Chapter 6The Expenditure Cycle Part II: Payroll Processing and Fixed Asset

Procedures
TRUE/FA!E
1. Time cards are used by cost accounting to allocate direct labor charges to work in process.
ANS: F
2. The personnel department authorizes changes in employee pay rates.
ANS: T
. !ost payroll systems "or mid#size "irms use real#time data processing.
ANS: F
$. To impro%e internal control& paychecks should be distributed by the employee's super%isor.
ANS: F
(. )mployee paychecks should be drawn against a special checking account.
ANS: T
*. +ecause a time clock is used& no super%ision is re,uired when employees enter and lea%e the work
place.
ANS: F
-. .n%entory control per"orms the "ormal record keeping "unction "or "i/ed assets.
ANS: F
0. The depreciation schedule shows when assets are "ully depreciated.
ANS: T
1. Authorization to dispose o" "i/ed assets should be issued by the user o" the asset.
ANS: F
12. 3ork#in#process records are updated by payroll personnel.
ANS: F
11. .deally& payroll checks are written on a special bank account used only "or payroll.
ANS: T
12. The super%isor is the best person to determine the e/istence o" a 4phantom employee5 and should
distribute paychecks.
ANS: F
1. 6ayroll processing can be automated easily because accounting "or payroll is %ery simple.
ANS: F
1$. Timekeeping is part o" the personnel "unction.
ANS: F
1(. Fi/ed asset accounting systems include cost allocation and matching procedures that are not part o"
routine e/penditure systems.
ANS: T
1*. Asset maintenance in%ol%es only the recording o" depreciation charges. 6hysical impro%ements are
always e/pensed.
ANS: F
1-. Fi/ed Asset Systems must keep track o" the physical location o" each asset to promote accountability.
ANS: T
10. Time cards capture the total time an indi%idual worker spends on each production 7ob.
ANS: F
11. Accounting con%entions and .8S rules sometime speci"y the depreciation parameters to be used.
ANS: T
22. The "i/ed asset disposal report authorizes the user department to dispose o" a "i/ed asset.
ANS: F
"UTIPE C#$ICE
1. The document that captures the total amount o" time that indi%idual workers spend on each production
7ob is called a
a. time card
b. 7ob ticket
c. personnel action "orm
d. labor distribution "orm
ANS: +
2. An important reconciliation in the payroll system is
a. general ledger compares the labor distribution summary "rom cost accounting to the
disbursement %oucher "rom accounts payable
b. personnel compares the number o" employees authorized to recei%e a paycheck to the
number o" paychecks prepared
c. production compares the number o" hours reported on 7ob tickets to the number o" hours
reported on time cards
d. payroll compares the labor distribution summary to the hours reported on time cards
ANS: A
. 3hich internal control is not an important part o" the payroll system9
a. Super%isors %eri"y the accuracy o" employee time cards.
b. 6aychecks are distributed by an independent paymaster.
c. Accounts payable %eri"ies the accuracy o" the payroll register be"ore trans"erring payroll
"unds to the general checking accounting.
d. :eneral ledger reconciles the labor distribution summary and the payroll disbursement
%oucher.
ANS: ;
$. 3hich transaction is not processed in the Fi/ed Asset System9
a. purchase o" building
b. impro%ement o" e,uipment
c. purchase o" raw materials
d. sale o" company %an
ANS: ;
(. <epreciation
a. is calculated by the department that uses the "i/ed asset
b. allocates the cost o" the asset o%er its use"ul li"e
c. is recorded weekly
d. results in book %alue appro/imating "air market %alue
ANS: +
*. <epreciation records include all o" the "ollowing in"ormation about "i/ed assets e/cept
a. the economic bene"it o" purchasing the asset
b. the cost o" the asset
c. the depreciation method being used
d. the location o" the asset
ANS: A
-. 3hich control is not a part o" the Fi/ed Asset System9
a. "ormal analysis o" the purchase re,uest
b. re%iew o" the assumptions used in the capital budgeting model
c. de%elopment o" an economic order ,uantity model
d. estimates o" anticipated cost sa%ings
ANS: ;
0. =b7ecti%es o" the Fi/ed Asset System do not include
a. authorizing the ac,uisition o" "i/ed assets
b. recording depreciation e/pense
c. computing gain and>or loss on disposal o" "i/ed assets
d. maintaining a record o" the "air market %alue o" all "i/ed assets
ANS: <
1. 3hich o" the "ollowing is not a characteristic o" the Fi/ed Asset System9
a. Ac,uisitions are routine transactions re,uiring general authorization.
