review controls in the capital expenditure area. The scope of this review will focus on capital expenditure area processes and transactional analysis. Audit Objectives Discussing and obtaining a general understanding of the system of internal controls which currently exist in the Capital Expenditure area. Assessing whether procedures related to the Capital Expenditure area under review are carried out in accordance with policy. Assessing the monitoring of risks and the operation of controls, related to the Capital Expenditure area. Developing recommendations that may improve efficiency and effectiveness of key processes and/or management of key business risks The procedures in completing the above stated objectives generally include an assessment of the internal financial and operating controls, discussions with related personnel, and specific testing of the following Capital Expenditure areas: • Authorization Procedures • Purchasing /Contract (property management entities) Procedures • Fixed Asset Accounting & Maintenance General Overview The capital expenditure function, in general, comprises authorization, acquisition, classification, maintenance, and periodic write-off of depreciable assets. GAAP typically determines the fixed asset capitalization process that guides entity policies and procedures. These policies include asset classes and related years of presumed useful lives. Organizations should develop explicit classification and capitalization periods covering all fixed asset classes incorporating guidelines in GAAP and applicable tax rules. Alternatives to fixed asset capitalization, or depreciating (expense) over specific useful life, are either expensing (usually less than one year) or leasing. The audit team should understand these options and beware of tendencies to capitalize small or low cost assets versus expensing them in the current period. Overall, management policies should clarify what types of assets should or should not be included in the fixed asset account, as many smaller items may not be evaluated during high-level external audit reviews of these accounts. Income tax rules allow for assets to be depreciated at an accelerated rate during the earlier part of an asset’s useful life such as “double-declining” or “sum-of-years” or service-quantity”. Other audit considerations that further necessitate maintenance of detailed fixed asset records include the variable starting point of asset additions and retirements. Most organizations will utilize an asset tracking application that will incorporate elected asset useful lives, depreciation calculations, maintenance records, and estimated salvage values. Regardless of the record



The purchases selected should be representative of the common types of purchase transactions including Capital Expenditures. In effect. The procedures should be initially performed on 8 purchases. Core Testing In the following work program sections. A sample of 12 asset purchases should be selected from the check register. Upon discovery of a control or depreciation calculation. additions. for example. Although not in the scope of this document. Management or auditors may want to compare accounting records to physical assets and asset tags assist to track and control assets. and disposition/scrap – the accumulation process of deriving the related financial statement balances. and depreciation accounting as these can impact both the current period profit and financial structure (financing) of the entity. • Dispositions and Additions Improperly Recognized: Management should be applying consistent accounting treatment and classifications of fixed asset additions and dispositions. internal auditors should understand the overall depreciation. Repairs and Maintenance. most organizations will pay particular attention to significant construction and custom software development projects. Another consideration includes understanding the distinction between maintenance costs to keep the asset in service and operational or other costs associated with improvement or betterment of an asset. At various steps in the work program. certain controls will be tested on a sample selected using the process below. Internal audit should be concerned with the authorization of fixed asset purchases and record keeping since such transactions in most organizations may be minimal in any single accounting period and considered of minimal risk. Internal audit should consider the treatments and controls of a sample of transactions including identifying apparently expired assets that are probably impaired but not disposed or written off. that does not appear to work effectively. A few common internal control areas of particular concern to internal audit reviews include: • Inadequate Management Approval Procedures & Guidelines: the accounting treatment and management decision processes may warrant attention from an internal audit team to ensure reasonable buy-lease analysis. even if manually maintained. all fixed assets should be tagged and their physical location recorded. at least two sets of calculations may be necessary (international tax jurisdictions or consolidation considerations). Basic sampling and/or confirmation procedures can be used to determine if exceptions to policies such as fixed asset inventory (existence) are functioning properly. appropriateness of estimates for asset useful life and salvage values. various client personnel are interviewed to determine which controls are in place and effective over the Expenditure Cycle. • Adequacy of Fixed Asset Balance: Although this may be of primary concern to the external audit financial statement attestation. Regular maintenance is an expense while betterment is to be capitalized and depreciated. the additional items selected should be tested to better evaluate the initial findings (See Extended Focus Steps). 2 . capital budgeting approval. and smaller fixed assets expensed.keeping tools. • Tax & Book Valuation Records: Tax regulations may require additional record keeping based upon limitations of depreciation methods.

