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FOLLOW - UP
FIXED ASSETS
INTERNAL AUDITING
JULY 1995
FOLLOW - UP
FIXED ASSETS
CITY OF TULSA
INTERNAL AUDITING
RON MAXWELL, CIA PHIL WOOD, CIA, CFA
CHIEF INTERNAL AUDITOR CITY AUDITOR
AUDIT TEAM:
Steve Jackson, CPA - Manager
Russ Nantz - In-Charge Auditor
The Finance Department is responsible for recording and reporting fixed asset information. Internal
Auditing reviewed the procedures and controls for recording, reporting and inventorying fixed assets
in 1991. In January 1992, Internal Auditing issued a report recommending specific actions to
strengthen the system of internal controls.
A follow-up review was done to determine the action taken on the recommendations made in the
original audit report. The purpose of a follow-up review is to inform management and elected officials
of the extent and adequacy of improvement action taken.
Three post audit events affected the Fixed Assets Function. These events include:
Purchase of A New Fixed Asset System
Since the original audit, the City purchased and installed a new Fixed Assets System. Discussion of
the system will be limited to its impact on the status of findings and recommendations from the
original audit report.
Issuance of Executive Order
In October 1992, the Mayor issued Executive Order Number 92-17 designating individual
departments as responsible for completing annual fixed asset physical inventories. The executive
order requires each department to appoint a Property Coordinator to be the designated official
contact person responsible for carrying out requirements of the executive order concerning fixed
assets. The follow-up audit included procedures concerning the Property Coordinator’s
responsibilities for physical inventories. The follow-up work did not review or address the adequacy
of the physical inventory process within the individual departments.
Increased Capitalization Limit
The capitalization limit for assets was raised from $500 to $1,000. This affects the follow-up review
regarding some of the original findings and recommendations for those assets costing between $500
and $1,000.
SCOPE AND OBJECTIVES
The scope of this review was limited to determining the extent and adequacy of improvement action
taken to carry out recommendations in the original audit report. The objective of this review was to
determine the status of improvements. The operating environment was reviewed for subsequent
events that would affect implementation of the original recommendations. The new system was
considered to the extent it relates to findings in the original audit.
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CONCLUSION
The original report had eight findings. Of these eight, corrective action is completed for one, partially
completed for four and pending(has not been started) for three. Recommendations have been made
for additional improvement action for seven of the original findings.
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FINDING I
THE EXISTENCE OF SOME RECORDED FIXED ASSETS SAMPLED COULD NOT BE
VERIFIED.
DEPARTMENTS INVOLVED
Finance
City Council
SUMMARY OF ORIGINAL FINDING, RECOMMENDATION AND RESPONSE
A sample of assets was selected for verification and testing of the accuracy of Fixed Asset System
information. Approximately 40 assets were selected from field locations and the Fixed Asset System
for inspection. For assets selected from the accounting records, two were transferred to surplus by
the user department without being recorded as transferred on the system and six were not found.
For assets selected from field locations, four were not found on the system and two had incorrect
locations recorded.
Internal Audit recommended periodic physical inventories of fixed assets and enforcement of
procedures requiring departments to review asset records quarterly and report changes in the status.
Management agreed with the recommendations and responded procedures on conducting periodic
physical inventories would be presented to appropriate City officials for authorization. Management
stated the improvements should be completed by December 31, 1993.
CURRENT STATUS: PARTIAL
Executive Order 92-17 - “Administrative Directive for Maintaining Control of City-Owned Property"
was issued to implement this recommendation. The order requires departments to provide a Property
Coordinator for performing a physical inventory. We surveyed Property Coordinators to test
effectiveness of this order,
Questionnaires were sent to Property Coordinators regarding:
1) Policies and procedures.
2) Date of last physical inventory.
3) Documentation of results.
4) Problems or delays in completing the annual physical inventory.
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The results obtained from the 21 respondents are:
1) Ten coordinators have not performed a physical inventory as required by Executive Order
#92-17.
2) Four coordinators have not documented results of the physical inventories.
3) Four coordinators stated difficulty obtaining needed documents and manuals.