b. 8etirements are reported on an authorized disposal report "orm.
c. Ac,uisition cost is allocated o%er the e/pected li"e o" the asset.
d. Trans"er o" "i/ed assets among departments is recorded in the "i/ed asset subsidiary ledger.
ANS: A
12. .n the payroll subsystem& which "unction should distribute paychecks9
a. personnel
b. timekeeping
c. paymaster
d. payroll
ANS: ;
11. 3here does the responsibility lie "or reconciling the labor distribution summary and the payroll
disbursement %oucher9
a. cash disbursements
b. cost accounting
c. personnel
d. general ledger
ANS: <
12. 3hich o" the "ollowing statements is not true9
a. 8outine payroll processing begins with the submission o" time cards.
b. 6ayroll clerks must %eri"y the hours reported on the time cards.
c. 6ayroll reconciles personnel action "orms with time cards and prepares paychecks.
d. ;ash disbursements signs paychecks and "orwards them to the paymaster "or distribution.
ANS: +
1. .n a manu"acturing "irm& employees use time cards and 7ob tickets. 3hich o" the "ollowing statements
is not correct9
a. ?ob tickets are prepared by employees "or each 7ob worked on& so an employee may ha%e
more that one 7ob ticket on a gi%en day.
b. An indi%idual employee will ha%e only one time card.
c. The time reported on 7ob tickets should reconcile with the time reported on time cards.
d. 6aychecks should be prepared "rom the 7ob tickets.
ANS: <
1$. 3hich department is responsible "or appro%ing changes in pay rates "or employees9
a. payroll
b. treasurer
c. personnel
d. cash disbursements
ANS: ;
1(. 3hich o" the "ollowing situations represents a serious control weakness9
a. Timekeeping is independent o" the payroll department.
b. 6aychecks are distributed by the employees immediate super%isor.
c. Time cards are reconciled with 7ob tickets.
d. 6ersonnel is responsible "or updating employee records& including creation o" records "or
new hires.
ANS: +
1*. 3hy would an organization re,uire the paymaster to deli%er all unclaimed paychecks to the internal
audit department9
a. to detect a 4phantom employee5 "or whom a check was produced
b. to pre%ent an absent employee@s check "rom being lost
c. to a%oid paying absent employees "or payday
d. to pre%ent the paymaster "rom cashing unclaimed checks
ANS: A
1-. 3hich o" the "ollowing is not a reasonable control "or "i/ed assets9
a. 6roper authorization is re,uired "or ac,uisition and disposal o" "i/ed assets.
b. Fi/ed asset records show the location o" each asset.
c. Fully depreciated assets are immediately disposed o".
d. <epreciation policies are in writing.
