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 assets 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
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keeping tools, even if manually maintained, all fixed assets should be tagged and their physical location recorded. Management or auditors may want to compare accounting records to physical assets and asset tags assist to track and control assets. 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. Regular maintenance is an expense while betterment is to be capitalized and depreciated. 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. Although not in the scope of this document, most organizations will pay particular attention to significant construction and custom software development projects. 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, capital budgeting approval, appropriateness of estimates for asset useful life and salvage values, and depreciation accounting as these can impact both the current period profit and financial structure (financing) of the entity. Tax & Book Valuation Records: Tax regulations may require additional record keeping based upon limitations of depreciation methods. In effect, at least two sets of calculations may be necessary (international tax jurisdictions or consolidation considerations). Dispositions and Additions Improperly Recognized: Management should be applying consistent accounting treatment and classifications of fixed asset additions and dispositions. 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. Adequacy of Fixed Asset Balance: Although this may be of primary concern to the external audit financial statement attestation, internal auditors should understand the overall depreciation, additions, and disposition/scrap the accumulation process of deriving the related financial statement balances. Basic sampling and/or confirmation procedures can be used to determine if exceptions to policies such as fixed asset inventory (existence) are functioning properly. Core Testing In the following work program sections, various client personnel are interviewed to determine which controls are in place and effective over the Expenditure Cycle. At various steps in the work program, certain controls will be tested on a sample selected using the process below. A sample of 12 asset purchases should be selected from the check register. The purchases selected should be representative of the common types of purchase transactions including Capital Expenditures, Repairs and Maintenance, and smaller fixed assets expensed. The procedures should be initially performed on 8 purchases. Upon discovery of a control or depreciation calculation, for example, that does not appear to work effectively, the additional items selected should be tested to better evaluate the initial findings (See Extended Focus Steps).

Work Program Step 1. AUTHORIZATION PROCEDURES Control Objective: To provide consistent, timely and accurate financial reporting of fixed asset expenditures and to ensure fixed asset expenditures are authorized and in accordance with policy. 1.0 Determine whether adequately detailed fixed asset records (Property, Plant, & Equipment) are maintained for facilities and equipment 1.0.1 Review policies and procedures in place to calculate, record, and accumulate the fixed asset value including related depreciation. Determine if segregation of duties exists between personnel responsible for maintaining the general ledger fixed asset accounts, custody of the assets, and disposal authorizations, etc. Evaluate the adequacy of protections of fixed asset records from unauthorized access. Different procedures may be required depending upon whether manual or software application records are maintained.

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1.0.2

1.0.3

1.1

Discuss whether capital projects in excess of $5,000, are supported by an authorized project release form (as required by Finance Policy).

Note: After review of the fixed asset listing or fixed asset additions listing, this dollar threshold may be adjusted to ensure adequate representation of accounting activity in this area. 1.1.1 Selectively test 3 projects to determine if proper authorizations and analysis supports purchase. All capital expenditures should be approved in advance by proper level of management including detailed policies characterizing cap-ex, maintenance & repairs (expensed), and betterment/enhancements for appropriate accounting treatments. Obtain/review project release form for timeliness and proper authorization.

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Work Program Step Note: different dollar values may have higher organizational approval requirements such as dual signatures. 1.2 For any projects exceeding the approved project release amount by 10%, was a change order approved? 1.2.1 Select 2 relevant projects and review the change order to determine if a timely and properly approved change order exists.

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1.3 Discuss the companys procedures for recording of Construction in Progress (CIP) [where applicable] and release (transfer) of CIP into fixed assets. Is the process in accordance with Finance Policies? Select a recent CIP transfer and assess compliance with policy and U.S. GAAP (e.g., timely transfer and initiation of depreciation). Note: organizations may focus particular attention to construction project assets or, if inadequate treatment is given, may be an indication of overall lax control over fixed assets. 1.4 Review the fixed asset additions listing. If the amount is significant, perform EXTENDED FOCUS step 1.1e. Is tier 1. testing sufficient? 1.5 Discuss with the Controllers accounting treatment for the proceeds from the sale of Fixed Assets. 1.5.1 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.