4) Seventeen coordinators do not have written policies and procedures.
5) Council staff stated they are not subject to the executive order.
RECOMMENDATION
These procedures are recommended to improve controls:
1) Development of a physical inventory tracking system to monitor completion of inventories
by the departments. Departments should be required to notify the Fixed Asset Section when
physical inventories are completed and whether adjustments are needed to fixed asset
accounting records.
2) The Fixed Asset Accounting Section should notify departments when physical inventories are
past due.
3) Development of model written procedures for departments to follow when performing
inventories. Departments could use the model procedures as a guide in developing specialized
departmental policies and procedures. The model policy should explain documentation
needed by the department to perform the inventory as well as explanation of documentation
needed by Finance to monitor completion of inventories. The Director of Finance should
approve the model procedures.
4) The City Council should consider developing similar policies and procedures for fixed assets.
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RESPONSE
Complete
In January 1995, a system was started to track progress of departmental inventories and we are
developing additional policies and procedures to strengthen the current system.
We will notify department heads when physical inventories are past due. Written policies and
procedures were provided to department property coordinators for conducting their annual
inventories. Instructions were given explaining documentation provided to conduct their inventory
and what documentation needed to be returned to the Finance department.
City Council voluntarily complied with the annual inventory.
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FINDING II
SOME FIXED ASSET TRANSACTIONS ARE NOT ACCURATELY AND PROMPTLY
RECORDED.
DEPARTMENT INVOLVED
Finance
SUMMARY OF ORIGINAL FINDING, RECOMMENDATION AND RESPONSE
Purchases were reviewed to determine if they were accurately and promptly recorded on the fixed
asset system. Of the 26 assets sampled, four had the wrong account type and one was not recorded.
The audit discovered the load date did not represent the actual load date.
A review of the entire fixed asset file using inquiry software determined that 807 assets did not have
date of acquisition recorded and incorrect cost amounts were recorded in the original cost field due
to adjustments made to this field. Three assets had the wrong building or site code recorded.
The audit also observed the following:
1) Some requests for changes were not processed.
2) Grouped assets were recorded on the old system without definition of individual items that
made up the group.
3) Departments transferred two assets, but this information was not entered in the computer
system.
4) Four assets were not recorded on the fixed asset system.
In a test of 31 assets, 12 did not have serial numbers recorded in the fixed asset system, seven did not
have make of the asset recorded, six did not have asset model recorded, and two did not have
information on location for the asset nor the Property Coordinator identified in the records.
Internal Auditing made the following recommendations:
1) Management should set up the following procedures:
A) Mandatory review of asset transactions recorded by all accountants.
B) Timely recording of fixed asset transactions.
C) Individual identification of all assets.
D) Periodic physical inventories of fixed assets.
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E) Standardized methods of data entry to help assure complete and consistent asset
records.
F) Automatic generation of a load date representing the date an asset is recorded.
G) Establishment of a policy for estimating and recording asset acquisition dates when
the acquisition date is unknown.
2) Correction of all errors noted in the finding.
Management concurred with all recommendations and stated improvements could be made by
December 31, 1993, following installation of new financial software.
CURRENT STATUS: PARTIAL
Review of actions on these recommendations determined procedures are not in place for mandatory
review of accountants’ work. The Fixed Asset Accountant has set a goal for entering assets by the
tenth of the month following the month of purchase. No guidelines have been written. The Finance
Department records assets individually and grouped assets are no longer recorded on the system as
recommended in the original audit. The system requires basic information for all assets entered
regardless of fund type. The new system does not track or use a load date. If an asset does not have
an acquisition date, the load date from the old system is used as the acquisition date. The Fixed Asset
Section is writing policies and procedures for recording transactions. The Fixed Assets Accountant
corrected errors noted in the original finding.
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RECOMMENDATION
Finance should develop written procedures addressing changes caused by installation of the new
system. The Director of Finance should approve these procedures which should include:
A. Standardized methods for data entry to assure complete and consistent data.
B. A procedure for estimating an acquisition date when it is unknown.
C. Requirements regarding “grouped assets.”
D. Time requirements for entering transactions.
E. Procedures for independent reviews of asset transactions entered.
RESPONSE
Concur with Recommendation
The Finance Department’s Fixed Asset Management Group is currently writing policies and
procedures with an anticipated completion date of March, 1996.