ANS: ;
10. ;ost accounting updates work#in#process accounts "rom
a. time cards
b. the labor distribution summary
c. 7ob tickets
d. personnel action "orms
ANS: ;
11. 6ayroll uses time card data to do all o" the "ollowing e/cept
a. prepare the payroll register
b. update employee payroll records
c. prepare the labor distribution summary
d. prepare paychecks
ANS: ;
22. 6ayroll checks are typically drawn on
a. the regular checking account
b. a payroll imprest account
c. a wages payable account
d. petty cash
ANS: +
21. The personnel action "orm pro%ides authorization control by
a. pre%enting paychecks "or terminated employees
b. %eri"ying pay rates "or employees
c. in"orming payroll o" new hires
d. all o" the abo%e
ANS: <
22. Accounting records that pro%ide the audit trail "or payroll include all o" the "ollowing e/cept
a. time cards
b. 7ob tickets
c. payroll register
d. accounts payable register
ANS: <
2. 6ersonnel actions "orms are used to do all o" the "ollowing e/cept
a. acti%ate new employees
b. terminate employees
c. record hours worked
d. change pay rates
ANS: ;
2$. The payroll department per"orms all o" the "ollowing e/cept
a. prepares the payroll register
b. distributes paychecks
c. updates employee payroll records
d. prepares paychecks
ANS: +
2(. The document that records the total amount o" time spent on a production 7ob is the
a. time card
b. 7ob ticket
c. labor distribution summary
d. personnel action "orm
ANS: ;
2*. A control techni,ue that can reduce the risk o" a terminated employee being paid is
a. a security camera %iewing the time clock
b. the super%isor taking role during the shi"t
c. paychecks being distributed by an independent paymaster
d. reconciliation o" time cards and 7ob tickets
ANS: ;
2-. Accounts payable
a. signs paychecks
b. prepares the payroll %oucher
c. reconciles time cards and employee records
d. distributes paychecks to employees
ANS: +
20. All o" the "ollowing are processed by the Fi/ed Asset System e/cept
a. sale o" unneeded e,uipment
b. purchase o" raw materials
c. repair o" production e,uipment
d. purchase o" a new plant
ANS: +
21. The Fi/ed Asset System per"orms all o" the "ollowing e/cept
a. determines the need "or new assets
b. maintains depreciation records
c. records retirement and disposal o" assets
d. tracks the physical location o" "i/ed assets
ANS: A
2. The payroll department per"orms all o" the "ollowing e/cept
a. prepares paychecks
b. trans"ers ade,uate "unds to the payroll imprest account
c. updates employee payroll records
d. prepares the payroll register
ANS: +
1. <epreciation
a. assures that assets are reported at "air market %alue
b. is discretionary "or many "irms
c. allocates the cost o" an asset o%er its use"ul li"e
d. is the responsibility o" the department using the asset
ANS: ;
2. The Fi/ed Asset System is similar to the e/penditure cycle e/cept
a. "i/ed asset transactions are non#routine and re,uire special authorization and controls
b. "i/ed assets are capitalized& not e/pensed
c. both a and b
d. none o" the abo%e
ANS: ;
. Asset maintenance in%ol%es
a. the recording o" periodic depreciation
b. ad7usting the asset records to re"lect the cost o" physical impro%ements
c. keeping track o" the physical location o" the assets
d. all o" the abo%e
ANS: <
$. The Fi/ed Asset Systems does all o" the "ollowing e/cept
a. records ac,uisition o" assets
b. records impro%ements to assets
c. estimates the "air market %alue o" assets in ser%ice
d. records the disposal o" assets
ANS: ;
(. Asset disposal
a. occurs as soon as an asset is "ully depreciated
b. re,uires no special authorization
c. automatically initiates the purchase o" a replacement asset
d. must "ollow "ormal authorization procedures
ANS: <
!#$RT A%!&ER
1. <escribe an internal control procedure that would pre%ent an employee "rom punching the time clock
"or another& absent employee.
ANS:
super%ision o" the time clock at the start o" the shi"t
2. 3hy should the employee@s super%isor not distribute paychecks9
ANS:
A "orm o" payroll "raud in%ol%es a super%isor submitting "raudulent time cards "or none/istent
employees. The resulting paychecks& when returned to the super%isor are then cashed by the
super%isor.
. <escribe an internal control procedure that would pre%ent a super%isor "rom stealing the unclaimed
paychecks o" employees who ha%e been terminated.
