INVENTORY AUDIT WORK PROGRAM

Project Team (List Members):

Project Phase Date Comments

Planning
Fieldwork
Report Issuance

Time Project Work Step Initial Index

PRE-AUDIT
1. Review prior audit report and relevant press releases
NA
(acquisitions).
2. Obtain completed inventory internal control
questionnaire from the plant controller. Document
NA
any potential control weaknesses or unusual
practices and investigate upon arrival.
3. Obtain and document the following as of the audit
date:
a) Trial Balance
NA
b) Manufacturing Statement (YTD)
NA
c) Manufacturing Budget (YTD)
Verify
d) Date of Last Physical
NA
e) Cycle Counting Accuracy History
Verify
f) Inventory Turnover, Days Sales in
Inventory, Margin
Verify
g) Date and Scope of External Auditor's Most
Recent Visit
Verify
h) Detail of Excess and Obsolete Inventory
NA
i) Detail of Inventory Held on Consignment
Verify
j) Detail of Inventory Held at Subcontractor
and Outside Vendor
NA
k) Type of Inventory System
l) Size of Facility (Square Footage)
m) Primary products
Verify
n) Top Five Customers and Competitors
4. Ensure financial statement trial balance agrees with Verify with
the trial balance maintained by the facility. Obtain WH Keeper
explanations for any differences with the plant &
controller upon arrival. Accounting
5. Obtain and quantify in ACL the following reports as of
the audit date:
a) Inventory Aging Report Verify
b) Perpetual Inventory Listing Verify
c) All Open Work Orders NA

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 Time Project Work Step Initial Index
6. Reconcile perpetual inventory listing with the account
balances that appear on the G/L. Obtain and Verify with
document explanations for differences from the Accounting
controller upon arrival.
Verify if
there are
7. Obtain and document explanations from the
old/back
controller for all open work orders older than two
orders &
months.
duration of
each one
8. Describe procedures for developing current year
material, labor and overhead standards, and the date
of the last revision. If a standard system is not used,
NA
obtain and document an explanation from the
controller and/or corporate operations as to why a
standard system has not been implemented.
Verify if
9. Compare and document budgeted variances to
there is
actual variances for materials, labor and overhead.
comparison
Obtain and document explanations for significant (5%
of variances
+) variances from the controller and/or corporate
of stock to
operations.
budgeted
10. For facilities that do not employ a standard costing
system, recalculate labor and overhead allocations
and compare to the amount capitalized. Obtain and NA
document explanations for significant (10%+)
variances from the controller upon arrival.
11. Discuss conclusions/observations with the senior
associate. Obtain and document T&B senior
management concerns and ensure there are NA
adequate procedures in the program to address those
risks.

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 Time Project Work Step Initial Index

RECEIVING
1. Interview employees associated with the receiving
process in order to gain an understanding. Map this
process and include all applicable financial journal
entries.

2. Through inquiry and observation, ensure the

following controls are in place and operating
effectively and are included on the process map.
Identify all control gaps.

a) Goods are received at a designated

receiving bay

b) Receipts are checked for quantity and

quality

c) All goods received are based on a valid

purchase order (PO) number

d) PO is stated on delivery documents and is

verified for validity

e) The quantity of goods received is verified to

the packing slip and bill of lading

f) The receiver signs delivery documents

g) All receipts are recorded in a log and can

be cross referenced to the appropriate delivery
documents

h) The log is regularly reviewed

i) Receipts are accurately, promptly and

completely updated in the inventory system

j) Goods are safeguarded

k) Transfer of goods are documented

l) Items not meeting qualifications are kept

separate from other items

3. Process map procedures for vendor returns.

Through inquiry and observation, ensure that returns
are communicated to the purchasing department and

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 Time Project Work Step Initial Index
debit memos are prepared and forwarded to
accounts payable in a timely manner. In most
instances, this will require sampling returns during
the audit period.
4. Through inquiry and observation, ensure that
shipment discrepancy reports are pre-numbered and
reviewed by the appropriate purchasing and
accounting personnel to ensure that debit memos
have been taken.