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FINDING III
SIMILAR ASSETS ARE NOT CONSISTENTLY DEPRECIATED OVER THEIR ESTIMATED
USEFUL LIVES IN THE PROPER FISCAL PERIOD.
DEPARTMENT INVOLVED
Finance
SUMMARY OF ORIGINAL FINDING, RECOMMENDATION AND RESPONSE
Policies and procedures at the time of the original audit required that no depreciation be taken in the
year an asset was acquired. The old system calculated depreciation at the end of the year. Audit
testing determined similar assets acquired in the same year were depreciated differently. Total
accumulated depreciation on 295 assets reviewed was understated $206,929.
Using inquiry software, 653 assets were found to have no accumulated depreciation. Two assets
were recorded on the system with wrong acquisition dates and wrong accumulated depreciation
amounts. The old system had no input edits, did not consider acquisition dates when calculating
depreciation, and did not allow depreciation to be calculated more than once annually.
Internal Auditing recommended:
1) Development of input verification edits for all essential data fields affecting depreciation.
2) Review and approval of output from the Fixed Asset System by someone other than the
accountant who entered the information.
3) A review of the capability of the fixed asset application to calculate and accumulate
depreciation correctly.
4) Correction of all depreciation errors recorded on the Fixed Asset System noted in the audit.
The response concurred with recommendations one, two and three. Recommendation four was
declined. December 31, 1993 was the completion date given.
CURRENT STATUS: PARTIAL
The new system does not have input edits; instead, it uses look-up tables to calculate depreciation.
Each asset type must be set up on the system. When assets are entered, the system uses the look-up
tables to determine and load required information. The user cannot override depreciation
information. This method of table look-up is adequate for ensuring depreciation information is
entered accurately.
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Finding II reports procedures are not in place for independent review of fixed asset transactions.
A sample of 43 assets was selected and depreciation was recalculated to verify the new system
calculates depreciation correctly. The recalculation was completed in two steps. This was done to
isolate errors into either the new or old system. The first step recalculated accumulated depreciation
as it should have been when assets were entered on the new system. The first step was completed
using the old conventions of calculating annual depreciation with no depreciation taken in the year
of acquisition and a full year depreciation taken in the year of disposition.
The second step of recalculation involved depreciation accrued this fiscal year. The new conventions
of monthly depreciation beginning in the month of acquisition were used. The recalculation assumed
straight-line depreciation with no salvage value. The current cost and estimated life on the system
were used. Of the 43 assets tested, recalculated depreciation of 22 assets were off by amounts
ranging from $3.69 to $759.78.
RECOMMENDATION
A review of the Fixed Asset System should be completed to determine why errors are occurring and
the improvement action needed.
RESPONSE
Complete
The Fixed Asset Management Group has made a review of depreciation errors, and corrected the
errors. A follow-up review has indicated satisfactory performance of the system.
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FINDING IV
PROCEDURES FOR MONITORING AND CLASSIFYING CONSTRUCTION IN
PROGRESS(CIP) EXPENDITURES NEED IMPROVEMENT.
DEPARTMENT INVOLVED
Finance
SUMMARY OF ORIGINAL FINDING, RECOMMENDATION AND RESPONSE
A review of policies and procedures for monitoring CIP expenditures determined written procedures
address only Water and Sewer Division construction projects. Project status reports are not required
from the Stormwater Division, Tulsa Development Authority or Parks and Recreation. Testing
revealed an error of $2,300 in CIP Projects and four of five assets tested were not under construction.
Internal Auditing recommended:
1) Procedures should require periodic departmental status reporting of all construction project
completions, dispositions and costs. The Fixed Asset Accounting Section should evaluate the
projects' status as CIP assets based upon project status reports received from the
departments.
2) Written procedures should address all CIP assets and functions.
3) Asset records should document all transaction activity. The asset account numbers,
representing the destination of amounts transferred from CIP when completed, should be
recorded in all CIP assets records.
