Internal Control of Fixed Assets: A Controller and Auditor's Guide

CHAPTER EIGHT 8

Reconciliation of Physical Inventory to Accounting Records

IN SOME WAYS THIS may be the most important chapter in the book. We assume that a company recognizes that its internal controls over Property, Plant, and Equipment (PP&E) have to be improved. New policies have been established for minimum capitalization going forward. Asset lives are based on realistic expected lives, not on tax requirements. Acquisition, transfer, and retirement policies will be followed so that the accounting records correspond to the physical assets, and vice versa.

At this point a controller can be satisfied that in the future PP&E will be under control. What is missing is the fact that the existing property records, and the actual assets present in the company, are not synchronized. One approach that may have appeal would be to say, “OK we’ve had problems in the past, but from here forward we undoubtedly will have a good system. Let’s just let the old problems sort themselves out over time. After all, every year from now on future-year depreciation charges will bring any past errors closer to resolution. Once all the old assets on our books are written down to zero or to salvage value, we no longer will have a problem. Meanwhile, all the new additions will be controlled, so let’s take our limited resources and utilize them elsewhere.”

This approach has a certain appeal, and if audit committees and outside auditors were able to live with the former system, and a new and better system ...