Inventory Management Review
Work Program
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.
Project Work Step
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 d.) Manual
internal control points e. System based control points and f. Internal control weaknesses.
3.
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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
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
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Video cameras in warehouse and security tapes are reviewed on a scheduled basis
There are set receiving hours
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
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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.
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.