4) Fixed Asset Accounting Section should obtain periodic status reports from department
personnel responsible for CIP projects.
5) Project personnel should notify the Fixed Asset Accounting Section of assets released from
CIP status after projects are completed.
The response from management agreed with the recommendations and gave December 31, 1993 as
the implementation date.
CURRENT STATUS: PENDING
Development of the new computer system has delayed implementation.
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RECOMMENDATION
Implementation of the original recommendations with Director of Finance approval of the written
policies and procedures.
RESPONSE
Concur with Recommendation
The Finance Department’s Fixed Asset Management Group is currently writing policies and
procedures with an anticipated completion date of March, 1996.
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FINDING V
STANDARDS AND PROCEDURES ARE NOT ESTABLISHED FOR PROPERTY INSURANCE.
DEPARTMENT INVOLVED
Finance
SUMMARY OF ORIGINAL FINDING, RECOMMENDATION AND RESPONSE
The Fixed Asset System was used to set insurance coverage for assets listed on the system. Historical
cost of new assets was used as the insurance value. Older asset values were based on estimated or
appraised values of the asset.
Testing showed adequate standards, policies and procedures were not in place for setting, reviewing
or documenting support for insurance values. The information listed on the Property Insurance
Summary Report, which identified assets for coverage, did not consistently include all assets the City
should have insured against loss. Watercraft, aircraft and animals were excluded from the policy.
Due to the manner in which assets were listed on the fixed assets system it was difficult to determine
assets were insured.
These recommendations were made:
1) Finance Department should develop written standards, policies and procedures for the
property insurance function. Management should evaluate property insurance values
periodically.
2) The Property Insurance Report should be reviewed and compared with the current insurance
policy. Only insurable assets should be listed on the insurance report. Assets excluded from
this report and the detail making up the totals should be reviewed periodically to assure
reliability of this information.
The response disagreed with the finding because the City switched to a blanket policy for insurance
not requiring individual insurance values and specific locations. Internal Auditing commented that
written standards, policies and procedures still needed to be developed.
CURRENT STATUS: PENDING
During the follow-up audit, the current insurance policy was reviewed. It is a blanket policy with a
$450,000,000 limit. The Finance Department employs a consultant to help evaluate and obtain
property insurance. The Property Insurance Summary Report is no longer used. Written standards,
policies and procedures have not been developed.
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Need for the Property Insurance Summary Report and written standards, policies and procedures has
not diminished. The Property Insurance Summary Report is needed to track the total amount of
property insurance needed. Management could compare it with the coverage obtained to assure
coverage is reasonable.
RECOMMENDATION
Implementation of the original audit recommendations.
RESPONSE
Concur with Recommendation
We will conduct further research into insurance requirements as they pertain to the current insurance
policy and options available on the Dunn & Bradstreet fixed asset software to track insurance values.
The policies and procedures will contain guidelines related to insurance requirements.
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FINDING VI
SOME FIXED ASSETS ARE NOT TAGGED IN ACCORDANCE WITH POLICIES AND
PROCEDURES.
DEPARTMENTS INVOLVED
Equipment Management
Finance
Public Works
Telecommunications
SUMMARY OF ORIGINAL FINDING, RECOMMENDATION AND RESPONSE
Metal tags were affixed to assets. When affixing metal tags was inappropriate, the asset number
would be stenciled onto the asset. The asset number corresponded to the asset number used in the
Fixed Asset System.
In reviewing the asset tagging procedures, the following exceptions were noted:
1) Three assets did not have tag numbers on them.
2) The “Asset Addition - Tag Report” was not used as required in Procedure No.1510.
3) There were 28 Public Works assets which had tags on them that did not match those recorded
for the assets in the Fixed Asset System.
4) The Fire Department’s Self-Contained Breathing Apparatuses were grouped under one fixed
asset number.
Internal Auditing recommended assets be individually tagged using a consistent numbering system.
Management concurred and gave December 31, 1993 as the completion date.
