School Board of the City of Richmond, Virginia Richmond Public Schools 1ORENOO” Internal Audit Services AUDIT REPORT Annual Warehouse Inventory and USDA Inventory Value Audit Period: July 1, 2011 through June 30, 2012 Mr. Clifford Cheek, Supervisor of Stores Ms. Susan Roberson, Director of Nutrition Services Audit Assignment No.: A-3401-12-022 September 21, 2012“Memorandum Internal Audit Services TO: ‘The Honorable Members of the School Board of the City of Richmond, Virginia Dr. Yvonne Brandon Superintendent FROM: Debora R. Johns, GaP JAE Chief of Internal Audit DATE: September 24, 2012 SUBJECT: Audit Report on the Annual Warehouse Inventory and USDA Inventory Value Assignment No.: A-3401-12-022 As a part of our approved Fiscal Year 2012, audit plan, Internal Audit Services completed the audit work on the annual warehouse inventory and USDA inventory value. Our work was performed in accordance with the International Standards for the Professional Practice of Internal Auditing. The audit covered the period of July 1, 2011 through June 30, 2012, The purpose of our audit was to conduct inventory test counts and price verification of the inventory to ensure its accuracy. In addition, we verified the value of the USDA inventory. We discussed our audit findings with management and they concurred with the audit results Although we exercised due professional care in the performance of this audit, this should not be construed to mean that unreported noncompliance or irregularities do not exist. The deterrence of fraud is the responsibility of management, Audit procedures alone, even when carried out with professional care, do not guarantee that fraud will be detected, The purpose of the audit report is to furnish management independent objective analyses, recommendations, counsel, and information conceming the activities reviewed. The audit report is 2 tool to help management identify weaknesses and implement specific improvements. We would like to acknowledge the cooperation extended to us during the performance of this audit by the warehouse staff and nutrition services staff. If you have any questions concerning this report, please contact me. My telephone number and email address are shown below. 401 Nerth Ninh Street Richmond, VA 23219-1927 Telephone: (804) 760-7628 Fax: (804) 780-7099 E-mail: Djotns@richmond kt2ve.usINTERNAL AUDIT SERV AUDIT REPORT Purpose of Audit Scope of Audit Warehouse Op- erations Warehouse inventory counts were conducted Tuesday, June 26, 2012 through Thursday, June 28, 2012. The physical inventory is the responsi- bility of management. Our responsibility is to conduct test counts and price verification of the inventory to ensure its accuracy. In addition, we verify the value of the USDA inventory. We conducted our audit in accordance with the International Standards for the Professional Practice of Internal Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the physical inventory is free of material misstatement. Our re- view included performing test counts of physical inventory, testing inven- tory purchase prices, reviewing intemal controls and comparing the inven- tory ledger balance to physical inventory. We believe our audit provides a | reasonable basis for our opinion. ‘The warehouse mini-store stocks approximately 677 stock items that are high volumelspecialty items for the schools and departments. The ware- house mini-store was established by management to provide a more effi- cient and economical way for the school district to procure various sup- plies. The supplies that are available in the mini-store ere janitorial; in- structional; art and office supplies; paper; forms and specialty items, such as gym uniforms and diploma covers. New stock items are added based on. customer demand, ‘The schools and departments may check the ware- house web site for new stock items. The Supervisor of Stores manages the warehouse mini-store with the as- sistance of five property supply technicians. The technicians are respon-Conclusion Warehouse Inventory Balance Internal Controls Test Counts sible for receiving and disbursing supplies; stocking the warehouse; tag- ging fixed assets; and delivering the orders to the various schools and de- partments. ‘The operational hours of the mini-store are 7:30 a.m. to 3:30 p.m. with a2 to 3 day delivery tumaround time, ‘The warehouse catalog is available on the AS400. The warehouse mini-store operates as a service to the school division and is supported by its sales and the general fund. Based on our observations, test counts, and inquiries, it is our opinion that a reasonable and adequate inventory count process was conducted. We present the following audit findings and comments to assist you in the efficient operation of the warehouse. Observations ‘The warehouse inventory balance at June 30, 2012, was $228,141.80 (See Attachment A). Based on our audit