You are responsible for the audit of the tangible non-current assets of Glub Ltd, a company

engaged in the manufacture and supply of soft drinks and other beverages to the retail,

catering and leisure industries. From your discussions with the finance director, you find out

that a capital expenditure budget is prepared annually.

Departmental managers can authorise capital expenditure up to 5,000, as long as it is

within their budget. Board approval is required for amounts above this threshold but the

managing director, who is also the major shareholder in the company, does not always

adhere to this policy. He often commits the company to acquiring assets without considering

how they are to be financed, leaving the finance director to arrange the borrowings.

Capital expenditure proposal forms are required to be completed but this is not always done,

particularly when items are required in an emergency, and there is no formal policy in

respect of obtaining quotes for major items of expenditure. There is a tangible non-current

asset register which is reconciled to the nominal ledger on a monthly basis. No other

checking procedures involving the non-current asset register are undertaken.

In July 201X, the company commenced construction of a new packing line. The line was

completed in November 201X. Costs recorded in the tangible non-current asset register

include materials, own and sub-contract labour, and overheads.

The overheads included are simply the overhead recovery rate used when pricing products

and include all overheads, both direct and indirect. The company borrowed money to build

the packing line and has included the interest on the loan as part of the construction cost.

Required:

(a) Identify four controls which should be in place to control the purchase of tangible fixed

assets and explain why they are necessary and the consequences to the company if they

are not in place

(b) Identify weaknesses in the system described above and, for each weakness, explain the

consequences that could result from it.