Payroll Processing and Fixed Asset Procedures:The Physical Fixed Asset System

The Physical Fixed Asset System

COMPUTER-BASED FIXED ASSET SYSTEM

Because many of the tasks in the fixed asset system are similar in concept to the purchases system in Chapter 5, we will dispense with a review of manual procedures. Figure 6-13 illustrates a computer-based fixed asset system, which demonstrates real-time processing. The top portion of the flowchart presents the fixed asset acquisition procedures, the center portion presents fixed asset maintenance procedures, and the bottom portion presents the asset disposal procedures. To simplify the flowchart and focus on the key features of the system, we have omitted the processing steps for AP and cash disbursements.

Acquisition Procedures

The process begins when the fixed asset accounting clerk receives a receiving report and a cash disbursement voucher. These documents provide evidence that the firm has physically received the asset and show its cost. From the computer terminal, a clerk creates a record of the asset in the fixed asset subsidiary ledger. Figure 6-14 presents a possible record structure for this file.

Notice that in addition to the historic cost information, the record contains data specifying the asset’s useful life, its salvage (residual) value, the depreciation method to be used, and the asset’s location in the organization.

The fixed asset system automatically updates the fixed asset control account in the general ledger and prepares journal vouchers for the general ledger department as evidence of the entry. The system also produces reports for accounting management. Figure 6-15 illustrates the fixed asset status report showing the cost, the accumulated depreciation (if any), and residual value for each of the firm’s fixed assets.

Based on the depreciation parameters contained in the fixed asset records, the system prepares a depreciation schedule for each asset when its acquisition is originally recorded. The schedule is stored on computer disk to permit future depreciation calculations.

Asset Maintenance

The fixed asset system uses the depreciation schedules to record end-of-period depreciation transactions automatically. The specific tasks include (1) calculating the current period’s depreciation, (2) updating the accumulated depreciation and book value fields in the subsidiary records, (3) posting the total amount of depreciation to the affected general ledger accounts (depreciation expense and accumulated depreciation), and (4) recording the depreciation transaction by adding a record to the journal voucher file. Finally, a fixed asset depreciation report, shown in Figure 6-16, is sent to the fixed asset department for review.

Department managers must report any changes in the custody or status of assets to the fixed asset department. From a computer terminal a clerk records such changes in the fixed asset subsidiary ledger.

Disposal Procedures

The disposal report formally authorizes the fixed asset department to remove from the ledger an asset disposed of by the user department. When the clerk deletes the record from the fixed asset subsidiary ledger, the system automatically (1) posts an adjusting entry to the fixed asset control account in the general ledger, (2) records any loss or gain associated with the disposal, and (3) prepares a journal voucher. A fixed asset status report containing details of the deletion is sent to the fixed asset department for review.

CONTROLLING THE FIXED ASSET SYSTEM

Because of the similarities between the fixed asset system and the expenditure cycle, many of the controls are the same and have already been discussed. Our discussion of fixed asset controls will thus focus on three areas of principal difference between these systems: authorization, supervision, and independent verification.

Authorization Controls

Fixed asset acquisitions should be formal and explicitly authorized. Each transaction should be initiated by a written request from the user or department. In the case of high-value items, there should be an independent approval process that evaluates the merits of the request on a cost-benefit basis.

Supervision Controls

Because capital assets are widely distributed throughout the organization, they are more susceptible to theft and misappropriation than inventories that are secured in a warehouse. Therefore, management supervision is an important element in the physical security of fixed assets. Supervisors must ensure that

fixed assets are being used in accordance with the organization’s policies and business practices. For example, microcomputers purchased for individual employees should be secured in their proper location and should not be removed from the premises without explicit approval. Company vehicles should be secured in the organization’s motor pool at the end of the shift and should not be taken home for personal use unless authorized by the appropriate supervisor.

Independent Verification Controls

Periodically, the internal auditor should review the asset acquisition and approval procedures to determine the reasonableness of factors used in the analysis. These include the useful life of the asset, the original financial cost, the proposed cost savings as a result of acquiring the asset, the discount rate used, and the capital budgeting method used in the analysis.

The internal auditor should verify the location, condition, and fair value of the organization’s fixed assets against the fixed asset records in the subsidiary ledger. In addition, the automatic depreciation charges calculated by the fixed asset system should be reviewed and verified for accuracy and complete- ness. System errors that miscalculate depreciation can result in the material misstatement of operating expenses, reported earnings, and asset values.