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Investment and Finance Cycle, DALL·E 2024-01-14 16.38.08 - A simple…
Investment and Finance Cycle
Functions in the Cycle
Disposal of Fixed Assets
Procedures for asset disposal, risks of overstating assets, and methods for recording disposals.
Repair and Maintenance of Assets
Differentiating between capital and revenue expenditure, misclassification risks.
Additions of Fixed Assets
Steps for asset acquisition, including proposal preparation, board approval, and procurement process.
Documents in the Cycle
Invoices
Verification of asset purchase or sale, price accuracy.
Fixed Asset Register
Recording asset details, depreciation, and disposals.
Fixed Asset Requisition Forms
Importance in authorising purchases detailing asset specifications.
Board Minutes
Documentation of key decisions and approvals.
Capital Budgets
Role in planning and approving capital expenditure.
Control Objectives
Accuracy
Recording assets at correct values, ensuring precise depreciation calculations.
Test: Enquire about what purchase procedures are followed, inspect assets are recorded as per invoice amount.
Recording
Proper recording of transactions in ledgers and registers.
Completeness
All valid transactions and assets are recorded.
Test: Inspect that the capital requisitions are in numerical sequence/Inspect documents for proof of review (signatures)
Classification
Correct categorisation of assets and related transactions.
Test: Inspect recon agrees with accounting records and source documents.
Authorisation
Ensuring all transactions are approved as per company policy.
Test: Inspect decision recorded in minutes of the meeting/inspect numerical capital requisition.
Cut off
: Timely recording of transactions in the correct accounting period.
Test: Review the fixed assets register and the ledger accounts for maintenance costs that have been incorrectly classified.
Occurrence/Validity
Verification that all recorded assets exist and have appropriate documentation.
Test: Inspect a sample of requisition and capital budget. Compare fixed asset with book assets.
General Controls
Measures to protect assets from theft and damage.
Test: Enquire and observe safeguarding procedures. Investigate company insurance policies.
Internal Controls
Asset Safeguarding
Physical and procedural measures to protect assets.
Documentation and Recording
Maintaining accurate and complete records.
Maintaining a clear audit trail for each transaction.
Regular updates to the fixed asset register.
Purchase and Sale of Assets
Ensuring adherence to procurement and disposal policies.
Reconciliation
Regularly match asset registers with physical assets and financial records.
Depreciation Calculation
Regular review and update of depreciation methods and rates.
Automated systems for calculating depreciation accurately.
Independent verification of depreciation calculations.
Technology and Data Security
Use of secure platforms for financial transactions and data storage.
Regular updates and audits of cybersecurity measures.
Weaknesses
Poor Asset Safeguarding Measures
Inadequate physical security or insurance coverage for assets.
Inconsistent Depreciation Practices
Inaccurate or outdated depreciation methods and rates.
Deficient Reconciliation Practices
Infrequent or inaccurate reconciliation of the fixed asset register with accounting records.
Lapses in Policy Adherence
Inadequate training or communication regarding asset management policies.
Insufficient Authorization Procedures
Weak or unclear approval hierarchy for asset transactions
Technology and Data Security Weaknesses
Outdated or unsecured financial systems and data storage solutions.
Inadequate Documentation Processes
Lack of detailed records or proper filing systems for asset-related documents.
Risks
Overstatement of Asset Risk
Risk of overstating assets' value, especially in the case of disposals, leading to an inflated balance sheet.
Depreciation Calculation Risk
Risk of errors in calculating depreciation, affecting profit and asset values on financial statements.
Compliance Risk
Risks associated with non-adherence to financial regulations and reporting standards in asset transactions.
Inadequate Asset Safeguarding Risk
Risk of loss due to theft, damage, or inadequate insurance of physical assets.
Fraud Risk in Asset Transactions
Risk of fraudulent activities in the acquisition or disposal of assets.
Investment Performance Risk
Risks related to the return on investments made by the company, including poor performance or loss of capital.
Asset Misclassification Risk
Risk of categorising expenses as capital investments (or vice versa), affecting profit and asset valuation.
Liquidity Risk in Asset Management
Risk of assets not being readily convertible into cash without significant value loss, impacting company liquidity.
Asset Evaluation Risk
Risk of incorrectly valuing fixed assets, leading to financial statement inaccuracies.
Interest Rate and Financing Risk
Risk of adverse effects on the company's financial condition due to changes in interest rates, particularly for financed assets.
EFT Payments
Internal controls
Multilevel passwords/Two senior employees
Access limited to one computer
Segregation of duties between payments and reconciliations
Internal audit and review by senior officials
