Accounting Information Systems: The Processes and Controls, 2nd Edition

RISKS AND CONTROLS IN FIXED ASSETS PROCESSES (STUDY OBJECTIVE 6)

AUTHORIZATION OF TRANSACTIONS

Designated members of management should be assigned responsibility for authorizing the purchase of new fixed assets, as well as the disposal or transfer of existing fixed assets. In the case of high-dollar items, there should be a strict approval process requiring the authorization of top management or the initiation of the capital budgeting procedures. This strict process for purchasing fixed assets should include at least three formal steps:

1. Investment analysis
2. Comparison with the capital budget
3. Review of the proposal and specific approval by the appropriate level of management

When a request is made to purchase fixed assets, there should be a formal investment analysis to justify that the expenditure will generate benefits that exceed the cost. This analysis could require two parts. The first part is financial justification with a model such as net present value, payback period, or internal rate of return. These models require that dollar estimates be determined for costs and benefits of the fixed asset. The second part would be a written narrative of the benefits, especially any benefits that are difficult to quantify in dollars. In many cases fixed asset purchases are important to consider even when financial costs exceed financial benefits. For example, if a direct competitor purchases a document imaging system to speed the processing of customer paperwork, a company may need ...