INVENTORY INTERNAL AUDIT PROGRAM

Understand and flowchart material movement in the GL from RM to WIP to FG

1) Obtain an understanding of raw material movement in the GL (Quoting relevant GL Codes)

from the point the supplier delivers raw material to the time the finished goods are invoiced to a
customer. This should be presented diagrammatically.

2) At every interface from one GL account to the next on the flow chart, please detail the
process, and documentation required to achieve that movement (material requisition),  booking
out slip, invoice. Etc. Also indicate individual who carries out that transaction.
3) Is there a risk of materials being physically moved from one GL account/ warehouse to the
next physically but not being moved in the system?

Agree Inventory balance in GL to detailed list/ Subledger

1) Obtain the detailed inventory listing (quantity and unit costs) and agree it to the GL balance
for the inventory.

Approval for stock write offs and write ons

(1) Stock Management: Adjustments (review authorization, ensure reason codes are predefined
and assigned), write offs and salvage sales (see together with Finance), stock covers, min/max.
(2) Review all movement types of the factory.
(3) Review balances in all Storage Types, ensure validity and existence of stock inside.
(4) Stock Counts: Raw, Pack (including at ext. whs)
(5) Review stock in transit levels. Identify deliveries with excessive delivery time.
(6) Pallet management. Controls over pallet (ILS xx each) Stock counts and write offs
(7) How are export returns managed?

Review and test inventory count procedures and count results

1) Obtain stock count procedures.

2) Are stocks counted on a monthly basis?
3) Who comprises the team for carrying out a stock count?
4) Are system transactions rights recalled from the inventory custodians, and all other
individuals prior to the count?
5) Do count sheets indicate system quantities when counting or they are blank?
Review inventory carrying values for reasonableness and accuracy

1) IAS 2 Requires that inventory is valued at the lower of;

a) Cost
b) Net Realizable Value
 
2) Group the materials to the following categories and carry out tests for each category:
a) Raw materials
b) Work in Progress
c) Finished Goods.
 
2) Obtain a schedule of inventory valuations, and trace the quantities in the valuation schedule
for a sample to the inventory count sheets. Be sure to validate that the count sheets are in hand
writing, based on actual/ original count results. Excel summaries are not acceptable for this
test and must be reconciled to source schedules. Variances should be quantified and reported,
and root causes identified and reported.
3) From the valuations schedule, obtain a sample for testing the carrying values and carry out
the following;
a) Raw materials:
i) Obtain the latest shipments for similar materials in your sample and establish the landed costs
for materials.
ii) Compare the landed costs to the carrying values in the raw material inventory valuation
schedule. Under the weighted average valuation, the difference between the carrying value and
the latest consignment should not exceed 5% of the landed consignment unit cost.
 
Material receipt and validation

(1) Is the person receiving stock (at all receiving stations) aware of signing mandates for LPOs?
The store receivers should have specimen signatures of LPO approvers.
2) Quantity and quality of goods receipt. Control over incoming materials (weighbridge, non
bulk/palletised material). Payment basis (LPO, GR, three way match), is the weigh bridge
weight used or the GR?
(3) Are received goods immediately placed into blocked status?
(4) Tests for incoming raw & packaging materials: COAs, tamper proof seals.
(5) Access rights for release. Materials send to production without QA/QC release
(7) Are delay of good receipts due to warehouses capacity constraints, resulting in demurrage
fees paid to transporters?
(8) What are the SLED thresholds for refusing incoming materials?  What is the average life
received by material?
(9) What are the thresholds for the 3-way match?
Segregation of Duty over receipt, validation, custody, issues and count

Resolution of stock variances

1) Identify how variances noted during stock count are resolved.