One of the responsibilities of the directors of a company is to establish strong internal controls to safeguard the assets of the firm.

      

One of the responsibilities of the directors of a company is to establish strong internal controls to safeguard the assets of the firm.
Required:
a) State the audit objectives of internal controls on fixed assets.
b) Set out the audit procedures you would follow to verify directors‘ fees.
c) What procedures would you apply to verify the extension of a building that has been constructed by the client during the year?

  

Answers


Wilfred
a) The audit objectives of internal controls on fixed asset would be to ensure that the internal control objectives over fixed assets have been achieved. These objectives include:
i. Fixed assets are correctly recorded, adequately secured and properly maintained.
ii. Acquisitions and disposals of fixed assets are properly authorized.
iii. Acquisitions and disposals of fixed assets are for the most favourable price possible.
iv. Fixed assets are properly recorded, appropriately depreciated and written down where necessary.
v. Safeguard assets from misuse.

b) Audit procedures to verify directors‘ fees.
i) A schedule should be obtained from the client showing the make up of the directors‘ remuneration;
ii) The amounts paid in respect of each individual should be verified by reference to the company‘s accounting records and the service agreements or a board minute in respect of management remuneration or to the articles of association or annual general meeting minute in respect of fees for services as directors.
iii) The auditor should confirm that all directors‘ emoluments have been disclosed in the financial statements as required by the companies Act and have been appropriately taxed.

c) Verification of building extension
i. Ensure that proper authorisation was granted to build the extension (evidence by minutes of the board meeting) either by the board or a designated official. (Evidenced by his signature).
ii. Ensure that all the costs of the extension has been properly capitalized. This is of special importance where any of the directors or senior executives are enumerated by commission on profits, as the figure upon which commission is calculated will be inflated if revenue expenditure is incorrectly allocated to capital.
iii. Physically inspect the building to verify the physical existence of the extension.
iv. Examine documents of title to the building, to ensure that the building together with the extension rightfully belongs to the client.
v. Ensure that the cost of the extension has been properly determined (i.e. the extension is properly valued). To do this: -
a. Ensure the Company‘s system for allocating costs to the extension is appropriate. Such costs include cost of labour,
construction materials etc.
b. Ensure the costs included relate to the project by taking a sample of costs included and tracing back to costings and
source documentation.
Wilfykil answered the question on February 21, 2019 at 12:25


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