Year 1 - Physical Inventory 1572

  • Does anyone have any insight from experiences as a SOX compliant company about conducting a complete asset verification of all assets in the first year for a company that must comply with SOX?%0ADoes the external auditor consider a 100% audit justified to ensure that the Company is starting with accurate/complete records?%0AThanking you in advance for your feedback.%0AMilan

  • SOX doesn’t require you to look at controls over opening balances - just controls throughout the year. In fact in Year 1 you may only need to have controls in place and operating at the first year-end.%0AI also would find it hard to justify a reqquirement for 100% asset verification in any circumstance related to SOX. Materiality should always come into play.

  • I agree with Denis. An asset inventory should be based on the risk of assets disappearing. Most companies don’t really need an asset inventory as they tend to run lean and the only assets on the books are those that are needed to run the operations. If the assets disappear, then it becomes very difficult to continue operations. I would think that the bigger risk would be evaluation of assets for impairment or improper depreciable life as those both can have a huge impact on financial reporting, but allowing the business to operate as normal.

  • Denis / Mike,
    Thank you for sharing your insight and feedback. Let me know if I can return the favor.

  • Folks,
    But, it is imperative that inventory of Property and Equipments should be conducted once in three years. It can be staggered business unit by business unit or it can be full blown.

  • It would be helpful if you can cite the SOX language from the SOX Act, the PCAOB, AS2, SEC or other governing authority that makes it imperative to conduct a complete inventory every 3 yrs.

  • Folks,
    This has been generally accepted management control suggested and tested by Deloitte Askin and Sells, Price WaterHouse and Ernst and Whinney (me and my friends being affiliated with these firms) much before the advent of Sarbanes Oxley Act, atleast being tested right from my Big 8 days way back in 1988.
    Physical inventory can mitigate ‘unauthorized acquisition, use or disposition’ risks and required specifically to be mitigared vide Section 404 and Section 103 of Sarbox.
    Section 103: ‘receipts and expenditures of issuer…in accordance with authorization of management and the directors.’
    I hope that this helps

  • We have previously had this discussion with our auditors and have gotten them comfortable with the fact that we do not perform physical inventories of our fixed assets. The risk of operating equipment disappearing is remote given that we need to have this equipment in place in order to properly operate our business. The same goes for our office equipment = we all have phones, computers, desks, chairs, etc. that are needed on a daily basis to perform our office duties. Our fixed asset records are not at the level of detail that would facilitate a physical inventory, nor do they need to be. As businesses look to operate more efficiently, they generally will eliminate the no-value-added processes, one of which, for us, was physical inventory of PP-and-E.
    What is our biggest financial statement risk by not performing a physical inventory? In my mind it would be that we have overstated our PP-and-E on the balance sheet and not recognized an asset write-off when an asset is prematurely retired. Given the immaterality of individual assets, it is highly unlikely that a material misstatement could occur if we missed an individual asset retirement.
    SOX is about ensuring that financial statements are materially correct. We cover the large risks to our financial statements through our SOX documentation and testing and ignore the smaller risks. As a company, we are willing to take the (very low) risk of an occasional asset disappearing without the proper write-off because the cost to inventory and track assets at that level of detail more than offsets the benefits that we could ever obtain.

  • Does that mean section 906 and section 103 do have materiality thresholds?
    What assurance does the corporate have about assets placed at remote locations?
    Plus we have been specifically asked by our External Auditors to perform physical inventories every three years.

  • 103 is geared towards auditors, not corporations (even though it states that auditors need to gain assurance about things that management is doing). Remind me as to what 906 covers. If it is fraud, then it is not subject to materiality in my opinion.
    Overall, SOX is based on materiality. The both the SEC and PCAOB guidance hints to that in their guidance to take a risk-based approach to testing controls.

  • I am sorry. It is Section 902 of the Act. It adds a section clarifying that an attempt or conspiracy to commit an offense under the federal mail fraud statute is subject to the same penalties as those prescribed for the offense.
    I hope that this helps.

  • I don’t think that there is a materiality consideration for fraud by an executive. I wouldn’t tolerate any level of fraud from anyone in company management. Tolerance of lower level fraud sends the wrong message to other employees.

  • We are using the same argument that kymike is.
    The fact that our projects accept the charge from our shipping company every month, tells us that our assets are there, and operational.

  • What would you recommend in a situation where capital asset disposals have been made by operations in years prior to Year 1 of SOX without communicating the disposal to Finance (a reconciliation of their disposals is underway), but Finance refuse to perform a physical inventory of capital assets?
    Is there any kind of compensating control that could be put in place or should we make a physical inventory review mandatory under our Company Level Controls and Policies?

  • If I was aware of a history of disposals by operations without informing Finance, I would certainly undertake a one-time review. I would also ensure that the operations team was better educated in the need to report the disposals to Finance - lower property taxes, accurate financial statements, potentially lower depreciation charges, etc. In addition to the educational aspect, I would ensure that HR was involved as they can better communicate the potential ramifications of not following company policy than can Finance. Lastly, I would involve Internal Audit in performing random physical asset counts for a period of time until I was comfortable that this practice was no longer occurring.

  • Thanks Kymike (I know my query should be on a separate posting at this stage).%0A we have already documented disposal communications as a key control requirement and have tried to perform random tests to confirm existence of assets, but finance never labelled the assets either so we cannot confirm anything.%0A What I would like to have them do is perform a 100% physical inventory, and label ALL items.%0A Feel like banging my head against a brick wall as the response I get continously is that resources are not available to perform such an inventory… and that the differences estimated are immaterial.%0AIt’s just that I would really like to resolve the issue,as otherwise, I am going to have to report it as a control deficiency to our auditors

  • Do keep materiality in mind. Don’t get too worked up over items that are not material. It is one thing to dispose of a cash register without reporting it (immaterial), but another to dispose of a large, expensive piece of machinery.%0AIf you feel that you must tag assets, only tag those above a certain value. Use the 80/20 rule - tag 20% of your assets that represent 80% of the value. Don’t worry about the rest as individual items would not be material to your FS.%0AIt won’t do any good to tag and inventory your assets unless you have a system to inventory against and can tie the assets back to your fixed asset register on your GL. It is a lot of work to go through this process, which is why many companies do not do it. Think about what resources it requires to do an annual asset inventory. If you have multiple locations that are spread out over a large geographical area, it does not make economical sense to have a HQ team travel around in order to do the inventory. If you have frequent turnover in the management of these facilities, you can always have the outgoing and incoming managers perform the inventory. I like this method because it allows the incoming manager to understand what assets he has responsibility for prior to taking over the operations.%0ABe creative in your approach. Make certain that there is a cost benefit. Identify compensating controls that may allow you to reduce the frequency of the asset counts.

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