PRODUCTION PROCESS/PHYSICAL SECURITY

1. Interview employees associated with the
production process. Map the production process and
include all applicable financial journal entries. Ensure
the following controls are present and are included in
the process map. Identify all control gaps.

a) Authorized persons approve goods

requisitions

b) goods requisitions coincide with the

approved sales plan

c) Disbursements from stockrooms are

allowed only upon receipt of properly authorized
requisition documents

d) Management approval is required for stock

issuance of amounts above the amount
necessary to support scheduled sales
requirements

e) Approved requisition documents and

inventory movement forms are promptly used to
update the inventory records

f) Pre-numbered requisition forms or

sequential logs are used to record issuance of
materials from stores and inventory movement
between locations

g) Warehouse/store is properly locked to

prevent unauthorized access and usage

h) Proper segregation of scrap and obsolete

inventory

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 Time Project Work Step Initial Index

PHYSICAL COUNTS
1. Obtain and review information supporting the most
recent wall-to-wall physical inventory. Ensure
quantities on hand were not known to counters prior
to the physical. Document compliance with corporate
policy.
2. Complete the physical inventory checklist.
Document control gaps, if any.
3. Document book-to-physical adjustments for the
past three years. Inquire as to whether or not the
adjustments were investigated prior to correcting
entries being made. Document your understanding of
this process. Determine when and if the adjustments
were capitalized or expensed and if they were
approved.
4. Evaluate propriety of reconciling items between the
perpetual inventory listings and the G/L account
balances. Examine supporting documentation for
each item individually greater than 2.5% of the
inventory account balance (or 50% of the items if
none individually exceed 2.5%, but the aggregate
exceeds 5%.)
5. Obtain, review and document policies and
procedures surrounding cycle counts. Observe two
cycle counts and document the following:
a) What was counted and how it was selected

b) Cycle counter is not aware of quantity on

hand prior to his count

c) Agree test counts to perpetual inventory

detail

d) Examine adjustment to perpetual inventory

detail/general ledger, if applicable

e) Document historical accuracy rates

6. Based solely on the work performed, document
observations regarding the physical security of
inventory.
7. Based on the date and results of the most recent wall-
to-wall physical count and the applicability of cycle
counts, consider performing the following:
a) Agree 10 inventory items per the perpetual
to the quantity on hand

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 Time Project Work Step Initial Index
b) Agree 10 inventory items on hand to the
perpetual

INVENTORY VALUATION
For facilities using a standard costing system, perform the
following:
1. Document procedures for developing current year
standards (raw material, labor and overhead) and the
date of the most recent development. Document
compliance with corporate policy.
2. On a sample basis (minimum of 30), test the
accuracy of the standards by performing the
following:
a) Examine recent invoices supporting raw
material component
b) Examine payroll-related information
supporting labor component, if applicable
c) Examine overhead estimate. Recalculate
based on available information
3. On a sample basis, examine the method and
accuracy of recording standard to actual variances.
Obtain explanations for standard to actual variances
greater than the budgeted amount as of audit date.
Examine entries to record variances and document
whether the variances were capitalized or expensed.
For facilities not using a standard costing system,
perform the following:
1. Document procedures for developing current year
labor and overhead amounts.
2. Examine (minimum of 30) recent invoices
supporting raw materials, and the raw material
component of WIP and FG. Document results by
quantifying unit cost variances and extrapolating to
population.
3. Recalculate labor and overhead calculations and
compare to amounts capitalized. Document
limitations in ability to recalculate.

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 Time Project Work Step Initial Index

INVENTORY RESERVES
1. Based on ACL reports, document inventory greater
than 180, 270 and 360 days.

2. Document method for estimating reserve for excess

and obsolete inventory. Document compliance with
corporate policy.

3. Obtain calculation of E&O estimate for most recent

quarter-end and agree to G/L. Agree significant
components to supporting documentation.

4. Document inconsistencies, if any, between the

calculation and aging analysis.

5. Ensure authorized persons adequately approve

provisions or write-offs. Review for evidence of
approval of inventory write-offs before they are
recorded.

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 Time Project Work Step Initial Index

CONSIGNMENT INVENTORY
1. Document policies and procedures for consigned
inventory. At a minimum, address the following items:
a) Existence of perpetual detail
b) Method of reporting, recording and verifying
changes
c) Method of accounting for scrap
d) Results of recent physical counts
2. Document compliance with corporate policy on
consigned inventories.

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 Time Project Work Step Initial Index

SCRAP
1. Document method for accounting for inventory scrap.
At a minimum, address the following:
a) Method used to quantify
b) Method used to cost
c) Method used to dispose
2. Through inquiry and observation, ensure that scrap
proceeds are collected from the scrap vendor
promptly after the collection of scrap materials.
3. Through inquiry and observation, ensure that approval
is granted before materials are sent to scrap.
4. Through inquiry and observation, ensure that
accounting and the warehouse verify the weight of
the scrap materials.
5. Through inquiry and observation, verify that scrap
vendors are selected through a bidding process.

