Discuss about the Audit Strengths of Internal Control.
The strengths of internal control of the acquisition and disposal of tangible non-current assets of B Ltd are as follows:
The company has its departments and every department is managed by a designated manager who raises his request for purchase of a new asset in a purchase requisition form. This form is then checked by the purchasing officer. If the purchasing officer finds the request as valid, he acknowledges and approves the same and then sends it to the finance department. This is a great procedure followed by the company which follows two stages of approval- first by the departmental manager and then by the purchasing department (Coram et. al, 2011). Hence, when the process moves through a two-way step then it is easy to check and verify the entire matter. Moreover, in such cases, the chances of deviations are less.
The financial accountant then approves the acquisition of assets of over $5,000 but up to $10,000 only. Beyond $ 10,000 purchase is approved by the board of directors only. In absence of any information, the assets costing less than $5,000 is assumed to be approved by the financial accountant only. This reduces the burden of the board of directors to some extent. As the accountant is concerned with the financial data so the onus of the approval resides with him and not the board of directors.
The approved purchase order is then sent to the supplier and the head office if any. Once the asset is delivered, it is checked by the receiving clerk as per its specifications and once satisfied, the clerk issues a barcode to the asset. Both the things including the invoice and the barcode attached asset is now recorded in the database. This practice allows the company to claim warranties or guarantee if required (Niemi & Sundgren, 2013). Also, it reduces any damages, theft or loss of the asset due to proper recording of the asset. Further, any falsification is negated as an error is removed at the earliest. This practice enhances the overall procedure of the company and deviations can be negated at the earliest.
The departmental manager now records the asset using a copy of purchase order, request letter and the barcode received in the case, to find any discrepancy from his original order. This shows the best internal policy as to the recording of the asset first at the head office level and then at the department level (Coram et. al, 2011). This minimizes the non recording of the asset or any misuse of the asset. Hence, any misstatement cannot happen as the recording and verification are done in two major steps. Such a practice leads to a better form of practice where recording happens in a sequential manner.
In case there is a need for asset disposal, the departmental manager fills up a form and sends it to the finance department which is then sent to the head office for approval and updation in the asset register. This shows that the department cannot carry out the purchase or disposal of the asset at its own will. In both the cases, approval is required (Holland & Lane, 2012).
There is a monthly reconciliation of the asset register and the entries therein with the journal register by the departmental manager and this shows that the departmental managers have to acknowledge the asset register and its reconciliation every month. This minimizes the scope of any mismanagement or misuse of the assets of the company (Niemi & Sundgren, 2013). When the reconciliation process is into operation then it becomes easy for the management to trace the deviations and leads to a better form of practice. Moreover, any omitted entry can be traced and rectification can be made at the earliest.
Appropriate calculation of depreciation-
There is also a policy of the company to calculate monthly depreciation at the rates input by the departmental manager. So the company can charge monthly depreciation instead of annual depreciation or any other method and allows depreciating or amortizing the asset in an even manner throughout the year (Parker et. al, 2011). Hence, the method that will lead to a better form of practice will bring more success to the company.
Following are the procedures to test the internal controls of the system of purchase and disposal of assets which can be termed as a walkthrough, which means that the total system of the purchase and disposal should be gone through and should be thoroughly checked for any error:
References
Church, B, Davis, S & McCracken, S. (2008). The auditor’s reporting model: A literature overview and research synthesis. Accounting Horizons, 22(1), 69-90.
Coram, P, Mock, T. J, Turner, J. & Gray, G. (2011). The communicative value of the auditor’s report. Australian Accounting Review 21(3), 235-252.
Hoffelder, K. (2012). New Audit Standard Encourages More Talking. Harvard Press.
Holland, K & Lane, J. (2012). Perceived auditor independence and audit firm fees’, Accounting and Business Research. 42(2), 115-141.
Mock, T. J., Bédard, J, Coram, P., Davis, S, Espahbodi, R. & Warne, R. (2013). The audit reporting model: Current research synthesis and implications. Auditing: A Journal of Practice and Theory, 32, 323-351.
Niemi, L & Sundgren, S 2012, ‘Are modified audit opinions related to the availability of credit? Evidence from Finnish SMEs’, European Accounting Review, vol. 21, no.4, pp. 767-796.
Parker, L, Guthrie, J & Linacre, S. (2011). The relationship between academic accounting research and professional practice, Accounting. Auditing & Accountability Journal, 24(1), 5-14.
Roach, L. (2010). Auditor Liability: Liability Limitation Agreements. Pearson.
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