Mega Process: Capital Expenditure Management

Major Process: Capital Expenditure

Major Process: Fixed Assets
Major Process: Project Planning & Monitoring

Mega Process Major Process Sub Process Risk

Capital Expenditure Capital Capital Budgeting • Capital budgets are not prepared for capital acquisitions
Management Expenditure and • Capital budgets are not approved by relevant authorities
Requisitioning • Capital purchases are made without obtaining requisite approvals
• Actual utilizations exceed the budgeted allocations

Capitalization & • All capital purchases have not been capitalized

Accounting • Assets received and lying in other locations are not accounted for in
books of account
• Delay in capitalization due to delay in receiving / processing of
invoices
• Capitalization entries are not transposed completely into the GL
• Assets, which are installed and ready for use, are not capitalized in
the books of accounts
• Assets, which are not ready for use, have been capitalized in the
books of accounts
 • All direct / indirect costs are not captured for capitalization
• Items not used in the projects and returned to stores are not adjusted
in the capitalization value
• Capital spares are not capitalized with the relevant asset
• Capital purchases have been accounted for as revenue expense and
vice versa
• Incomplete transfer from capital work-in-progress to capital assets
account
*• Tax information derived from economic activities, within the fixed
asset cycle, are not accurately and promptly recorded

Revaluation of • Assets are revalued incorrectly

Assets • Revalued assets are incorrectly accounted for
• Depreciation on assets is inaccurately calculated

Depreciation • Depreciation rates are not as per the estimated useful life of the asset
• Depreciation method, rate, useful life of asset and salvage value is
not consistent with the laid down depreciation policy of the company
• There exist errors in depreciation computation / accounting
• Depreciation is not recorded on all assets.

• Low system interface in depreciation computation making it

susceptible to errors
• The balances in the FA sub ledger and GL do not reconcile
• Depreciation is not recorded in the books of account
 • Depreciation is not recorded in the books of account

Fixed Assets Physical • Assets recorded in the fixed assets register (FAR) do not physically
verification (PV) exist and vice versa
• Idle assets / assets not in working conditions, are not identified on a
periodic basis
• Assets at third party locations are not safeguarded or not utilized for
specified purposes

FAR and GL • Fixed asset cost, depreciation and accumulated depreciation do not
match the GL
• FAR does not capture all relevant information.
• Unauthorized access to FAR
• Incomplete asset details entered into the FAR
 • FAR does not capture all relevant information.
• Unauthorized access to FAR
• Incomplete asset details entered into the FAR

Asset Movement

Safeguarding of • Insurance of assets is not done

Assets • Insurance value of the assets is not adequate
• Insurance is not renewed on timely basis
Project Planning Project Planning • Non-comprehensive coverage of project tasks
& monitoring • Lack of real time reporting & resultant mismanagement of project
timelines
• Inaccurate Budgeting- based on historical data vs zero cost budgeting
• Frequent changes in project specifications leading to excess cost
and/or project delays

Project • Defective Monitoring & reporting system

Monitoring • Non-definition of key performace parameters
• Bill passing errors

Project Closure • Delay in Approvals

• Bad Debts
• Delay in handover and consequent cost of maintenance charges borne
by the Company or loss of rental income
• Exess/obsolete inventories
• Material reconciliation and non-recovery of wastages
 Work Steps
• Understand the process of capital budgeting and obtain the relevant policies and DOA/SOA for approval of
capital expenditure
• Discuss, enquire & verify whether capital expenditure requirement is conceptually approved by Chairman and
Managing director(CMD)/Co Chairman and Managing Director(CCMD) based on growth strategy presented by
the Business Unit Heads, Manufacturing Heads. Functional Heads and Chief of Project with focus on new
products, additional capacities, growth in market share, environmental issues etc.
• Check whether based on the Strategic direction the budget for project expansion and routine capital expenditure
is made by the project team and the respective manufacturing heads/Functional heads
• Also whether the budget estimates from the respective manufacturing units is dovetailed into the overall Capital
Budget of the Company, which is prepared as part of the annual plan

Capital Budget Approval

• Verify whether Capital budgets of various locations are consolidated at Corporate Office and reviewed by
Executive Directors which is then approved by CMD/CCMD and is presented to the Board of Directors by
Executive Director Finance(EDF)

• Document the capex approval process and enquire/ verify whether the same is adequate in terms of preparation,
verification & approval of capex approval
• Discuss and document the work flow for capex w.r.t the following:
- Manual Allotment of Capex Number
- Entering of Capex in ERP
- Access Rights
- Review of Access Right