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 Time Project Work Step Initial Index

SHIPPING AND RECEIVING (INCLUDING RETURNS)

1. For the most recent quarter-end, obtain the last and
first three shippers and receivers and agree pertinent
data to accounts receivable and inventory records
ensuring that transactions are recorded in the proper
period.
2. Explain the facility’s procedures for ensuring proper
cut-off.

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 Time Project Work Step Initial Index

GENERAL
1. Through inquiry and observation confirm that
management corrective action plans have been
implemented. If not, obtain explanation(s) and
consider the necessity of including in current year
audit report.

2. Complete best practices checklist.

3. Complete inventory diagnostic.
4.
5.
6.

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 INVENTORYAUDIT WORK PROGRAM: SAMPLE 2

Project Team (List Members):

Project Timing Date Comments

Planning
Fieldwork
Report Issuance (Local)
Report Issuance (Worldwide)

Objectives

 Evaluate controls in place over inventory functions, such as cycle counting, customer
returns, physical security, shipping and receiving.
 Evaluate overall efficiency of the inventory management process.
 Provide management team with cost effective suggestions to improve the general control
environment as well as to increase operating efficiency.

Time Project Work Step Initial Index

1. Review existing policies and procedures for the
inventory management functions, including: cycle
count procedures, handling of returned materials, the
scrap process, shipping and receiving, physical
security, training, and handling of slow moving,
excess and obsolete inventory.
2. Interview to understand the process.
 Obtain an understanding of the overall inventory
management processes by interviewing key
personnel.

 Perform an initial flowcharting of the process as

described by the personnel involved and
interviewed. Update the flowchart periodically as the
audit work progresses and the internal audit team’s
understanding grows.

 Ensure that the finalized process flow diagram is

included in the audit report. This diagram should
include, at a minimum a.) Each major process step,
such as shipments arrive, shipments are counted,
quality control steps, bin report is generated, etc. b.)
Which departments are involved in the step, such
as inventory control, technology support,
purchasing, etc. c.) Reports being used/reviewed

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 Time Project Work Step Initial Index
d.) Manual internal control points e.) System-based
control points and f.) Internal control weaknesses.
3. Test for the following inventory process control points
and/or understand what alternative control(s) the
company has in place.
 Blind (counter does not know system inventory
figure) cycle counts

 Cycle count reconciliation

 Write-off authorization

 Shipment forms created outside of the warehouse

 Exception reports reviewed daily

 Receiving dept. counts all items received

 Quality control (QC) inspection on all items received

 Goods recounted after QC inspection

 All goods have movement tracking sheets

 Carriers sign manifest documents

4. Test for the following inventory physical control points

and/or understand what alternative control(s) the
company has in place.

 Badge access is required

 A security officer is in place in the warehouse and

the officer moves selected goods

 A list of all personnel with access to the warehouse

is reviewed on a periodic basis to determine
whether these people should remain. The list is
adjusted as necessary.

 Video cameras in the warehouse and security tapes

are reviewed on a scheduled basis

 There are set receiving hours

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 There are locked cages for selected goods

5. Test for the following inventory system control points

and/or understand what alternative control(s) the
company has in place.

 Bins/inventory accounts “blocked” during cycle

counts

 Picking documents are created by system, not

manual

 Shipping/receiving documents are scanned

 Test system procedures for maintaining the
completeness of all information initially captured at
time of product receipt

 Test reconciliation procedures to ensure

completeness/accuracy of the process as
product/materials receipts move from one location
to another
6. Ensure that scrap material is identified, tracked and
destroyed in a secure and controlled manner. All
destruction of scrap material should be witnessed.

7. Ensure that weekend and holiday access to the

warehouse is granted on an exception basis only, as
approved by the warehouse manager.

8. Ensure that a cross-training program exists for all

warehouse personnel. This should include, at a
minimum, re-training on any new policies and
procedures that result from the internal audit review.

9. Ensure that slow moving and obsolete inventory

reports are reviewed monthly. Consider the need for a
unique location to monitor slow moving and obsolete
items.

10. Ensure that a well-controlled management approval

process is in place to authorize any adjustment to
inventory balances in the system. The larger the
adjustment, the higher level the authorizing manager
should be, all the way up to the CFO.

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 Time Project Work Step Initial Index
11. Test that each shipment is counted and compared to
the packing slip prior to admission into inventory.
Discrepancies should be noted and tracked via a
discrepancy log.

12. Review management reports and also understand the

performance metrics being used to monitor the
inventory management process. Ensure that metrics
truly reflect the department’s/company’s goals.