results, the Department of Finance decreased the inventory ledger balance by $111,666.78. ‘The Supervisor of Stores established and maintained an adequate system of internal control to provide reasonable assurance that inventory was ac- ‘counted for properly. ‘We conducted test counts of seventy-one inventory items. The value of the inventory items counted was $110,165.74. ‘This represents 48.30% of, the total inventory value at June 25, 2012. Two stock items did not agree with the perpetual inventory records (see Attachment B), The Supervisor of Stores keyed one additional adjustment for a stock item that was notPerera eas reed eNews Inventory Ad- Jjustments included in our test count. ‘The net amount for inventory adjustments was ($0.86). In addition, there were no variances between Intemal Audit and the warehouse physical counts. The inventory system stock adjustment program is used for the following © To adjust on-hand quantities or unit costs for stock items. + To review, post, or delete any differences between the purchase order price and invoice amount if the system does not net differ ences automatically. ‘The warehouse management elected to allow the system to post adjust- ‘ments automatically for differences between the purchase order price and invoice amount. ‘The Supervisor of Stores conducts cycle counts throughout the school year to ensure the accuracy of the inventory. Cycle counting is a best practice ‘utilized in the warehouse industry. The Supervisor of Stores is responsi- ble for making stock adjustments to on-hand quantities or unit costs fol- lowing the physical counts. ‘We reviewed the adjustments for the period July 1, 2011 to June 30, 2012, As of June 30, 2012, 677 inventory stock items were listed on the Stock Status Listing, Twenty-seven inventory adjustments were keyed that changed the on-hand quantity of 25 stock items, which represents 4% of the total stock items. The stock adjustments were summarized by reason code (see Attachment C). The net total dollar value of the 27 adjustments is ($3,065.75). The twenty-seven adjustments include the three adjust- ments made after the year-end inventory. Reason Code 1 ~ Breakage/Decrease (7 adjustments and 6 stock items)Inventory Ad- justments (Con- tinued) Comparative Analysis of Stock On Hand at June 30th represented the largest number of inventory adjustments. Reason Code 3 - Adjustment Overage/Increase had the second largest amount of adjustments (6 adjustments and 6 stock items) and was due to errors created from the warehouse workers pulling the wrong stock item or pulling a quantity amount less than what was ordered from a school or department. Reason Code 4 — Adjustment Shortage/Decrease (5 adjust- ments and 5 stock items) was also due to pulling errors, ‘The perpetual inventory system was decreased by the differences between the physical count and the warehouse system. The number of inventory adjustments have decrease over the past two fis- cal years from 53 (FY2010) to 34 (FY2011) to the 27 adjustments in FY2012. The dectease in the number of adjustments was due to the addi- tional training received by the warehouse workers, efforts to ensure that the right stock items were pulled for orders; exchanging stock items that had been incorrectly pulled and separating like stock items that are often incorrectly pulled. We performed a comparative analysis of the inventory stock item balances for June 30, 2011 and June 30, 2012. There were 641 stock items as of June 30, 2011 and 677 stock items as of June 30, 2012. ‘The inventory balance for June 30, 2011 was $239,808.58 and the inventory balance for June 30, 2012 is $228,141.80. Fifty additional stock items were added to the inventory catalog during FY2011-2012. The new inventory stock items consist of such things as binders, folders, cartridges and parchment paper. According to the Supervisor of Stores, the various schools and de- partments requested the additional stock items. In addition, fourteen in- ventory stock items were deleted from the inventory catalog following the FY2010-2011 school year. A review of the stock items balances at JuneMovement of In- ventory Price Testing USDA Inventory Value 30, 2011 and 2012 disclosed that the differences were due to the normal inventory processes of receipting, issuing, returning and adjustment of stock items. The Stock Items with No Activity Listing for Fiscal Year 2012 had fifteen (15) stock items valued at $2,704.27. Nine (9) of the fifteen (15) stock items had a dollar value greater than zero and the remaining six (6) stock items had a zero value, Four of the fifteen stock items were listed as new. ‘There were four stock items on the Stock Items with No Activity Report with a “Delete at Zero” note. Therefore, the warchouse staff is aware that these stock items are slow moving and does not intend to reorder them. ‘We commend the warehouse