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INVESTMENT AND FINANCE CYCLE AND EFT PAYMENT CONTROLS SUMMARY - Coggle…
INVESTMENT AND FINANCE CYCLE AND EFT PAYMENT CONTROLS SUMMARY
INVESTING ACTIVITIES
Additions of fixed assets
Repair and maintenance of assets.
Disposals of fixed assets
DOCUMENTS REQUIRED
Capital budgets
Fixed Asset requisition with quote/negotiated prices
Minutes of Board of Directors (authorisation of purchases and sales)
Invoices (purchases and sales)
Fixed Asset register
General Ledger accounts: Fixed assets
Depreciation
Profit/loss on disposal
Accumulated depreciation
FUNCTIONS OF CYCLE
• Raising of funds and repayment thereof
• Obligations such as interest and dividends which arise out of finance raised
• The application of funds raised for the acquisition of assets
CONTROL OBJECTIVES, INTERNAL CONTROLS & TEST CONTROLS
Occurrence/Validity
INTERNAL CONTROL
A fixed asset requisition and capital budgets should support all fixed asset purchases
An independent senior official should periodically compare physical assets to recorded assets
Authorisation
INTERNAL CONTROL
Purchases and sales of fixed assets should be authorised by senior management on a numerical capital requisition/sales document
Authorisation/decision should be recorded in minutes
Completeness
INTERNAL CONTROL
Capital requisitions are numerically accounted for and the list of missing numbers should be regularly followed up.
Fixed assets should be recorded in a fixed asset register and be regularly compared with physical assets
Accuracy
INTERNAL CONTROL
Fixed assets should be recorded at the amount of the invoice
A computer program tested in advance should be used for depreciation and other calculations and if calculation is per hand, an independently reviewed on calculation should be performed
Recording
INTERNAL CONTROL
All purchases and sales of fixed assets should be recorded in the fixed asset ledger accounts (control account) and fixed asset register from the source documents.
Regularly reconcile the fixed asset register is with the control accounts in the ledger.
Classification
INTERNAL CONTROL
Fixed assets should be classified according to company policy into the respective categories
Capitalise improvements as fixed assets and clearly distinguish them from maintenance
Cut off
INTERNAL CONTROL
Fixed assets purchased should be recorded at the date of receipt (per Good Received Note) and when sold as from the date that the risks and rewards of ownership passes to the purchaser in substance
General Controls
INTERNAL CONTROL
Fixed assets should be stored in permanent form (bolted)
Safe guard assets by:
Limiting access to authorised persons and
implementing controls protecting assets against physical elements such as rain or weather
adequately insure assets
SUBSTANTIVE TESTING
Substantive testing is an audit procedure that examines the financial statements and supporting documentation to see if they contain errors
It is evidence to support the assertion that the financial records of an entity are complete, valid, and accurate.
financial statement assertions
Existence:
Select a sample of items from the fixed asset register, including new additions physically inspect the assets by considering the condition of the assets and whether assets are still in use
Additions of fixed assets
Select all material purchase transactions and inspect supporting documentation for approval such as minutes, invoices, title deeds
Compare details in the fixed asset register to suppliers invoice/purchase contract. (amount, date, description etc.)
Disposal of fixed assets:
Enquire from management with respect to disposals, scrapings, insurance claims and request to audit insurance claim documentation in detail, ensure correct
accounting in general ledger of claim received and assets removed
Inspect correspondence with insurers and for claims pending, you should obtain confirmation from insurers.
Enquire about disposals and inspect receipts for discontinued operations and inspect fixed asset register to ensure assets disposed are reflected as zero
Repairs and improvements:
• Scrutinise the repair expense account for any unusual items and follow up
• For a sample of material expenses, inspect the source documentation to determine the exact nature of the expense
Rights and Obligation:
Inspect the underlying documents of title deeds/contracts/lease agreements for terms and conditions, parties involved
Review minutes of directors/shareholders meetings for approval of fixed asset acquisition.
Valuation
Revaluation of assets:
Consider if assets are valued by an expert - consider ISA 620 “ Using work of an auditor’s expert
For the expert consider
Independence, qualifications, experience and reputation of the expert
Assumptions and methods used by the expert should be assessed
Calculation performed by the expert must be re-performed
Re-perform calculation performed by the client where assets are revalued
Depreciation:
Obtain fixed asset summary schedule for purposes of recalculation Obtain rates and basis of calculation from prior year working papers or financial statements Through enquiry & re-performing of calculations ensure rates and basis are consistently applied Obtain evidence of estimated useful lives and residual value of assets and assess the reasonableness
Impairment:
Enquire from management and obtain evidence regarding factors, which could indicate impairment such as:
Market value decline, Changes in technology, economic conditions etc
Discuss the underlying assumptions with management and the calculation of the impairment loss must be reperformed
Obtain evidence that the estimate of value in use, selling price, discount rates of future cash flows are appropriate/reasonable
Ensure impairment loss is disclosed in financial statements according to IFRS;
Consider the use of an expert.
Amortisation of intangible assets:
In order to determine the reasonableness of amortisation method and period applied, inspect evidence of rights attached to intangible assets/management’s projections,
Accounting estimates
Review and test process used by management to develop estimate for reasonableness
Evaluate underlying assumptions used in deriving the estimate and consider their appropriateness
Test calculations and compare prior year estimates with actual results
Consider approval process
Compare with independent estimate
Review subsequent events to confirm estimate
Completeness:
In order to identify any material purchase transactions, scrutinise minutes/contracts/lease agreements/invoices and follow through to entry in fixed asset register.
Select a sample of assets on hand and trace to relevant entries in the fixed asset register
Presentation and disclosure:
Inspect the financial statements to ensure that amounts are classified and disclosed correctly in terms of IFRS
FINANCING ACTIVITIES
Owners’ Equity
Issue of shares
Buy back of shares
Statutory requirements
Authorisation for the issue of shares
Declaration of dividends
Borrowings
Cash inflow from long-term/short-term borrowings received
Subsequent repayment of capital sum
Interest charged on borrowings
Authorisation required for borrowings
DOCUMENTS REQUIRED
Minutes of shareholders/directors
Debenture trust deed
Prospectus
Share certificate
Loan/lease contract
Mortgage bond
Journal voucher
EXAMPLE
If there is lack of proper authorisation process when purchasing fixed assets, there is a risk that unwanted assets might be purchased resulting in loss for the company