Elements of Internal Control over fixed assets

Fixed Assets are sometimes referred to as Property, Plant and Equipment (PP&E) and the terms are used interchangeably.  In many companies the following elements of Internal Control over PP&E are considered and performed according to standard guidelines:

• Approval process for Capital Expenditures (Capex)
• Determination whether planned expenditure is capitalized or expensed
• Purchasing and Accounts Payable systems are correctly applied
• If capitalized, appropriate useful life and salvage value determined
• Correct depreciation expense is calculated and applied each period
• Property tax reports filed with tax jurisdictions
• Insurance coverage relates directly to asset exposure

However, there is one critical element of Internal Control that often is missed.  This involves periodically checking that the information shown in the property record system corresponds to the actual assets reported to be there.  To put this into perspective, a company may have a very good system of invoicing and accounts receivable, but it is still necessary to confirm that outstanding balances as part of the required annual audit.  One well known aspect of this is the verification of ageing debts in the A/R ledger to confirm their collectability.

Similarly, with inventory (raw material, work in process and finished goods), for the past 70 years companies have been required to perform a physical count and valuation at least once a year.  Further, auditors are required to monitor closely the inventory taking and pricing.  In the case of perpetual inventory systems, periodic sample testing is required, again with external auditor input. After the reconciliation of receivables and inventory, adjusting entries must be made to bring the accounting records into agreement with the underlying assets. It is equally necessary that the same kind of reconciliation of reported balances to actual physical assets is in place because for many companies, PP&E may represent 35% or more of total assets. Without a periodic reconciliation, the property record system will lose accuracy as items are scrapped or enhanced. If a reconciliation is performed and adjusting entries made, however, the resultant asset category totals have been verified. Management can then sign with confidence the Section 404 certification – its assertion that there is a system of Internal Controls and that the system is working properly.