Assig nment Question:
A large engineering company has 1 2 manufacturing plants all over the country. Its production/manufacturing process is capital intensive and company has different types of plants.
Preparatio n of annul d etailed budget of assets especially non-cuurrent assets is the responsibility of finance manager. Thereafter, this final b udget is sent to the Board of directors for final approoval. This bud get is approv ed for more than five years by the Board of direc tors after consulting with the audit com mittee. Finally, the approved budget is fed into t he computerize ed system with proper issuing authority.
At time, p lant is receive d by the Com pany; a pre- numbered note is prepared with different copies. One copy is sent to the accounting department so t h at they could update no n-current ass ets and one copy is sent to the audit department. In the next step, plant is thorough ly inspected by the qualified persons an d is tested fo r operation. Production department prepares an operational efficiency certificate for the accounting department. Then Pre-numbered purchase invoice and the operational efficiency certificate are checked when they received.different dates during the year, the non-current assets register is compare d to the actual plant by a n authorized person who compares identification number of the machine in register and also engraved on the plant
The inter nal audit department also examines on a sample basis from requisition of machi nnery to operation i.e. from preparatio n of budget to entry in the assets regiister. A sample of assets eentries from non-current a ssets is also compared with machinery on work shop floor by the internal audit staff.
Required:
Pinpoint FIVE strengths of the Company y’s control environment with reference to no n- current assets and explain the impact on control risk. (5X5X5X5X5)
Solution of Assignment # 2
| Strengths | Impact of control |
| Operational certificates and pre-numbered | Proper documentation of amount paid for |
| machinery received notes are available to the | machinery is available to accounting department |
| accounting department for comparison with | that reduces the chance of embezzlement. |
| purchase invoice of machinery and equipment. | |
| Operation of the equipment is assessed prudently | It will help to ensure the operational usefulness |
| by qualified people of production department. | of machinery and equipment. |
| Production and accounting departments are | It minimizes the fraudulent entries in non-current |
| independent; so updating the non-current asset | asset register. Manipulation of asset register is |
| register only by authorized persons is major | very difficult by the production department. |
| strength of its internal controls. | |
| Checking of non-current assets is performed on | The risk of loss and theft of plant, machinery and |
| specific date ensures the effectiveness of internal | equipment is reduced. |
| control and better asset management policy. | |
| The internal audit department tests on a sample | The internal auditing department will be more |
| basis either recorded non-current assets are in | independent than the accounting department and |
| existence. | hence will provide further comfort that the non- |
| current asset register is not overstated. | |
| Internal audit tests the operation of the entire | Any control which is not operating effectively is |
| Non-current assets recording system. | likely to be identified and ratified before |
| significant errors can occur. | |
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