2 1. Obtain/review project release form for timeliness and proper authorization.3 3 .1 Review policies and procedures in place to calculate. & Equipment) are maintained for facilities and equipment 1. All capital expenditures should be approved in advance by proper level of management including detailed policies characterizing cap-ex. and accumulate the fixed asset value including related depreciation. 1. record.0.3 1. Plant. timely and accurate financial reporting of fixed asset expenditures and to ensure fixed asset expenditures are authorized and in accordance with policy. Initial Index . AUTHORIZATION PROCEDURES Control Objective: To provide consistent. maintenance & repairs (expensed).000.Comment 1. Different procedures may be required depending upon whether manual or software application records are maintained.Work Program Step 1. are supported by an authorized project release form (as required by Finance Policy).1. Determine if segregation of duties exists between personnel responsible for maintaining the general ledger fixed asset accounts.0. and betterment/enhancements for appropriate accounting treatments. etc. custody of the assets.1 Discuss whether capital projects in excess of $5. Note: After review of the fixed asset listing or fixed asset additions listing.1.1 Selectively test 3 projects to determine if proper authorizations and analysis supports purchase. and disposal authorizations.1. Evaluate the adequacy of protections of fixed asset records from unauthorized access. 1.0 Determine whether adequately detailed fixed asset records (Property.0. 1.2 1. this dollar threshold may be adjusted to ensure adequate representation of accounting activity in this area.

.Comment 1.5.5 Discuss with the Controller’s accounting treatment for the proceeds from the sale of Fixed Assets.g. EXTENDED FOCUS Upon discovery of a “NO” answer. (i. as / if exceptions are noted). isolated. 1.4 Review the fixed asset additions listing. perform EXTENDED FOCUS step 1.) If the exception is pervasive. GAAP (e.. timely transfer and initiation of depreciation). a lack of a control by a “clerk” would have less of an impact than a lack of control by the “Controller”) What other “risk areas” are affected by the break 4 • • . 1. Note: organizations may focus particular attention to construction project assets or.1 For entities with property management relationships determine if fixed asset proceeds from the sale of fixed assets are accounted for in accordance with the management contract..g. Is tier 1. was a change order approved? 1.S. etc.e.Work Program Step Note: different dollar values may have higher organizational approval requirements such as dual signatures. testing sufficient? 1.3 Discuss the company’s procedures for recording of Construction in Progress (“CIP”) [where applicable] and release (transfer) of CIP into fixed assets. an additional sample should be selected for the applicable review procedure in order to better evaluate initial findings (e. 1.1 Select 2 relevant projects and review the change order to determine if a timely and properly approved change order exists. Initial Index .2 For any projects exceeding the approved project release amount by 10%. if inadequate treatment is given. mitigating control exists.g.2. then determine the impact of the following items: • Mitigating controls (if an effective. do not include as a report observation) The level of the person responsible (e. Is the process in accordance with Finance Policies? Select a recent CIP transfer and assess compliance with policy and U. If the amount is significant.1e. pervasive.. may be an indication of overall lax control over fixed assets.

