Letham Co is a large engineering company with ten manufacturing units throughout the country in which it is located. The manufacturing process is capital intensive and the company holds a wide variety of plant and equipment.

The finance director is responsible for the preparation of a detailed non-current assets budget annually, which is based on a five-year budget approved by the whole board of directors after consultation with the audit committee. This annual budget, which is also approved by the full board, is held on computer fi le and is the authority for the issue of a purchase order.

When the item of plant and equipment is delivered to the company, a pre-numbered goods received note (GRN) is prepared, a copy of which is sent to the accounting department, and used to update the non-current assets budget to reflect the movement. The equipment is carefully inspected by production personnel and tested for proper operation.

An operational certificate is prepared by the production department and this is used by the accounting department, together with the GRN, to check against the purchase invoice when it is received.

At the same time as the purchase invoice enters the purchasing system, a computerised non-current assets register is updated. Access to the non-current assets register is restricted to personnel in the accounting department. On a rolling basis throughout the year the non-current assets register is compared to plant and equipment on site by accounting department personnel, using identification numbers in the register and permanently marked onto each item in the factory.

The internal audit department also tests on a sample basis the operation of the system from budget preparation to entry in the non-current assets register. Internal audit staff also compare a sample of entries in the non-current assets register with equipment on the shop floor.

Required:

SIX STRENGTHS in Letham’s control environment in respect of non-current assets and explain why they may reduce control risk. (12 marks)