Capital Assets Through the Eyes of an Auditor

Agenda Internal Controls over Capital Asset Reporting Addressing the Risk of Misappropriation Common Internal Control Deficiencies and Misstatements Uniform Guidance Requirements over Equipment

What are Management’s Assertions? Existence or Occurrence Rights or Obligations Completeness Accuracy or Valuation Cutoff Understandability, Classification, Presentation, and Disclosure

Existence Reporting Control Objective – All capital assets reported are valid. Internal Controls: Periodic physical inventory and reconciliation to capital asset records. Capital asset deletions are properly authorized, identified, and tracked by appropriate staff. Capital asset records are reconciled periodically to the controlling accounts in the general ledger.

Completeness Reporting Control Objective – All capital assets are reported. Internal Controls: Periodic physical inventory and reconciliation to capital asset records. Capital asset additions are properly identified and tracked through the normal purchasing process. Capital outlay expenditures are reconciled to capital additions at least annually. The CIP budget is reconciled to capital additions annually. Leases are spot checked for capital asset recognition.

Accuracy, Valuation, or Allocation Reporting Control Objectives – Capital assets are properly valued and depreciated. Internal Controls: Invoices and other purchase documentation is reviewed against capital asset records. Management review of capital additions to ensure valuation is properly supported. Capital assets are reviewed annually for impairment. Useful lives are assigned based on policy and input from departments. Depreciation is scanned, spot checked, and reviewed analytically before schedules are finalized.

Classification and Disclosure Reporting Control Objectives – Capital assets are classified appropriately (fund/account/activity) and related disclosures are presented in accordance with GAAP. Internal Controls: Capital asset records are reconciled periodically to the controlling accounts in the general ledger. Management reviews financial statements and disclosures to ensure they agree with the general ledger and are complete. Financial statement checklist is completed. (GFOA checklist)

Misappropriation of Capital Assets Operating Control Objective – Capital assets are adequately safeguarded against theft and misuse. Internal Controls: All types of at-risk capital assets are adequately safeguarded (security guards, alarms, restricted access) Adequate levels of insurance are maintained. Physical inventories are conducted periodically and differences are investigated. (detective control) The individual responsible for taking the inventory is not the custodian of the asset or charged with maintaining capital asset records. Logs of use are maintained and reviewed periodically to ensure assets are being used as intended.

Common Internal Control Deficiencies and Misstatements An internal control deficiency does not always lead to a misstatement However, a misstatement is unlikely to be prevented or detected

Common Internal Control Deficiencies and Misstatements No review process over capital asset additions Is the correct asset value being added? Does the addition account for all ancillary costs? Are there multiple invoices involved? Are they all captured?

Common Internal Control Deficiencies and Misstatements No reconciliation process between asset additions and actual capital outlay expenditures Documenting the process of reconciliations By Fund By Expenditure Code

Common Internal Control Deficiencies and Misstatements Donated Assets Not identified at time of donation. Not identified until asset is deleted. Recent example – Land was sold (discovered reading minutes), but was not deleted from listing. Reason it wasn’t on the listing was because it was never added in the first place!

Common Internal Control Deficiencies and Misstatements Useful lives Organizations have detailed policies/procedures over useful lives but not followed in practice. Conversely, if policies are very generic, it often leads to useful lives that do not match real useful lives of assets. Are users of the assets providing information on the expected service life of assets?

Common Internal Control Deficiencies and Misstatements Construction in Progress Projects are not moved into a depreciable category when placed into service. Reconciliation of CIP project accounts are not being performed resulting in period costs not being expensed. Projects are not separated into the appropriate depreciable asset categories and useful lives are not appropriately assigned.

Common Internal Control Deficiencies and Misstatements Contributed Capital Generally does not follow standard procedures for adding assets Relying on outside sources for accurate information Not consistent between projects Other departments do not know ramifications of not communicating projects

Other Tips Don’t wait until the auditor’s are on site to update capital asset schedules. Don’t treat capital assets as a hazing ritual for new staff. Ensure capital asset accountant receives the appropriate training and guidance. Have someone thoroughly review the capital asset schedules before they are finalized. Perform periodic risk assessments.

Uniform Guidance (UG) How does UG define equipment? 2 CFR 200.33 - tangible personal property (including information technology systems) having a useful life of more than one year and a per-unit acquisition cost which equals or exceeds the lesser of the capitalization level established by the non-Federal entity for financial statement purposes, or $5,000”

Uniform Guidance (cont’d) Next step: Where was the federal funding sourced? State award – The State’s policies and procedures apply. Direct Federal award – 2 CFR 200.313 applies.

Uniform Guidance – Property Records Does the government identify the equipment as federally funded and retain the minimum information required below? Description of the property, including location, use, and condition Serial Number or other identification number Source of funding including the Federal Award Identification Number (FAIN) Date of disposal and sale price if applicable Cost of property and percentage of federal funding Acquisition date and who holds title

Uniform Guidance – Property Use Does the government only use the equipment for authorized purposes? See 200.313(c)(1) Does the government ensure liens are not placed on the property without the approval of the grantor? Does the government charge an appropriate fee when equipment is used for a non-federally funded program or project? See 200.313(c)(3)

Uniform Guidance – Inventory Does the government inventory the equipment and reconcile the results of the inventory to the inventory listing at least every two years?

Uniform Guidance – Maintenance and Safeguards Does the government have a system of routine maintenance to ensure property is kept in good condition? Is property adequately secured and controlled to prevent theft, misuse, or damage? Is the property adequately insured against damage or theft?

Uniform Guidance – Disposal When equipment is identified for disposal does the government first seek disposition instructions from the grantor?

Questions? Chris Goeman, CPA, CGFM christopher.goeman@heinfeldmeech.com Joshua Jumper, CPA, CGFM joshua.jumper@heinfeldmeech.com