The company buys fixed assets for long-term use. They are not sold for cash in the short term, which means they essentially last longer than 12 months. Such assets would include land, building, or equipment owned by a business.
A misrepresentation of fixed assets can lead to an imbalance of the balance sheet on a whole, which is a great risk for the overall books of accounting of the company. This article will discuss some critical risks for fixed assets and what internal controls can manage these risks.
What is internal control?
Internal control is a subset of accounts that helps in proper reporting of the company’s assets. Internal controls help in controlling two forms of risks.
The first form of risk relates to the physical risk of the asset getting lost, damaged, or stolen and, therefore its effect on its balance sheet.
The second form of risk is financial in nature. There is a risk of an error being caused in the cost, depreciation, useful life, or the scrap value assigned to the asset and therefore can again cause the books of accounting to be affected.
In order to manage each of these two risks, there is a separate set of controls that helps the management eliminate or reduce these risks so that the reporting on the financial statements is not incorrect or misrepresented.
The objective of asset security controls is to verify the physical condition of the fixed asset that is its existence, condition, and safe custody.
It is recommended that someone is assigned the responsibility for safeguarding the asset, most probably the manager of a department.
This can be done by creating a list of all the fixed assets and sending the manager this list each quarter as a reminder. The responsibility of the asset can also be tied to the annual bonus plan for the manager to ensure that the asset is really looked after.
Further, when an asset is passed on from one manager to another, this should be done by signing a proper formal document that will be useful for keeping track of the asset’s movement from one place to another.
If any asset gets damaged, misplaced, or stolen, the department which was responsible for its safekeeping should be made to pay for replacing the fixed asset. This way, the manager and the staff will ensure that the asset is kept safely so that any cash funds they have do not have to be spent this way.
Other important security controls include conducting a regular audit of all the fixed assets to ensure that all fixed assets are in safe custody, and if anything is missing, it can be identified quickly.
Additionally, access to areas with expensive fixed assets should be limited. The company might consider using radio frequency tags attached to such fixed assets, with detectors installed on all exits, which can help alert an alert when anyone tries to walk out with the asset.
However, such risk is only applicable to fixed assets that are easily movable. Assets such as buildings, land, or very large machinery do not require such safekeeping, whereas smaller equipment such as laptops or computers are at considerable risk.
Asset acquisition control is the process through which new assets are added to the business. It is common for managers to review all new acquisitions beforehand and set a budget aside for them.
However, when a new asset is required for which the budget had not been approved before, the approval process for such assets should be made stringent to check if the asset is really needed now rather than in the next budget period.
This can be done by sending the approval request to a senior managerial level.
Next, any additions made to the fixed assets must be reviewed by a second person who can ensure that there is no misrepresentation, misclassification, or any error in entering the asset information, which can seriously impact the company’s financial statements.
Each and every asset should be tagged with a serial number so as to ensure there is no duplication of assets in the record and any missing assets can be quickly identified. This includes tagging new additions to assets as well. A list should be created containing all the serial numbers and should be regularly audited.
When disposing of assets, it is again required that it is done with approval from the managers. The disposal of assets should be documented formally.
Additionally, any cash received from the sale of an asset must match the sale value of the asset. This will make sure that the company recovers the actual sale value.
Assets that are not required anymore or have worn out after their useful life should be disposed of off in a timely manner so that the cash is not tied up in such assets. This will help in improving the liquidity of the business as well.
To sum up, what has been explained above, fixed assets are the most expensive assets listed on the company’s balance sheet and therefore have high risk associated with them.
The internal controls used for fixed assets include asset security control, asset acquisition control, and asset disposal control.
These controls help in ensuring that the assets remain in safe custody and are not misclassified, misreported, or stolen from the company.
Any errors or misrepresentations in recording such assets can cause a major loss for the company. The risk associated with the mismanagement of fixed assets is both physical and financial risk.