ANS:
This type o" "raud can be reduced or eliminated by using a paymaster to distribute paychecks to
employees in person. Any uncollected paychecks are then returned to payroll. Also& mail "inal
paychecks to terminated employees.
$. 3hy should employee paychecks be drawn against a special checking account9
ANS:
A separate imprest account is established "or the e/act amount o" the payroll based on the payroll
summary. 3hen the paychecks are cashed& this account should clear lea%ing a zero balance. Any errors
in checks Aadditional checks or abnormal amountsB would result in a non#zero balance in the imprest
account and>or some paycheck would not clear. This will alert management to the problem so
correcti%e action can be taken.
(. 3hy should employees clocking on and o"" the 7ob be super%ised.
ANS:
A "orm o" payroll "raud in%ol%es employees clocking the time cards o" absent employees. +y
super%ising the clocking in and out process& this "raud can be reduced or eliminated.
*. 3hat is a personnel action "orm9
ANS:
The personnel action "orm pro%ides the payroll department with a list o" currently acti%e employees& so
that any submission o" time cards by super%isors "or "ictitious or e/#employees will not be processed.
-. .n a manu"acturing "irm& employees typically "ill out two di""erent documents regarding their time
worked. 3hat are they9 3hy are there two9
ANS:
The two documents are the time card and the 7ob ticket. Two are re,uired because the time card
records all the time worked by an employee during the period while the 7ob ticket details the time by
pro7ect.
0. Cist two types o" authorization re,uired in the Fi/ed Asset System.
ANS:
authorization to purchase the asset and to dispose o" the asset
1. Cist "our types o" data that appear on a depreciation schedule.
ANS:
item description& depreciation method& use"ul li"e& date ac,uired& cost& sal%age %alue& accumulated
depreciation& depreciation e/pense per period& book %alue
12. 3hich documents prompt the "i/ed asset department to create a "i/ed asset record9
ANS:
the recei%ing report and the disbursement %oucher
11. <escribe an internal control that would pre%ent an employee "rom stealing a computer and then
reporting it as scrapped.
ANS:
Super%isors must authorize the disposal o" the computer. Dnless so authorized& the record will continue
to show that the employee is responsible "or the computer.
12. <escribe an internal control that would pre%ent the payment o" insurance premiums on an automobile
that is no longer owned by the company.
ANS:
6er"orm an annual physical in%entory o" "i/ed assets and ad7ust the records to re"lect assets no longer
on hand. 6repare reports about the disposal o" assets.
1. <escribe an internal control that would pre%ent the charging o" depreciation e/pense to the
maintenance department "or a sweeper that is now located in and used by the engineering department.
ANS:
6repare reports about the trans"er o" "i/ed assets. 6er"orm an annual physical in%entory and note the
location o" assets. +udget and then hold each department accountable "or depreciation e/pense "or
assets located in each department.
1$. <escribe an internal control that would pre%ent the ac,uisition o" o""ice e,uipment which is not
needed by the "irm.
ANS:
A higher organizational le%el or other appropriate person authorizes "i/ed asset ac,uisitionsE part o" the
authorization is showing that a need "or the asset e/ists.
1(. 3hat negati%e conse,uences result when "i/ed asset records include assets that are no longer owned
by the "irm9
ANS:
=n the "inancial statements& assets will be o%erstated and depreciation e/pense could be o%erstated.
Assets on property ta/ returns will be o%erstated and too much ta/ will be paid. .nsurance premiums
will be paid on none/istent assets.
1*. )/plain the purpose o" each o" the "ollowing documents used in the payroll system:
the personnel action "orm& the 7ob ticket& the time card.
ANS:
The personnel action form is a document which identi"ies employees who should recei%e a paycheckE
re"lects changes in pay rates& payroll deductions& and 7ob classi"ications.
The job ticket collects in"ormation on the time indi%idual workers spend on each production 7ob.
The time card captures the total time that an employee is at work.
