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Investment and Finance Cycle and EFT payment controls - Coggle Diagram
Investment and Finance Cycle and EFT payment controls
Finance and Investment Cycle
Mainly deals with
Raising of finance
Obligations which arise out of the finance raised
The application of funds raised for the acquisition of assets
Relatively few transactions
Usually material
Frequently governed by legal and regulatory requirements
Examples of fraud in the cycle
Omitting long term liabilities from the financial statements
Understating the value of long term liabilities
Overstating assets by including fictitious assets or assets which the company does not own
Overstating assets by understating depreciation allowances or impairment
Investment activities
Main activities
Additions of fixed assets
The following steps must be taken before an asset can be acquired:
• A formal written proposal by a Capex Committee must be completed;
• The proposal must be supported by quotes and the required source of finance;
• The proposal must then be presented to the Board of Directors;
• The decision taken by the directors must be minuted;
• In large organisations different levels of authorisation must be obtained for the acquisition of assets;
• If any director has an interest in a contract for the purchase of assets, this interest must be disclosed;
• If any director has an interest in a contract for the purchase of assets, this interest must be disclosed;
• In some cases a formal signed contract is required for the purchase of the asset.
Disposals of fixed assets
• The proceeds from disposals usually take the form of:
o Cash receipts; or
o Trade-in values.
• Normally entities have less formal controls around disposal of their assets and therefore the accurate accounting can be overlooked;
• The major risk of disposal relates to the fact that disposed assets can still be reflected as assets in the statement of financial position in an attempt to overstate assets.
Repair and maintenance of assets
-The risk that costs incurred for repair and maintenance are incorrectly treated.
The risk exists that items are capitalised instead of expensed in the attempt to overstate profits or that an item is incorrectly expensed instead of capitalised.
Key documents
Capital budget
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
Finance Activities
2 Main sources
Owners Equity
• Issue of shares;
• Share buy backs;
• 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;
Common Documents
• Minutes of shareholders/directors
• Debenture trust deed
• Prospectus
• Share certificate
• Loan/lease contract
• Mortgage bond
• Journal voucher
Internal controls, test of controls and control objectives in the cycle
Control Objectives
Occurrence/Validity: All recorded assets are valid (really exist) and are supported by
proper documentation
Internal Controls
All fixed asset purchases are supported by a fixed asset requisition and capital budgets
Recorded assets are periodically compared to physical assets by an independent senior official
Authorisation: All purchases and sales are authorised according to company’s policy
Internal controls
Purchases and sales of fixed assets are authorized by senior management on a numerical capital requisition document and Authorization recorded in minutes
Completeness: All valid fixed assets are recorded and nothing is left out
Internal controls
Capital requisitions are numerically accounted for
The list of missing numbers is regularly followed up
Fixed assets are recorded in a fixed asset register and are regularly compared with fixed assets
Accuracy: All fixed assets are recorded at the correct amount and totals are
arithmetically correct.
Internal Controls
Fixed assets are recorded at the correct amount and totals are arithmetically correct
Depreciation and other calculations are done by a computer with a program that has been tested before hand
Recording: All transactions w.r.t. fixed assets and depreciation are correctly recorded.
Internal controls
All purchases and sales of fixed assets are recorded in the fixed asset ledger accounts and fixed asset register from the source documents
The fixed asset register is reconciled with the control accounts in the ledger on a regular basis
Classification: All transactions w.r.t. fixed assets are correctly classified according to its
nature
Internal controls
Fixed assets are classified into the respective categories according to company policy
Improvements are capitalized as fixed assets and clearly distinguished from maintenance
Cut off: All purchases and sales of fixed assets are recorded in the period to which it
relates
Internal controls
Fixed assets purchased are recorded at the date of receipt and when sold as from the date that the risks and rewards of ownership passes to the purchaser in substance
General Controls: Assets are properly safeguarded against theft and physical elements
Internal controls
Fixed assets are, as far as possible stored in permanent form
Safeguard assets by limiting access to authorized persons and protecting assets against physical elements
Adequately insured
Substantive testing
Financial statement assertions
Existence
Select a sample of items from the fixed asset register, including new additions, and physically inspect the assets;
With physical inspection, consider the condition of the assets and whether assets are still in use.
Rights and obligations
• Inspect the underlying documents of title deeds/contracts/lease agreements for terms and conditions, parties involved etc.;
Review minutes of directors/shareholders meetings for approval of fixed asset acquisitions.
Valuation
Revaluation of assets
Consider if assets are valued by an expert
Where assets are revalued - re-perform calculation performed by the clien
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
Amortization of intangible assets
Inspect evidence of rights attached to intangible assets to determine the reasonableness of amortisation method and period applied
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
Compare prior year estimates with actual results;
Consider approval process
Compare with independent estimate
Consider the use of an expert
Completness
Scrutinise minutes/contracts/lease agreements/invoices to identify any material purchase transactions 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 disclosurea
Inspect the financial statements to ensure that amounts are classified and disclosed correctly in terms of IFRS.
Example of weaknesses and risks
No authorisation process to purchase a new asset
Risk that the organisation will purchase a asset they do not need
Assets are not recorded properly
Risk that assets are overvalued
Person making the purchase has a conflict of interest
Risk that the person overpays for the asset
EFT
Multilevel passwords should be used, from two senior employees. These password must be simultaneously entered.
Access to EFT payments should be limited to one computer;
There should be proper access controls over the terminal that is used to make the payment;
The terminal should shut down after 3 unsuccessful access attempts of logging in;
All EFT transfers should be limited to a specific day, for example, Payroll should run 25th of each month;
Completeness tests should be performed. E.g. If you had to pay 10 employees you have to ensure that 10 salaries were paid;
To effect the payment 2 passwords of 2 different senior employees should be entered;
After the payments are made there should be an:
Audit trail;
The payment should reflect on the bank statement;
A bank reconciliation should be performed.
The reconciliation should be done by a person who is independent of the EFT transactions that were made.