• Understand and document the budget monitoring process

• Check whether budget tracking/ budget to actual reports are prepared and reviewed
• Identify whether there are system based controls on cost overrun and there are approval procedures for the same
• Verify whether there is adequate SODs w.r.t proposer and approver of capex. Also, whether an independent
purchase department is responsible for all buying activities. The Purchase Department raises a PO only on the
basis of an approved Capex

• Check for existence of duly approved capitalisation policy and process of timely review of the same
• Document the process of MRN preparation and check whether:
i) Purchase of Capital Assets
Capital purchases are flagged by way of a separate PO series linked to respective Capex numbers. On receiving of
a capital item, a MRN is created based on approved purchase order. Once the material is inspected and approved
by project team , the MRN is approved by store officer. The moment the MRN is approved by the stores keeper
the following entry gets generated in system:
Inventory a/c dr
To Memorandum control a/c.
ii) Purchase of Services
Separate Job orders series is maintained and all services are recorded in the books through approved job orders
only. On receiving the services an MRN is prepared. The moment the MRN is approved the inventory the
following entry gets generated in system
Stores job order project a/c dr
To memorandum control a/c .
• Verify whether access rights for approving MRN in ERP is restricted to authorised personnel
• Check whether Provision for MRN pending invoicing is made correctly and timely and that the provision is
made by Accounts personnel for all unmatched MRNs at the time of annual closing to recognize the inventory and
liability of the Company
• Check whether there is a process of review of open orders for various projects and all the open/ back orders
quantities of purchase orders/ job orders
• Verify the Overheads allocation process and check whether At each month end a report is generated which
details various indirect/ pre - operative/ trial run expenditures and ensures the allocation of these overheads to the
related projects
• Check whether capital completion certificate is received prior to capitalisation
• Verify whether CWIP account is reviewed on a peridocial basis as to whether the same is reconciled and to
identify any instances of old items that are pending capitalisation
• Identify the basis of capitalisation and check for the adequacy, timeliness and completeness of the same

• Check whether:
Approval
need for revaluation is identified by Head of Finance and is approved by CMD/CCMD
Revaluation
The revaluation of assets is done by the approved valuer
Accounting Policy for reinstatement of revalued assets
Revalued amounts are reflected by restating gross book value and accumulated depreciation as per the FA manual
Review of Accounting Policy and procedures for reinstatement of revalued assets
Whether periodical review is being carried out
Authorization and review of revaluation journal
The Revaluation journal is posted based on the approved documents in respect of revaluation
The revaluation journal is authorized before the same is posted
Access rights to update revaluation journal entries
Access rights for passing revaluation entries is restricted

• Check the following:

Depreciation policy
The company has Fixed Asset Manual which incorporates the depreciation Policy
Review of Depreciation Policy
There is periodic review of the Fixed Asset module of Accounting manual
Depreciation master/table
Depreciation master
Does the system automatically computes the depreciation based on the predefined logic and the depreciation rates
• Restricted access to the depreciation master
Access to the depreciation master is be restricted. Access rights are reviewed periodically by IT department to
ensure that functional responsibilities
• Periodic review of depreciation rates
Confirmation on an annual basis that the depreciation rates coded in the depreciation master are consistent with
the rates specified in the accounting policy

• Computation of depreciation
Reconciliation of depreciable base to GL
The depreciation schedule is tallied with the GL account balances to ensure that all assets are included in the
depreciation schedule

• System based depreciation run

System runs the depreciation based on predefined logic taking into account the depreciable amounts, rate of
depreciation etc for assets appearing as opening balance as on 1st of April every year
• Analytical review
Depreciation Logic Test
Depreciation Logic test is carried out on annual basis by matching the depreciation report generated and
computations carried on in a separate excel sheet.
Review of Analytical review
Review of analytical review carried out for analyzing any significant variations.