1-. Fow do "i/ed asset systems di""er "rom the e/penditure cycle9
ANS:
The "i/ed asset system processes nonroutine transactions "or a wider group o" users in the organization
than the e/penditure cycle. Further& the e/penditure cycle processes routine ac,uisitions o" raw
materials in%entories "or the production "unction and "inished goods in%entories "or the sales "unction.
The e/penditure cycle transactions are o"tentimes automatically appro%ed by the system& while "i/ed
asset transaction appro%als typically demand indi%idual attention due to the uni,ueness o" the
transactions.
10. 3hat is recorded by the asset maintenance part o" the Fi/ed Asset System9
ANS:
periodic depreciation "ollowing an appro%ed depreciation schedule and physical impro%ements to the
asset to increase the subsidiary account and to ad7ust the depreciation schedule
11. Fow are the "ollowing carried out in the Fi/ed Asset System: authorization& super%ision& independent
%eri"ication9
ANS:
Independent authorization is re,uired to ac,uire an asset and to "ormalize the depreciation schedule.
Supervision must be e/ercised o%er the physical assets.
Independent verification must con"irm the location& e/istence& and condition o" the assets.
22. 3hich department authorizes changes to employee pay rates9
ANS:
The personnel department %ia the personnel action "orm
E!!A'
1. The :ol" ;lub ;ompany makes custom gol" clubs. The manu"acturing super%isor inter%iews people
who ha%e specialized manu"acturing skills& and he in"orms payroll when an employee is hired. The
employees use a time clock to record the hours they work. The employees are also re,uired to keep a
record o" the time they spend working on each order. The super%isor appro%es all time cards.
The accountant analyzes the 7ob tickets and prepares a labor distribution summary. 6ayroll prepares the
payroll register and paychecks. The super%isor distributes the paychecks to the employees. 6ayroll
in"orms cash disbursement o" the "unds re,uired to co%er the entire payroll amount. The cash
disbursements clerk ensures that there are ade,uate "unds in the company's regular checking account to
co%er the payroll.
<escribe at least three internal control weaknessesE "or each weakness suggest an impro%ement to
internal control.
ANS:
3)AGN)SS: The super%isor could be creating "ictitious employees. The super%isor has too many
incompatible dutiesE he hires workers& appro%es the time cards& and distributes the paychecks.
.!68=H)!)NT: Segregate duties. 6ersonnel should hire employees and a paymaster should
distribute paychecks.
3)AGN)SS: )mployees could be paid "or time they do not workE a co#worker could record an
absent worker as present Apunch the time clockB.
.!68=H)!)NT: Super%ise the time clock. 8econcile time cards and 7ob time tickets.
3)AGN)SS: 6ayroll has authorization and transaction processing responsibilities. 6ayroll is
authorizing the disbursement to "und the entire payroll. Accounts payable is not part o" the system.
.!68=H)!)NT: Segregate dutiesE accounts payable should %eri"y the accuracy o" the payroll
register and create a disbursement %oucher.
3)AGN)SS: 6ayroll is "unded through the general checking account.
.!68=H)!)NT: 6aychecks should be written on a separate payroll account.
2. <escribe how the Fi/ed Asset System di""ers "rom the e/penditure cycle.
ANS:
The Fi/ed Asset System processes nonroutine transactions which are recorded as capital assets. The
recei%ing department deli%ers "i/ed assets to the user>manager. The "i/ed asset department per"orms
the record keeping "unction.
The e/penditure cycle processes routine transactions which are o"ten debited to in%entory or e/pensed.
The recei%ing department deli%ers routine purchases to a central store or warehouse. .n%entory ;ontrol
per"orms the record keeping "unction "or in%entory purchases.
. Three ma7or tasks are handled by the Fi/ed Asset System. 3hat is the purpose o" each9 3hat special
control issues a""ect each9
ANS:
Asset ac,uisition handles the steps leading to the ac,uisition o" new "i/ed assets: recognition o" need&
authorization and appro%al& possible capital in%estment analysis& and selection o" supplier. +ecause o"
the %alue o" "i/ed assets& special appro%als are needed.
