Equipment audit program

Finding that sweet spot between the two extremes is not easy. This article is all about solving that problem. You have a budget to stick to and targets to hit.

In short, the best equipment maintenance program allocates your limited resources to the right work at the right time and ensures work is done as efficiently as possible. That all starts with your preventive maintenance schedule. A world-class equipment maintenance program is not built on a set-it-and-forget-it PM schedule. Things are always changing at your organization. Assets are getting older. Equipment might operate differently depending on the season. Your budget could be cut or fingers crossed increased.

If everything around you is changing, your preventive maintenance schedule should too. Doing a regular audit of your PM schedule is an essential part of this process. It removes inefficiencies and helps you adapt to changing circumstances. It helps you find waste and eliminate it from your equipment maintenance program. A preventive maintenance audit will help you answer these questions. The average equipment maintenance program includes over 2, preventive maintenance work orders every year.

Auditing each and every one of them is probably not realistic. So how do you prioritize the PMs to evaluate and modify? It all starts with the component the PM is associated with and how important the component is to the success of your operation, says Jason Afara, Senior Solutions Engineer at Fiix.

Jason brings up an x-ray machine or a metal detector as an example. These components have an impact on the number of units produced, the quality of those units, and the safety of those units. Inspections of these components are also done frequently, leaving the most room for improvement. These elements have the biggest impact on your operation, so addressing them will give you quick wins.

Lastly, Jason points out that some PMs need to be audited annually or monthly based on compliance regulations. Below are elements of a preventive maintenance task to consider when doing your audit and some factors that can help you optimize each part of your PM.

Start by assessing how often the task is done and what triggers the task in your schedule. Tweaking the frequency of your PMs is one of the easiest ways to increase the impact of your time and money. There is one main question to answer at this stage: Should the task be done at a higher, lower, or the same frequency?

Equipment criticality is crucial for prioritizing tasks in your equipment maintenance program. It helps you understand:. This means that such repair and maintenance expense shall be treated as expenses directly in the Profit or Loss account; Any disposal or retirements of PPE as well as the sales proceeds and other related costs for such disposal are properly recognized and recorded in the accounting book; and Last but not least, there is proper depreciation expense in relation to the PPE are properly calculated and allocated based on its costs as well as the expected life expectancy or estimated useful life and scraped value.

In addition, it is to ensure that the entity has consistently applied the use of acceptable depreciation methods for each relevant assets. Risks and Control Deficiencies in Relation to PPE In this section, we cover the risks for the PPE as well as the control deficiencies sometimes called internal control deficiencies that may happen for the accounting and management of PPE.

Below are the key risks associated with the PPE that we commonly encounter so far: An entity or management may intentionally account for or overstate the PPE as well as the depreciation on such PPE. Some other expenses that should not be capitalized may have been incorrectly capitalized.

The depreciation method and the assessment of useful life of assets may be used resulting the overstatement or understatement of the depreciation charge into the profit and loss account. The capitalization of borrowing costs may have been incorrectly calculated and capitalized as asset value. Assets may have loss but still recorded in the accounting book and recorded the depreciation expense. Below are the examples of control deficiencies that we commonly encounter during the course of the audit: There is no properly physical count of the assets.

This raise doubt in the existence of the assets. There is properly process and procedure for the disposal of assets. The segregation of duties have not been properly allocated for the authorization of purchased, recording the assets as well as the depreciation expense in the General Ledger GL. In addition, there is no proper segregation of duties for those who perform the physical count and reconciliation process. Lack of competent person who manage and calculate the depreciation schedule that may have doubt in the incurred depreciation recorded.

In addition, there is no additional reviewer to review such deprecation schedule before posting to GL. There is no proper control on the reconciliation process between the assets and depreciation schedule to the GL or Trial Balance TB No properly asset code tagged on each item of the assets resulting in difficulty of performing the physical count of assets.

To ensure that the recorded assets represent the assets being used by the year-end. To ensure that the PPE addition represents assets acquired in the year. To ensure that the PPE disposal represents the assets sold or scrapped in the year. To ensure that all PPE addition and disposal occurred during the year have been properly recorded b.

To ensure that the balance of the PPE represents the assets in use at the year-end. To ensure that the PPEs are recorded at cost less accumulated depreciation b. To ensure that the PPE addition and disposal are correctly and accurately recorded.

