51.3 7 marker asset verification and management accounting info

Question 1

Comparison of the non-current asset register with physical assets was last undertaken in January
20X6. Company policy stipulates that an annual asset verification exercise must be performed.

Answer 1

Asset verification

Consequences
Assets may be overvalued because:
* assets recorded in the register may not exist or have been stolen
* assets may be impaired or no longer in use.
Assets may be undervalued because:
* acquisitions may not be recorded
* assets may still in use but fully written down.
Assets may not be available when required for use resulting in business disruption.
Additionally, incorrect capital allowances may be claimed and depreciation charges/useful
life may be inappropriate.
Compliance with covenants may be affected by misstated assets/profits.

Recommendations
* Annual or more frequent reconciliations to be performed by a named person who is
independent of the custodian of the assets
* Physical assets should be checked to the register to ensure completeness of records
* Entries in the register should be checked to the physical asset to ensure existence
* Inspections should include consideration of condition and appropriateness of useful
life of the assets
* Differences to be reported to a responsible official who should investigate and resolve
the differences
* Communication of policy to staff
* Monitoring to ensure that procedures are followed.
* Disciplinary action if procedures are not followed

Question 2

Directors are presented with management accounting information at their monthly board
meetings. The management accounting information does not include cash flow forecasts nor
details of whether VE complies with the bank covenants.

Answer 2

Content of management accounting information

Consequences
There may be cash flow issues and the business may be unable to pay its debts as they fall
due.
The business could breach loan covenants resulting in the withdrawal of loans.
Extra costs may be incurred as a result of penalties imposed by the bank.
Ultimately the going concern status could be at risk.
The directors may be unable to take corrective action or may make poor decisions
because of the lack of information.
The business may be trading illegally and the directors may be failing in their
responsibility for maintaining solvency of the business.

Recommendations
* The agenda of directors’ meetings should include a review of cash flow forecasts and
compliance with bank covenants.
* Information presented at directors’ meetings should include cash flow forecasts for at
least the next 12 months (or the period of the bank loans), key assumptions used in
their preparation, a sensitivity analysis and a commentary on compliance/noncompliance with covenants.