Haskin Inc. was founded 40 years ago and now has several manufacturing plants in Central and Western Canada. The evaluation of proposed capital expenditures became increasingly difficult for management as the com¬ pany became geographically dispersed and diversified its product line. Thus, the Capital Budgeting Group was organized in 2000 to review all capital expenditure proposals in excess of $50,000.

The Capital Budgeting Group conducts its annual plan¬ ning and budget meeting each September for the upcoming calendar year. The group establishes a minimum return for investments (hurdle rate) and estimates a target level of capital expenditures for the next year based on the expected available funds. The group then reviews the capital expenditure proposals that have been submitted by the various oper¬ ating segments. Proposals that meet either the return on investment criterion or a critical need criterion are approved to the extent of available funds.

The Capital Budgeting Group also meets monthly, as necessary, to consider any projects of a critical nature that were not expected or requested in the annual budget review. These monthly meetings allow the Capital Budgeting Group to make adjustments during the year as new developments occur.

Haskin's profits have been decreasing slightly for the past two years in spite of a small but steady sales growth, a sales growth that is expected to continue through 2003. As a result of the profit stagnation, top management is emphasizing cost control, and all aspects of Haskin's operations are being reviewed for cost reduction opportunities.

Haskin's internal audit department has become involved in the company-wide cost reduction effort. The department has already identified several areas where cost reductions could be realized and has made recommendations to implement the necessary procedures to effect the cost savings. Tom Watson, internal audit director, is now focusing on the activities of the Capital Budgeting Group in an attempt to deter¬ mine the efficiency and effectiveness of the capital budgeting process.
In an attempt to gain a better understanding of the capital budgeting process, Watson decided to examine the history of one capital project in detail. A capital expenditure proposal of Haskin's Regina plant that was approved by the Capital Budgeting Group in 2002 was selected randomly from a population of all proposals approved by the group at its 2001 and 2002 annual planning and budget meetings.
The Regina proposal consisted of a request for five new machines to replace equipment that was 20 years old and for which preventive maintenance had become very expensive. Four of the machines were for replacement purposes, and the fifth was for planned growth in demand. Each of the four replacement machines was expected to result in annual maintenance cost savings of \($10,000\). The fifth machine was exactly like the other four and was expected to generate an annual contribution of \($15,000\) through increased output. Each machine cost \($50,000\) and had an estimated useful life of eight years.
Required

a. Identify and discuss the issues that Haskin Inc.'s internal audit department must address in its examination and evaluation of the Regina plant's 2002 capital expenditure project.

b. Recommend procedures to be used by Haskin's internal audit department in the audit review of the Regina plant's 2002 capital expenditure project.
(CMA adapted)