1. Capital Assets Through the Eyes of an Auditor

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

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

4. 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.

5. 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.

6. 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.

7. 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)

8. 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.

9. 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

10. 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?

11. 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

12. 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!

13. 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?

14. 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.

15. 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

16. 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.

17. Uniform Guidance (UG)
How does UG define equipment? 2 CFR 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”

18. 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 applies.

19. 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

20. Uniform Guidance – Property Use
Does the government only use the equipment for authorized purposes? See (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 (c)(3)

21. 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?

22. 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?

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

24. Questions? Chris Goeman, CPA, CGFM
Joshua Jumper, CPA, CGFM