Fixed asset errors are slow to surface. A capitalization policy applied inconsistently or a disposal never recorded can sit in the register for years. Controls need to cover the full life of the asset: approval of spending, the capitalization decision, depreciation, verification that the asset exists and the disposal. This post provides an RCM, a worked policy example anchored to the IRS de minimis safe harbor, and test steps.
The RCM
| ID | Risk | Control | Type | Assertion | Test step |
|---|---|---|---|---|---|
| FA-01 | Unauthorized capital spending | Capital requests approved per delegation matrix before commitment; budget variances reviewed | Preventive | Occurrence | Sample additions; agree to approved request |
| FA-02 | Expense items capitalized or capital items expensed | Written capitalization policy with thresholds; accounting review of invoices above a threshold and a monthly review of repairs and maintenance for capital items | Preventive, detective | Classification | Sample invoices in capital and expense accounts; apply policy |
| FA-03 | Assets recorded at the wrong amount | Capitalized cost includes only eligible costs; supporting invoices attached | Preventive | Accuracy | Recompute cost for sample |
| FA-04 | Depreciation misstated | Useful lives and methods set by policy; depreciation run reviewed against expectation | Detective | Valuation | Recompute for sample; compare to expectation |
| FA-05 | Construction in progress not transferred when placed in service | Project completion review; aged CIP report reviewed quarterly | Detective | Valuation | Test aging; inspect completion evidence |
| FA-06 | Assets in the register do not exist or are lost | Physical verification of the register at reasonable intervals; differences investigated and recorded | Detective | Existence | Observe verification; trace sample both directions |
| FA-07 | Disposals not recorded | Disposal request with approval; finance notified; gain or loss reviewed | Preventive | Existence | Compare scrap and sale documents to the register |
| FA-08 | Impairment indicators ignored | Annual review for impairment triggers documented | Detective | Valuation | Inspect review memo |
| FA-09 | Register differs from the general ledger | Subledger to general ledger reconciliation monthly | Detective | Accuracy | Reperform for sample months |
| FA-10 | Lease versus purchase misclassified | Contract review of equipment arrangements for lease components | Preventive | Classification | Sample contracts |
Statutory and tax anchors
For issuers, Section 13(b)(2)(B)(iv) of the Exchange Act requires comparison of recorded accountability for assets with existing assets at reasonable intervals and action on differences. FA-06 is that control.
For tax, Treasury Regulation 1.263(a)-1(f) provides a de minimis safe harbor. A taxpayer with an applicable financial statement (AFS) can expense amounts not exceeding $5,000 per invoice or per item as substantiated by the invoice, provided that, at the beginning of the tax year, it has written accounting procedures treating such amounts as expenses for non-tax purposes and it expenses the amount on its financial statement under those procedures. Taxpayers without an AFS have a lower per-item limit ($500 in the regulation text, or another amount identified in published guidance), and their accounting procedures need not be written. The safe harbor does not apply to inventory property or land. The election is made by attaching a statement titled "Section 1.263(a)-1(f) de minimis safe harbor election" to a timely filed original return, including extensions, and it cannot be revoked.
The control point is the one the regulation itself makes: the policy must exist at the beginning of the year and the books must follow it. A policy that exists only for tax, with no matching book treatment, fails the conditions.
Worked example: capitalization policy
A company with an AFS (for example, certified audited financial statements used for credit or reporting purposes) adopts a book capitalization threshold of $10,000 per item. For tax, it wants the de minimis safe harbor.
The mismatch: the regulation's per-item limit for an AFS taxpayer is $5,000. Items from $5,000 to $10,000 are expensed on the books. The safe harbor does not reach them, so each must be analyzed under the general capitalization rules for tax, which creates a book-tax difference the company must track. The cleaner design is a book policy and a tax election that agree, or a documented schedule of the differences.
Under Standard 13.4 Evaluation Criteria, internal auditors assess whether management's criteria are adequate and use them if they are; here the written capitalization policy is the criteria for the test below.
Test: obtain the written procedures and confirm their date is at or before the first day of the tax year; confirm the books expensed the items under them; sample expense invoices at or below $5,000 and between $5,000 and $10,000; and confirm the election statement was attached to the timely filed return. See /us/blog/property-plant-equipment-asc-360-capitalization-depreciation-disposals and /us/glossary/de-minimis-safe-harbor.
Physical verification example
Internal audit selects 60 register items and traces them to physical locations, then selects 60 physical assets and traces them to the register. Results: 4 of 60 register items cannot be located (all small equipment disposed of years ago); 7 of 60 physical assets lack tags and are not in the register. The cause is no disposal notification process and no tagging at receipt. Recommendation: tag at receipt, disposal form signed by finance, annual full verification.
Analytics
- Additions near period end and just below the capitalization threshold.
- Assets with zero depreciation or fully depreciated assets still in use or disposed.
- Repairs and maintenance accounts with large single invoices.
- Duplicate asset records by serial number.
- CIP balances older than 12 months.
Mistakes to avoid
- A capitalization policy that differs in practice between divisions.
- A safe harbor election made without the required procedures in place at the start of the year.
- Verifying the register only by tracing book to floor, not floor to book.
- Letting CIP sit unaged.
CORAA prepares ready-to-review audit files for US CPA firms from client books; the firm keeps the client, the review and the signature. See /us.
Sources
- Securities Exchange Act of 1934, section 13(b)(2)(B)(iv), 15 U.S.C. 78m(b)(2)(B): https://www.law.cornell.edu/uscode/text/15/78m
- Treasury Regulation 1.263(a)-1(f), de minimis safe harbor, 26 CFR 1.263(a)-1: https://www.ecfr.gov/current/title-26/section-1.263(a)-1
- The IIA, Global Internal Audit Standards (2024), Standard 13.4 Evaluation Criteria: https://www.theiia.org/en/standards/2024-standards/global-internal-audit-standards/
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