or capital expenditure contract. Are all additions for individual projects less than $5. • Reconciles to the balance sheet.3 Was this the case without exception? Select a sample of fixed asset purchases/additions off the fixed-asset acquisition listing to review: • Acquisition costs match purchase invoice including tax.2 If the entity records fixed assets on their balance sheet.E Review listing of non-project additions. freight. 2. does the entity obtain at least 3 competitive quotes? For the 3 material contracts tested above. related depreciation period started FIXED ASSET MAINTENANCE & DEPRECIATION 3.1 2. PURCHASING /CONTRACT PROCEDURES Note: Ensure through discussion that an adequate selection of reputable suppliers is asked to tender for each new purchasing.Work Program Step down in control. and • Calculates and records the depreciation of the fixed assets.1. 3. 1. are appropriate depreciation rates employed 5 . If they do is there a fixed asset register that: • Adequately describes at lease high value. • 2. review whether any projects appear to be split into segments <$5K to avoid approval levels. ensure that competitive quotes were obtained from at least 3 suppliers and documented. 2.Comment Incorporate the impact of the above items in the synopsis section of each observation.000? During review of non-profit additions. • Why the breakdown in control was not detected through supervisory review Initial Index .1 Does the company carry fixed asset balances on its balance sheet. and installation treatments • In-service initiation date agrees with invoice and approval information. mobile assets fixed assets. maintenance. 3.2 For each contract.

Request the fixed asset listing including current period additions and deletions.1. are consistently and accurately applied. 4. or no longer productive. 4.1.2. Evaluate fixed asset deletions or dispositions to determine if appropriately supported by documentation. and match to the fixed asset listing(s).1.1. Are these potentially impaired? Scrap? In disrepair? 3.3 During the onsite audit visit. through recalculations.2. • Trace gain or loss on retirement to G/L and evaluate if extricated from books in the proper accounting period (month).2. 4. production facilities.Work Program Step to write down the fixed assets? 3.Comment 3. and: • Determine if accumulated depreciation (and the estimated scrap value) and any gain or loss was accurately calculated and recognized. obsolete.1 Determine.1 Per review of related policy and procedures with discussion with management. examine supporting information. Select a sample of repairs and maintenance items. Initial Index . if depreciation methods and calculations.2 3. observe the fixed assets through out the location. develop an understanding of asset tagging and identification (description documentation) process 4.1. Plan to utilize a distinguishing tag or 6 . Identify a sample of fixed assets already retired. INVENTORY PROCEDURES 4. and distribution centers where assets may be stagnant. and determine that items are properly expensed.0 Determine a plan for sampling a physical inventory for fixed assets including geographical locations. 3. • Are the fixed assets maintained? • Are the company’s fixed assets visibly in presentable shape and good condition? • Look for assets that should be considered for disposal or scrap especially in warehouse. asset classes and related confirmation procedures where necessary.2 Count and identify each asset. according to scope of plan.2.

Match transaction files for all additions listing and the deletion/disposal listing files to the fixed asset master-file database to determine if all additions are included and all disposals are no longer included. • Search for items on the fixed asset listing that could not be readily identified or were not in the location described on the listing. Determine access rights and related functional access to asset deletions and disposals (and 7 Initial Index . Compare the calculated accumulated depreciation amounts for fixed assets to the recorded book values to determine if any assets have (a recorded) negative book value. salvage values per fixed asset items are reasonable. 5.Comment • . scan data sorts to determine if listing results appear to be reasonable. In accordance with fixed asset classification.0 Utilize computer assisted audit technique applications. Review the fixed application’s access security report to determine if only authorized users have access to functions and records consistent with job descriptions. Collect relevant information and follow up on all exceptions for resolution. salvage. such as ACL. • Note exceptions for assets that do not fit the related description. 5. Consider if manual processes utilize spreadsheets that record and calculate related information. purchase and installation dates (period between) seem reasonable. 5. and installation (date of service) policy and procedures. assets identified without asset tags. APPLICATION SYSTEM & CAAT 5.e. Program Step “counted” indicator. or assets with tags not registered on the inventory listing. • After the area assets have been matched and counted search for assets that apparently should be included. • Determine if segregation of duties between the recording and G/L accounting (or application interface) are adequate. to review the fixed asset file. (i. and fixed assets are in appropriate classes & related useful life durations) 5.3. Inquire with management until all exceptions are resolved.

Comment 8 . • Compare manual recalculations for a sample of 3 assets to the application generated accumulated depreciation to determine if application parameters and internal calculations are correct.Work Program Step related approval functionality where available). Initial Index .