13. In order to promote consistent practices, ensure that

the policies and procedures document is updated for
any process changes that resulted from the internal
audit review.

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 INVENTORY AUDIT WORK PROGRAM: SAMPLE 3

Project Team (List Members):

Project Phase Date Comments

Planning
Fieldwork
Report Issuance

Audit Objectives

Objective Comments Initial

1. Evaluate the processes
needed to procure, store and
manage inventories: raw
materials, work-in-progress
and finished goods.
2. Evaluate the effectiveness
and efficiency of current
inventory management
processes, which will include:
 Forecasting requirements
to match marketplace
demands
 Organizing the function
electronically
 Ensuring accuracy of
inventories and related
recordkeeping activities
 Optimizing supply base

Time Audit Step Initial Index

PLANNING & GENERAL
1. Identify key management sponsors and other
individuals who will be directly affected by the review
and send a formal notification memo approximately 2-
4 weeks prior to the beginning of fieldwork.
Communicate objectives, timing and expectations of
degree of assistance required of personnel.
2. Complete scoping and planning activities sufficient to
prepare a detailed work plan and time budget.
Complete work plan and submit for
manager/supervisory approval.

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 Time Audit Step Initial Index
3. Prepare time estimate and communicate expectations
to all team members.
4. Review and become well-acquainted with the
following:
 Current procedures to monitor inventory
 Organization charts
 Background on current processes
5. Schedule and hold a final planning meeting prior to
the beginning of any significant fieldwork. Involve the
complete audit team. Discuss the detailed plan and all
relevant assignments, expectations, etc.
6. Set up and organize workpapers.
7. Provide manager with weekly status reports, including
summary of hours incurred, estimates to complete,
and budget versus actual status.
UNDERSTAND THE PROCESS
1. Through individual interviews or small group
meetings, develop an understanding of the key
processes and activities that relate to inventory
management. Develop process maps, if appropriate,
to document understanding of the processes and
activities.

Representation of individuals from the following

departments should be considered:
 Purchasing
 Warehousing
 Distribution
 Finance
 Marketing/Support
 Engineering

a. Focus attention on identifying and

documenting the key internal controls in
each area. Evaluate the type and quality
of each control.

b. Document any process performance

issues/problems that are identified.
2. Analyze current financial data relating to inventory,
including demand projections and physical/perpetual
inventory records.
3. Analyze company policies and assess compliance
with the policies for minimizing inventory levels,
reserves and write-offs.
4. Analyze methods used to calculate production and
inventory costs. Benchmark costing methods with any

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 Time Audit Step Initial Index
known best practices.
IDENTIFY PROCESS PERFORMANCE GAPS
1. Summarize and gauge the significant process
improvement opportunities identified.
2. Determine relevant key process measures and
controls to target for validation.
3. Discuss observations with management.
4. Test accuracy and reliability of relevant performance
measures and management information.
VALIDATE PROCESS MEASURES & CONTROLS
1. Test compliance with current policies and procedures.
2. Test accuracy and reliability of relevant performance
measures and management information.
ANALYZE ROOT CAUSES OF PROCESS
OPERATING AND CONTROL DEFICIENCIES
1. As required to develop specific action steps to
improve processes and controls, complete additional
analysis on specific issues. (Consult with
senior/manager for scope of issues and additional
analysis required.)
2. Define and refine solutions/recommendations for key
findings and issues. Draft formal written findings and
recommendations. Each finding should include: (1)
What should be, (2) what is, (3) why a difference
exists between (1) & (2), (4) business impact of
difference, and (5) recommended course of action to
correct deficiency.
3. Validate each finding, recommendation and course of
action with process owner or other appropriate
management.
REPORTING AND WRAP-UP
1. Draft final reports for manager review and approval.
2. Draft report should include the following sections:

 Executive Summary
 Objectives & Scope Statement
 Background (in general and for each process)
 Summary of Procedures Performed
 Detailed Findings & Recommendations
(organized by area/process/significance)
 Action Matrix
 Follow-Up Procedures
 Appendix: Process Maps
3. Review draft report in closing meeting with all
process owners. All findings and recommendations
should have been discussed prior to the closing

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 Time Audit Step Initial Index
meeting so that this meeting is only a formality.
4. Clear draft report with corporate controller and/or
other appropriate personnel.
5. Make final revisions and issue final report.
6. Distribute customer satisfaction survey forms.
7. Finalize working paper documentation related to all
work performed.
8. Prepare final time summary and staff evaluation
forms.

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