CURRENT STATUS: PARTIAL
The original recommendations were implemented, however, difficultly was encountered verifying
radios due to a difference of understanding over responsibility for tracking and inventorying radios.
When a department requests a radio, Telecommunications places the order. The radio is shipped to
Telecommunications for initial programming and assignment of an asset number before it is sent to
the department. The radio is listed on Telecommunications asset listing. The problem is the
requesting department has the radio and Telecommunications has the asset information on the radio.
There is disagreement over who is responsible for tracking the radio information. The departments
believe Telecommunications tracks the radios and Telecommunications believes the departments
tracks the radios.
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RECOMMENDATION
Responsibility for accounting for radios should be clarified. Asset information should be placed with
the department that is assigned responsibility for tracking the asset.
RESPONSE
Complete
It has been clarified that Telecommunications has the responsibility of inventorying radios in General
Fixed Assets.
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FINDING VII
FIXED ASSET TRANSACTIONS ARE NOT CONSISTENTLY RECORDED IN ACCORDANCE
WITH POLICIES AND PROCEDURES.
DEPARTMENT INVOLVED
Finance
SUMMARY OF ORIGINAL FINDING, RECOMMENDATION AND RESPONSE
Discrepancies were reported in some asset lives. Assets were inconsistently transferred to proprietary
funds. The City capitalized a study that did not fit the description of an asset.
Compliance with established policies and procedures was recommended to ensure fixed asset
transactions were recorded according to management criteria and that all errors noted in the report
be corrected. Management concurred with the recommendations and gave December 31, 1993 as
the completion date.
CURRENT STATUS: COMPLETED
The new Fixed Asset System uses look-up tables to determine asset lives which resolves asset life
inconsistency. Fixed Asset Accounting transfers the current cost of assets, studies are no longer
capitalized and all errors reported were corrected. Satisfactory corrective action has been taken and
no response from management is requested.
17
FINDING VIII
STANDARDS AND PROCEDURES SHOULD BE IMPROVED FOR FIXED ASSET
RECONCILIATIONS.
DEPARTMENT INVOLVED
Finance
SUMMARY OF ORIGINAL FINDING, RECOMMENDATION AND RESPONSE
Test work determined problems existed with balancing assets, depreciation and accumulated
depreciation. No standardized methods were used to document and review reconciliations.
Internal Auditing recommended reconciliations be documented and all related accounts in the General
Ledger be reconciled to the Fixed Asset System. Further, procedures were suggested to include:
1) Documented periodic reconciliation of the Fixed Asset System to Fixed Asset General Ledger
control accounts.
2) The use of standardized forms to document the source of all reconciliation information.
3) Management’s review and acknowledgment, by signing and dating the reconciliation of the
Fixed Asset System to the Fixed Asset General Ledger control accounts.
The response concurred with the recommendations and gave June 30, 1992 as the implementation
date.
CURRENT STATUS: PENDING
This finding has not been acted on due to other priorities.
RECOMMENDATION
Implementation of the original audit recommendations.
18
RESPONSE
Concur with Recommendation
Policies and procedures have been written for reconciliation between General Ledger and the Fixed
Asset System. The reconciliation schedule is being incorporated into the accountants audit work
papers.
19
REPORT DISTRIBUTION
COPIES NAME
2 Susan Savage, Mayor
1 Councilor District One, Joe Williams
1 Councilor District Two, Darla Hall
1 Councilor District Three, Darrel L. Gilbert
1 Councilor District Four, Gary L. Watts
1 Councilor District Five, Mel Rice
1 Councilor District Six, Arthur L. Justis
1 Councilor District Seven, John D. Benjamin
1 Councilor District Eight, Vickie L. Cleveland
1 Councilor District Nine, Robert K. Gardner
1 Phil Wood, City Auditor
1 Don Cannon, Council Administrator
2 Mike Kier, Director of Finance
1 Cathy Scott, Controller
1 Pat Connelly, Budget Manager
1 Robert Lemons, Chief Administrative Officer
1 Linda Redwine, Council Secretary
28 All Department Heads
1 Coopers and Lybrand
5 Mayor’s Audit Advisory Committee
1 Sales Tax Overview Committee
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