staff for monitoring the slow moving stock items. The inventory is accurately valued. The total value of the test sample was $107,100.66, which represents 46.96% of the total inventory value at June 25, 2012. Of the 50 stock items tested, five (5) stock items had a unit cost not within 10% of the invoice cost. The variances were due to a change in vendor or a price increase or decrease on the stock items. In addition, there were 15 stock items with a unit cost more than 10% of the prior year unit cost. The variances were due to products purchased at higher price than the previous year or using a different vendor. All differences were researched and deemed reasonable. Dori Foods, Inc. was issued a contract by the Virginia Department of Ag- riculture and Consumer Services (VDACS) to receive, store and distribute the USDA food inventory items. Richmond Public Schools Nutrition Services’ staff orders commodities using the USDA Electronic Commodi-aT inventory Audit Exit Conference Acknowledge ment Tey ty Ordering System (ECOS). Dori Foods, Inc. receipts the commodities and sends a notice of arrival to Richmond Public Schools (RPS). Dori Foods, Ine. is responsible for conducting inventories and submitting the inventory counts to VDACS and RPS Nutrition Services, VDACS con- ducts site visits and test counts of the inventory. The financial risk to the school district is very low, because of the intemal controls and Dori Foods Inc. is financially responsible for inventory shortages and damages. ‘The total value of USDA inventory on June 30, 2012, was $0.00. Richmond Public Schools Nutrition Services transferred all remaining stock items from Dori Foods, Ine. to the various schools and agencies prior to June 30, 2012. ‘The results of the audit were discussed with the Supervisor of Stores on June 30, 2012. ‘We wish to thank Mr. Clifford Cheek, Supervisor of Stores and School ‘Nutrition Services’ staff for their cooperation during the audit.Attachment A RICHMOND PUBLIC SCHOOLS INVENTORY LEAD SHEET «13072012 Inventory Inwentory Inventory Inventory ‘Value Value Value Percent 02011 00012, Change Change Parker Field S 23980858 $228,141.80 $ (11,666.78) 3% went 3 23980858 $ 228,141.80 $ (11,666.78) 5% Adjusted Warehouse Inventory at 6/30 $230,808.58 $228,141.80 $_(11.666.78) 8% General Ledger Balance at June 30 $169,266.94 $239,808.58 s 8 einer 7 : ‘Trial Balance Total $169,266.94 S__70541.64 2% Adiusting Journal Eni SMstsd = $_(11.666.78)RICHMOND PUBLIC SCHOOLS Attachment 8 ‘Warehouse Inventory Auelt| Comparative Analysis of Inventory Count ‘Year Ended June 20,2012 Stockton Darpton PRT POerER LACKS cz, GATOR [plover work weniex, TBE, (ae STL meee Mooemnee BEEScal [Bsrenee Mera. one ROU TORELAT TE UE feo ony Fox eT AE PER TILE, ROU FAC CUAL PLY NANPPE aT CE OO NTEROEPART HEN AL ERO fap, Boer NTE parce were comet TE fewerabor, noc Hecate [eee foe He OSU fearTTIboe Be COLOR IDG HPCE rISce WC Fe Cen oHIGOe HP ConA BA Geant —[OrerVUnde 0 | Sasen lsIsfebiiselsiails) is bsAttachment C Richmond Public Schools Warehouse Inventory Audit Inventory Adjustments-By Reason Code & Dollar Value Fiscal Year 2011-2012 Dollar Value of Adjustment 7 ($263.13) 3 |ADJUSTMENT OVERAGE/INCREASE $136.84) 4 |ADJUSTMENT SHORTAGE-DECREASE. (994.7) INVENTORY ADJUSTMENT VENDOR - Total # of Reason Codes Adjustments ‘Adjustment Description 1 IBREAKAGE-DECREASE 24 loveRAGE KEEP AT NO COST : biti] EFESTIVE STOOKRETURN TO VENDOR FOR } ee |CREDITIEXCHANGE z eee 34 | DECREASE DUE TO RECEIVER ERROR 4 (2,083.83) Totals a ($3,085.75)© A Publication of Richmond Public Schools Richmond, Virginia In accordance with federal laws, the laws of the Commonwealth of Virginia and the policies of the School Board of the City of Richmond, the Richmond Public Schools does not discriminate on the basis of sex, race, color, age, religion, disabilities or national origin in the provision of employment and services. The Richmond Public Schools operates equal opportunity and affirmative action programs for students and staff. The Richmond Public Schools is an equal opportunity/affirmative action employer. ‘The Title IX Officer is Ms. Angela C. Lewis, Clerk of the School Board, 301 N. 9” St. Richmond, VA 23219-1927, (804) 780-7716. The Section 504 Coordinator is Ms. Michelle Boyd, Director of Exceptional Education and Student Services, 301 N. 9" St, Richmond, VA, 23219-1927, (804) 780-7911. The ADA Coordinator is Ms. Valarie Abbott Jones, 2015 Seddon Way, Richmond, VA. 23230-4117, (804) 780-6211. The United States Department of Education’s Office of Civil Rights may also be contacted at 550 12" Street SW, PCP-6093 Washington, DC 20202, (202) 245-6700. School Board Dawn C. Page, Chair Maurice A. Henderson, Vice Chait Kimberly M. Bridges Donald L. Coleman Kimberly B. Gray Norma H. Murdoch-Kitt ‘Adria A. Graham Scott ‘Chandra H. Smith Evette L. Wilson Dr. Yvonne W. Brandon, Superintendent