Internal Audit
Question 1
The following information is extracted from a draft of anaudit report prepared upon the completion of an audit of theinventory warehousing procedures for a division.
Findings
[#5]
We performed extensive tests of inventory record-keeping andquantities on hand. Based on our tests, we have concluded that thedivision carries a large quantity of excess inventory, particularlyin the area of component parts. We expect this is due to theconservatism of local management that does not want to riskshutting down production if the goods are not on hand. However, asnoted earlier in the report, the excess inventory has led to ahigher than average level of obsolete inventory write-downs at thisdivision. We recommend that production forecasts be established,along with lead times for various products, and used in conjunctionwith economic order quantity concepts to order and maintainappropriate inventory levels.
[#6]
We observed that receiving reports were not filled out when thereceiving department became busy. Instead, the receiving managerwould fill out reports after work and forward them to accountspayable. There is a risk that all items received might not berecorded, or that failing to initially record might result in someitems being diverted to other places. During our tests, we notedmany instances in which accounts payable had to call to receivingto obtain a receiving report. We recommend that receiving reportsbe prepared.
[#7]
Inventory is messy. We recommend that management communicate theimportance of orderly inventory management techniques to warehousepersonnel to avoid the problems noted earlier about: (1) locatinginventory when needed for production; and (2) incurring unusuallylarge amounts of inventory write-offs because of obsolescence.
[#8]
We appreciate the cooperation of divisional management. Weintend to discuss our findings with them and follow up bycommunicating your reaction to those recommendations includedwithin this report. Given additional time for analysis, we feelthere are substantial opportunities available for significant costsavings and we are proud to be a part of the process.
Required
- Identify deficiencies in paragraphs [#5] and [#7] relating tothe completeness of the finding and issues in writing.
- Identify a deficiency in paragraph [#6] relating to thecompleteness of a finding.
- Identify deficiencies in paragraph [#8].