Asset maintenance in%ol%es ad7usting the subsidiary account balances "or depreciation& and
impro%ements and tracking location. ;ontrol in%ol%es accountability by keeping track o" the physical
location o" each asset.
Asset disposal handles the remo%al o" assets "rom the subsidiary ledger when the asset is taken out o"
ser%ice. This re,uires special appro%al and preparation o" a disposal report.
$. The +accus ;orp. manu"actures medical e,uipment. This is a capital intensi%e industry and
in%estments in "i/ed assets e/ceed I( million a year. The minimum cost "or production e,uipment is
I-(&222. 3hen super%isors want new production machinery& they contact the plant manager. The plant
manager appro%es or denies the re,uest based on discussions with the production super%isor& the repair
and maintenance super%isor& and the ,uality control super%isor.
A purchase order is prepared by the purchasing department and sent to one o" the three ma7or suppliers
o" production machinery "or medical e,uipment. The e,uipment is deli%ered immediately to the
production "loor and put into ser%ice. At the end o" the month& the production super%isor in"orms the
general ledger clerk about the receipt o" the machinery. The general ledger clerk establishes an asset
record "or the machine. At the end o" the year& the general ledger clerk computes straight#line
depreciation based on a 12#year li"e with a 12 percent sal%age %alue. <epreciation e/pense is recorded
as a direct reduction o" the asset cost.
The repair department per"orms routine maintenance on all o" the production e,uipment. =ccasionally
the repair department rebuilds a machine to e/tend its use"ul li"e. All o" the costs associated with the
repair department are charged to manu"acturing o%erhead. 3hen a machine becomes obsolete&
production employees mo%e it to a corner o" the "actory "loor and break it down so that parts can be
used in other machines. 6roduction employees routinely remo%e parts "or personal use. Some smaller
machines ha%e disappeared completely "rom the "actory "loor.
The general ledger clerk takes a physical in%entory e%ery three years. About -( percent o" the "i/ed
assets can be located and identi"ied. =ther assets ha%e serial numbers that are inaccessible& so the item
cannot be matched to a "i/ed asset record. Some "i/ed asset records cannot be traced to an actual item.
Se%eral machines that ha%e been scrapped and are being used "or spare parts were matched to "i/ed
asset records. At the last in%entory& the general ledger clerk did not make any ad7ustments to the "i/ed
asset records e/plaining that -( percent accuracy in the "i/ed asset physical in%entory was e/cellent.
<escribe "i%e internal control weaknesses and e/plain how to correct them.
ANS:
3)AGN)SS: There is no written documentation o" the appro%al "or purchase.
.!68=H)!)NT: A "ormal capital in%estment analysis should be per"ormed "or purchases o" "i/ed
assetsE the analysis should e%aluate cost and bene"its o" the re,uest.
3)AGN)SS: There is no process "or obtaining competiti%e bids.
.!68=H)!)NT: 6rice bids should be obtained "rom the three suppliers be"ore a purchase order is
issued.
3)AGN)SS: Fi/ed assets are deli%ered directly to the "actory "loor.
.!68=H)!)NT: All purchases should go through the recei%ing departmentE the e,uipment should
be inspected and a recei%ing report should be prepared.
3)AGN)SS: The production super%isor noti"ies the general ledger clerk about the receipt o" "i/ed
assets.
.!68=H)!)NT: The recei%ing department should send a copy o" the recei%ing report to the "i/ed
asset department so that "i/ed asset records can be updated and accountability "or the asset established.
3)AGN)SS: The general ledger clerk is maintaining "i/ed asset records.
.!68=H)!)NT: The "i/ed asset department should maintain "i/ed asset records.
3)AGN)SS: <epreciation is computed using a standard method& asset li"e& and sal%age %alue.
.!68=H)!)NT: !anagement should ensure that the depreciation method is appropriate. The asset
li"e and sal%age %alue should be determined indi%idually "or each "i/ed asset ac,uisition.
