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(b) Strong points in the control environment of Letham Co in respect of non-current assets are set out below, together with explanations as to their impact on control risk:
Strengths
(i) Approval of the five-year and annual budgets by the board of directors.
(ii) The budget is updated when the order for new equipment is placed.
(iii) Pre-numbered goods received notes and operational certificates are available to the accounting department for comparison with the purchase invoice.
(iv) Informed people in the production department carefully assess the proper operation of the equipment.
(v) The accounting department, independent of the production facility, updates the non-tangible assets register and only the accounting department has access to it.
(vi) Accounting department personnel, independent of production, perform rolling tests to ensure that the non-current assets register and non-current assets on hand are in agreement with each other.
(vii) The internal audit department tests on a sample basis that recorded non-current assets are in existence, but see (c) below.
(viii) Internal audit test the operation of the entire non-current assets recording system. (Tutorial note: Marks would also be available for additional strengths:
– Pre-numbered goods received notes used to update the budget
– Permanent identification numbers recorded on assets
– Purchase invoice automatically updates the non-current assets register.)
Impact on control risk
The annual budget is the ‘trigger’ for placing orders for equipment. Its approval by the board will ensure that only authorised non-current assets are purchased.
The company can use the updated budget at any time to anticipate cash outflows. It will also ensure that there is no duplication of assets purchased.
Only goods that have been received and are operating effectively will be paid for.
This will help to ensure the operational effectiveness of plant and equipment.
The potential for fraudulent entries to cover theft/ unauthorised purchases will be reduced and the non-current assets register, an important non-current assets control document, cannot be manipulated by the people who hold the assets.
The risk of theft and loss of plant and equipment is reduced and the likelihood that all items in the register existing increased.
The internal auditing department will be more independent than the accounting department and hence will provide further comfort that the non-current assets register is not overstated.
Any controls which are not operating effectively are likely to be identified and rectified before significant errors can occur.