To ensure that the disclosures are adequately prepared and in accordance with accounting standards. This includes the cost of the PPE, additions, disposals, depreciation policies, useful lives, and assets held under finance leases. Whether a register containing title deeds of the assets are maintained properly. Whether the title deeds or registration documents are kept in safe custody and verified periodically. Whether the organization maintained a detail record of projects which are in progress.

Whether the expenditures incurred are properly allocated between capital and revenue. Accountability for and safeguarding of fixed assets Whether there is any system for identification of fixed assets.

Whether adequate safeguards are made to protect the fixed assets from fire, theft accessibility to unauthorized persons, and use of locks burglar alarms etc. Whether the fixed assets are properly insured and the auditor has to check regarding the adequacy of the cover the time period, etc. Whether the fixed assets are physically verified on a periodic basis including those assets lying with third parties. Whether follow up action has been taken for the discrepancies between the record books and physical verifications.

Whether there is any system for identifying and reporting damaged, obsolete and idle fixed assets. Independent checks : The auditor has to see whether there is any internal audit for fixed assets and determining the coverage and effectiveness of the internal audit.

Substantive procedures for fixed assets The auditor determines the nature timing and extent of substantive procedures relating to fixed assets after evaluating the effectiveness of internal controls. The procedures normally followed are the following A. Examination of records and documents. Verify the opening balances from the previous years financial statements or ledger accounts.

Verify the additions made during the year from the approval of appropriate authority copies of purchase orders, invoices receiving reports, acknowledgement form the supplier and bank statement. Verify the assets constructed during the year by examining work order records, statement of allocation and apportionments of costs, certificate of work performed, contractors bills, invoices of suppliers of materials, bank statement etc.

Verify the major repairs and maintenance to ensure no revenue expenditure related to the capital assets is included. Verify the disposal or retirement of fixed assets by examining the approval of appropriate authority, quotations invited from buyers, contract with the buyer, copy of the sale bills, evidence of physical deliveries etc.

Examine whether the book values and accumulated depreciation of the fixed assets disposed or discarded are properly adjusted accounting the resulting gains or losses properly. Verify the minutes of the board of directors, agreements, and correspondence with lawyers to identify any charges or encumbrances on the fixed assets. Verify the arithmetical accuracy of the fixed asset records.

Verify whether the value shown in the financial statement is after charging adequate depreciation. Examine the evidence of ownership of fixed assets. Review or observation of a second verification Though the physical verification is the duty of the management, the auditor can review or observe the verification by examining the documents relating to the physical verification.

The procedures followed are: Review the instructions issued to the staff entrusted with the responsibility of physical verification and judges the appropriateness and adequacy of the instructions.

Assess the competence of the personnel conducting the physical verification. Examine the frequency of the verification and verify whether it is reasonable in the circumstances of the case. When direct physical verification is not possible examine any indirect evidence of the existence of the fixed assets. Tests check the fixed asset record with the physical verification records. Examine the appropriate follow up action taken for the discrepancies revealed by physical verification with the fixed asset records.

Examination of Valuation and disclosure Examine whether the fixed assets have been valued according to the generally accepted accounting principles. Examine whether adequate depreciation have been provided.

Examine the basis on which the consideration has been approportionated to various assets when several assets have been purchased for a consolidated price. Examine the relevant documents such as title deeds agreements etc in order to ascertain the extent of the shares of the organization when the organization owns assets jointly with others. Analytical Procedures : -The analytical procedures employed by the auditors in the audit of fixed assets are the following: Compare the additions or disposals of fixed assets made during the year with the budgeted figures.

Compare the ratio of depreciation for the current year to the average book value of the fixed assets with the corresponding figures of the previous year. Compare the amount of repairs and maintenance of the current year with the figures of the previous year. Compare the ratio of actual capacity utilization with the installed capacity of the current year with the figures of the previous year. Vouch PPE additions to supporting documentation.

Vouch PPE disposals to supporting documentation. Review entries to repairs and maintenance expenses. Inspect PPE and additions thereto. Examine title documents and pertinent papers. Evaluate fair presentation of depreciation expense by evaluating the appropriateness of useful lives and estimated salvage values set by the Commission on Audit.

Determine that PPE and related expenses, gains, and losses are properly identified and classified in the financial statements.