Assessing Fixed-Asset Control Risk
When auditing a company’s assets, don’t forget to take a look at asset control risk features the company has in place. During your audit you can perform tests of internal controls to limit the number of transaction you sample and test, or test every transaction. For many accounts with few transactions, it’s more efficient to forgo control testing in favor of looking at the complete population of transactions.
When you assess a client’s fixed-asset control risk, remember that control risk is directly affected by asset acquisition and disposal internal controls set in place by the business.
In many businesses, property, plant, and equipment (PP&E) consists of just a few high-value assets. If that’s the case for your client, it’s probably more efficient for you to bypass the tests of controls and just assess control risk as high. By doing so, you’d use substantive analytical procedures instead of sampling. Using substantive analytical procedures means that you compare what’s on your client’s books to what you expect to be on the books.
Here are some examples of PP&E substantive analytical tests:
Trend analysis: Compare prior-year balances in both PP&E and depreciation expense with what you see in the current year. Then consider whether any large increases or decreases are to be expected based on your other audit work, such as inspecting the client’s work environment and interviewing management. (For example, did the managers talk about buying new equipment to increase sales?)
Ratio analysis: Compare the ratio of insurance expense for the PP&E being insured to the prior-year ratio. Taking into consideration any normal year-to-year increase in rates, has the ratio of expense to asset stayed consistent?
Reasonability: Is any change up or down in the PP&E and depreciation balances within the expected ranges? A good procedure is to compare what the company budgeted to spend on PP&E with what it actually spent.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