3)AGN)SS: <epreciation is recorded as a direct reduction o" the asset cost.
.!68=H)!)NT: <epreciation should be recorded in an Accumulated <epreciation account "or each
asset.
3)AGN)SS: ;osts to rebuild a machine is charged to manu"acturing o%erhead.
.!68=H)!)NT: ;osts to rebuild machines should be recorded as an increase to the cost o" the
asset.
3)AGN)SS: There is no authorization to scrap an obsolete machine.
.!68=H)!)NT: =btain written authorization "rom management be"ore a machine is scrapped.
3)AGN)SS: )mployees remo%e e,uipment and e,uipment parts "rom the premises without
authorization.
.!68=H)!)NT: )mployees should recei%e written authorization be"ore remo%ing parts or
e,uipment "rom the "actory.
3)AGN)SS: The general ledger clerk is conducting the physical in%entory and maintaining the
record keeping.
.!68=H)!)NT: The general ledger clerk should not be taking the physical in%entory count. Also&
the physical count should occur more "re,uently.
3)AGN)SS: Fi/ed assets cannot be matched with records.
.!68=H)!)NT: Apply easily accessible labels to identi"y "i/ed assets.
3)AGN)SS: Fi/ed assets cannot be located and are not remo%ed "rom the books.
.!68=H)!)NT: Fi/ed assets that cannot be located must be remo%ed "rom the "i/ed asset records.
3)AGN)SS: Fi/ed assets that are scrapped remain on the books.
.!68=H)!)NT: Assets that are scrapped should be remo%ed "rom the "i/ed asset records.
3)AGN)SS: The clerk regards -(J accuracy as e/cellent.
.!68=H)!)NT: Acceptance o" -(J accuracy is poor. Any %ariation should be in%estigated and
records updated.
(. 3hy does the payroll process lend itsel" to batch processing9
ANS:
6ayroll lends itsel" to batch computerization because it is processed at "i/ed time inter%als which
permits some time lag. 6rocessing the payroll "ile usually in%ol%es most employees each time it is
processed& which is an e""icient use o" computer resources and can be accomplished with a single pass
through the "ile.
*. <iscuss the "undamental risk and control issues associated with "i/ed assets that are di""erent "rom raw
materials and "inished goods.
ANS:
ADTF=8.KAT.=N ;=NT8=CS. +ecause "i/ed assets are re,uested and employed by end#users
asset ac,uisitions should be "ormal and e/plicitly authorized. )ach material transaction should be
initiated by a written re,uest "rom the user or department. .n the case o" high#%alue items& there should
be an independent appro%al process that e%aluates the merits o" the re,uest on a cost#bene"it basis.
SD6)8H.S.=N ;=NT8=CS. +ecause capital assets are widely distributed around the organization&
they are more susceptible to the"t and misappropriation than in%entories that are secured in a
warehouse. There"ore& management super%ision is an important element in the physical security o"
"i/ed assets. Super%isors must ensure that "i/ed assets are being used in accordance with the
organization@s policies and business practices.
.N<)6)N<)NT H)8.F.;AT.=N ;=NT8=CS.
1. 6eriodically& the internal auditor should re%iew the asset ac,uisition and appro%al procedures to
determine the reasonableness o" key "actors including: the use"ul li"e o" the asset& the original
"inancial cost& proposed cost sa%ings as a result o" ac,uiring the asset& the discount rate used& and
the capital budgeting method used in 7usti"ying decisions to buy or dispose o" assets.
2. The internal auditor should %eri"y the location& condition& and "air %alue o" the organization@s "i/ed
assets against the "i/ed asset records in the subsidiary ledger.
. The automatic depreciation charges calculated by the "i/ed asset system should be re%iewed and
%eri"ied "or accuracy and completeness. System errors that miscalculate depreciation can result in
the material misstatement o" operating e/penses& reported earnings& and asset %alues.