• FAR to GL reconciliation
Reconciliation of Fixed Asset register with the General Ledger is done on an annual basis
• Book close checklist
A monthly book close check list is circulated which includes Depreciation calculation and checking as a line item.
Review of depreciation calculation schedule before the books are closed

• Check for the following:

-Physical verification policy:
Existence of a policy
Company has specified a Fixed Asset Manual detailing the following attributes:
- Scope of physical verification i.e. which all assets are to be covered;
- Periodicity of verification;
- Responsibility for physical verification;
- Procedure to be followed for doing physical verification; and
- Regularisation/write off of assets not located or not found in working conditions
Review of policy
There is review of policy on predefined intervals to make suitable changes as required by different statute
-Physical verification of assets
Segregation of duties
Segregation of duties exists between the personnel carrying out the PV and the personnel maintaining and
updating the FAR
Conduct of Physical Verification
PV is carried out periodically and all discrepancies noted (in terms of idle assets, missing assets) are investigated
and reviewed by Plant Heads and Site Incharge
• Approvals for write off is obtained

• Physical Verification of assets located at 'out' locations

-Check whether confirmation is taken from parties where assets are located at out locations on an annual basis and
-Confirmation for material sent on Job work is taken at the year end

• Access for updating of Fixed Asset Register:

Check whether access to capitalize and record assets in the FAR is restricted to authorized personnel. Discuss
whether there is a standard FA code comprising of:
- asset main group
- asset sub-group
- year of capitalization
- GU code
- Unique series
• Mandatory fields in FAR:
Discuss whether following details are required to be maintained in the Fixed asset register
- Asset Code
- Description of the Asset
- Classification
- Location
- Quantification
- Original Cost
- Date of purchase/capitalization
- Depreciation Method
- Rates of Depreciation
• Also whether FAR is maintained in excel spread sheet and in ERP and identify whether FAR contains details to
comply with requirement CARO
• Check whether Manager Accounts ensures that the FAR as per ERP and as recorded in excel sheet is reconciled

• FAR to GL reconciliation:
Whether FAR is updated and reconciled with the General Ledger on an annual basis
• Document the process and Work flow for asset movement
• Check whether Request and Approval for asset movement is done in a defined Asset transfer form
• Verify whether the movement/transfer of asset is initiated by the Plant head by filling a Asset Transfer Form
(only for NRGP) after the approval of Manufacturing Head or as specified in the work flow/policy
• Check whether preparation and approval of NRGP is based on approved asset transfer form
• Verify whether plant security verifies the approved NRGP with the specimen signature list for allowing the
removal of goods

• Verify whether access rights to prepare NRGP is restricted to stores officer/ or as specified in the work flow/
policy
• Updation of fixed asset register (FAR) for assets moved outside the factory premises
Whether there is a formal procedure for updation of change in location in FAR. In addition whether any
confirmation is received from the receiving location

• Preparation and approval of RGP

Whether there are authorized personnel's for approving the transfer of goods on returnable basis and an RGP is
prepared and is approved by the authorized personnel before the goods are sent out.
Whether plant security verifies the approved RGP with the specimen signature list for allowing the removal of
goods

• Review of assets sent on RGP(open RGP)

Check whether review of assets sent on RGP but pending receipt is done by the Stores department and whether
stores generates a report of assets sent on RGPs but pending receipt and send it to relevant departments for
immediate action
• Review of assets sent on NRGP( open NRGP)
Whether there exists any control whereby a reconciliation between NRGP issued for permanent transfer to other
locations but pending confirmation is carried out

• Insurance of Assets
Determine whether fixed assets are adequately covered by comparing the net book value and the sum insured

• Review and renewal of Policy

Understand the process of review and renewal of insurance policies. For eg, whether there is a process of
preparing and maintaining an excel spread sheet which details the list of insurances and their due dates of expiry

• Adequacy of Insurance policy

Whether there exists a control to ensure that the insurance cover taken during the year is adequate and covers all
the assets of the Company. Further, whether adequate measures are taken for immediate insurance of additions
made after the policy has been taken
• Discuss & understand the process of planning for a project, the activities involved, departmental interlinks &
documents generated
• Check if project tasks have been defined & prioritised
• Check if timelines have been set & interdependencies defined
• Check if project specifications have been finalised & documented
• Verify the budgets defined & approvals for the same
• Check if performance parameters have been defined along with braod project milestones/timelines

• Discuss & understand the process of project monitoring

• Review construction against defined milestones
• Ensure receipt of requisite approvals
• Check if quality control measures are complied with
• Check if work completion certificates are obtained
• Timely verification,approval & processing of bills submitted
• Whether timely communication of project status to management

• Discuss & understand the process handling project closure

• Check for approvals
• Verify whether possession handover has taken place
• Check material reconciliation with vendors/contractors and final settlement of contractor claims/bills
• Check whether inventory has been reconciled & correctly accounted for