Finance And Investment Cycle

Question 1

What are the key activities involved in the finance and investment cycle?

Answer 1

Investment activities and financing activities

Question 2

What types of transactions are included in investment activities?

Answer 2

• Purchase of assets
• Capitalisation of assets
• Disposal of assets
• Maintenance of assets

These transactions require specific authorisation requirements.

Question 3

What is the purpose of testing controls in the investment cycle?

Answer 3

To determine if the controls meet the objectives set by management

This involves inspecting, observing, and verifying control implementation.

Question 4

How can fraud be committed in this cycle

Answer 4

• Omitting long term loans;
• Understating the value of long term liabilities;
• Overstating assets by including fictitious assets
• Overstating assets by understating depreciation allowances or impairment.

Question 5

Investing activities: Authorisation

Answer 5

• Acquisitions and disposals should be authorised by top management and the BOD
• Statutory approval from the shareholders;
• Existence of Capex committee that will prepare and present all requests and proposals to the BOD;
• Different levels of authorisation in the organisation.

Question 6

Investment activities: Inherent risks

Answer 6

• Management bias and incentive to misstate capital expenditure to achieve budget and obtain performance bonuses;
• Nature and complexity of the assets acquired leading to errors in accounting, such as property – stage of completion;
• Valuation of intangible assets
• Determining useful lives of assets or fair market values;
• Risk of management override of controls through unauthorised acquisitions;
• Risk of fraud and theft of assets;
• Errors in the recording of assets.

Question 7

Investing activities: Addition of fixed assets authorisation process

Answer 7

• There should be a formal written proposal by capex committee;
• The proposal should be supported by quotes and source of finance;
• These documents should be presented to board of directors (BOD)/governing body (GB);
• The decision taken about the addition should be minuted;
• In large organisation there are different levels of authorisation, thus make sure you follow all the procedures;
• All directors’ interest in contracts should be disclosed;
• There should be an issue of purchase order/ DN from supplier/ invoice;
• There should be a formal signed contract (E.g.: Financing from bank).

Question 8

Investment Activities: Disposal

Answer 8

• We will receive proceeds (amount we receive for selling the asset);
• There are less formal controls over disposal – thus accurate accounting is sometimes overlooked;
  THUS: Risk – disposed assets are still reflected as assets in the SOFP. Thus they are overstating their assets

Question 9

Investment Activities: REPAIRS, MAINTENANCE and IMPROVEMENTS

Answer 9

• Risk – items will be capitalised instead of expensed;
• Or items expensed instead of capitalised.

Question 10

Validity : Internal control

Answer 10

1. All fixed asset purchases are supported by a fixed asset requisition and capital budgets. (Supporting documentation).
2. Recorded assets are periodically compared to physical assets by an independent senior official.

Question 11

Validity: Test of control

Answer 11

1. Select a sample of fixed asset purchases and inspect that the supporting requisition and capital budget exists.
2. Enquire with the client’s personnel about the procedures w.r.t. purchasing of fixed assets and periodic comparison of fixed assets with book assets.
3. Inspect proof of comparisons by client official (signature).

Question 12

Authorisation: Internal control

Answer 12

1. Purchases and sales of fixed assets:
   * Authorised by senior management on a numerical capital requisition/sales document;
   * Authorisation/decision recorded in minutes.

Question 13

Authorisation: test of control

Answer 13

1. Enquire with the client personnel about the policy w.r.t. the authorisation of purchases and sales.
2. Inspect that there is a numerical capital requisition /sales document.
3. Inspect that the decision was recorded in the minutes as proof of authorisation.

Question 14

Completeness: Internal control

Answer 14

1. Capital requisitions are numerically accounted for (Sequentially pre-numbered).
2. The list of missing numbers is regularly followed up.
3. Fixed assets are recorded in a fixed asset register and are regularly compared with fixed assets (see reference to the test under validity).

Question 15

Completeness: test of control

Answer 15

1. Inspect that the capital requisitions are in numerical sequence.
2. Inspect that there is proof of client review (signature) that missing numbers are followed up.
3. Inspect the fixed asset register for proof of review (signature).

Question 16

Accuracy: Internal control

Answer 16

1. Fixed assets are recorded at the amount of the invoice.
2. Depreciation and other calculations are done by computer with a program which has been tested beforehand (if calculation is per hand, perform an independently reviewed on calculation).

Question 17

Accuracy: Test of control

Answer 17

1. Enquire from management about procedures followed when recording an asset.
2. Inspect that the assets are recorded as per the amount on the invoice.
3. Test the functioning of programmed controls (e.g. test date). If calculation performed by hand, inspect schedules for proof of client review of calculation.

Question 18

Recording: Internal control

Answer 18

1. All purchases and sales of fixed assets are recorded in the fixed asset ledger accounts (control account) and fixed asset register from the source documents.
2. The fixed asset register is reconciled with the control accounts in the ledger on a regular basis.

Question 18

Recording: Test of control

Answer 18

1. Select purchases and sales of fixed assets from the cash book and follow it through to the source documents, fixed asset register and entries in the ledger. Agree details such as the date, amount, description and category of asset.
2. Inspect the reconciliation and agree it with the accounting records and source documents.
3. Inspect the reconciliation for proof of review by a senior employee at the client.

Question 19

Classification: Internal control

Answer 19

1. Fixed assets are classified into the respective categories according to company policy.
2. Improvements are capitalised as fixed assets and clearly distinguished from maintenance.

Question 20

Classification: Test of control

Answer 20

1. Verify/enquire the procedure followed when classifying the assets and inspect/verify that the classification of assets is according to the policy.
2. Review the fixed assets register and the ledger accounts for maintenance costs that have been incorrectly classified.

Question 21

Cut off: Internal control

Answer 21

1. Fixed assets purchased are recorded at the date of receipt (per GRN) and when sold as from the date that the risks and rewards of ownership passes to the purchaser in substance.

Question 22

Cut off: Test of control

Answer 22

1. Enquire about procedures w.r.t. recording and cut-off.
2. Select purchases and sales from source documents and follow it through to the ledger accounts and fixed asset register - ensure recorded in correct period. (Test also in other direction from records to supporting documentation).

Question 23

General controls: Internal control

Answer 23

1. Fixed assets are, as far as possible, stored in permanent form (bolted).
2. Safe guard assets by:
   * Limiting access to authorised persons (locked, key control)
   * Controls protecting assets against physical elements (rain, weather)
3. Asset adequately insured.

Question 23

General control: test of control

Answer 23

1. Enquire with personnel about procedures w.r.t. safeguarding.
2. Observe the procedures w.r.t. safeguarding.
3. Investigate the company’s insurance policy and proof of application of the policy requirements.
4. Confirm by way of enquiry and inspection of insurance contracts that the assets are insured.