EXTENDED FOCUS Upon discovery of a NO answer, (i.e., as / if exceptions are noted), an additional sample should be selected for the applicable review procedure in order to better evaluate initial findings (e.g., isolated, pervasive, etc.) If the exception is pervasive, then determine the impact of the following items: Mitigating controls (if an effective, mitigating control exists, do not include as a report observation) The level of the person responsible (e.g., 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
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Work Program Step down in control. Why the breakdown in control was not detected through supervisory review

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Incorporate the impact of the above items in the synopsis section of each observation. 1.1.E Review listing of non-project additions. Are all additions for individual projects less than $5,000? During review of non-profit additions, review whether any projects appear to be split into segments <$5K to avoid approval levels. 2. PURCHASING /CONTRACT PROCEDURES Note: Ensure through discussion that an adequate selection of reputable suppliers is asked to tender for each new purchasing, maintenance, or capital expenditure contract. 2.1 2.2 For each contract, does the entity obtain at least 3 competitive quotes? For the 3 material contracts tested above, ensure that competitive quotes were obtained from at least 3 suppliers and documented. 2.3 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, freight, and installation treatments In-service initiation date agrees with invoice and approval information; related depreciation period started FIXED ASSET MAINTENANCE & DEPRECIATION

3. 3.1

Does the company carry fixed asset balances on its balance sheet. If they do is there a fixed asset register that: Adequately describes at lease high value, mobile assets fixed assets; Reconciles to the balance sheet; and Calculates and records the depreciation of the fixed assets. 3.2 If the entity records fixed assets on their balance sheet, are appropriate depreciation rates employed

Work Program Step to write down the fixed assets? 3.2.1 Determine, through recalculations, if depreciation methods and calculations, are consistently and accurately applied. Select a sample of repairs and maintenance items, examine supporting information, and determine that items are properly expensed.

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3.3 During the onsite audit visit, observe the fixed assets through out the location. Are the fixed assets maintained? Are the companys fixed assets visibly in presentable shape and good condition? Look for assets that should be considered for disposal or scrap especially in warehouse, production facilities, and distribution centers where assets may be stagnant, obsolete, or no longer productive. Are these potentially impaired? Scrap? In disrepair? 3.1.1. Evaluate fixed asset deletions or dispositions to determine if appropriately supported by documentation. 3.2.2. Identify a sample of fixed assets already retired, and: Determine if accumulated depreciation (and the estimated scrap value) and any gain or loss was accurately calculated and recognized. Trace gain or loss on retirement to G/L and evaluate if extricated from books in the proper accounting period (month). 4. INVENTORY PROCEDURES 4.0 Determine a plan for sampling a physical inventory for fixed assets including geographical locations, asset classes and related confirmation procedures where necessary. 4.1. Request the fixed asset listing including current period additions and deletions. 4.1.1 Per review of related policy and procedures with discussion with management, develop an understanding of asset tagging and identification (description documentation) process 4.1.2 Count and identify each asset, according to scope of plan, and match to the fixed asset listing(s). Plan to utilize a distinguishing tag or
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Work Program Step counted indicator. Note exceptions for assets that do not fit the related description, assets identified without asset tags, or assets with tags not registered on the inventory listing. Collect relevant information and follow up on all exceptions for resolution. Search for items on the fixed asset listing that could not be readily identified or were not in the location described on the listing. After the area assets have been matched and counted search for assets that apparently should be included. Inquire with management until all exceptions are resolved. 5. APPLICATION SYSTEM & CAAT 5.0 Utilize computer assisted audit technique applications, such as ACL, to review the fixed asset file. 5.1. 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. 5.2. In accordance with fixed asset classification, salvage, and installation (date of service) policy and procedures, scan data sorts to determine if listing results appear to be reasonable. (i.e. purchase and installation dates (period between) seem reasonable; salvage values per fixed asset items are reasonable, and fixed assets are in appropriate classes & related useful life durations) 5.3. 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. 5.4. Review the fixed applications access security report to determine if only authorized users have access to functions and records consistent with job descriptions. Determine if segregation of duties between the recording and G/L accounting (or application interface) are adequate. Consider if manual processes utilize spreadsheets that record and calculate related information. Determine access rights and related functional access to asset deletions and disposals (and
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Work Program Step related approval functionality where available). 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.

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