Inventory
Suggested procedures for reviewing and testing Inventory.
Copyright 2008 © ECG Enterprises, Inc. All rigths
reserved. www.ecgenterprises.com
Inventory
A well performed collateral examination will provide the following
9 Analytical review
A l i l i
of key areas that includes:
f k h i l d
9 Year to year comparisons and trend analysis of key performance metrics.
9 Explanations for fluctuations
p
noted in any of the above performance metrics
9 Substantive testing to verify:
9 Authenticity, existence and valuation of balances reported
9 Existence of internal controls and proper procedures
Copyright 2008 © ECG Enterprises, Inc. All rights reserved.
www.ecgenterprises.com
Inventory
A well performed collateral examination will also provide the following
9 Calculation of Borrowing Availability that includes:
9Suggested reserves or ineligible balances to mitigate all potential risk items noted during the exam
9All eligible collateral, ineligible and reserve amounts, suggested and current advance rates overall limits current advance rates, overall limits and sub‐limits, and all loan balances
Copyright 2008 © ECG Enterprises, Inc. All rights reserved. www.ecgenterprises.com
Inventory
The analytical review portion of the an Inventory audit consists of the following procedures:
• Historical breakdown of inventory by component
• Inventory roll forward
•T
Turn over comparisons
i
• Reconciliations of reported collateral to sub ledger, general ledger and balance sheet
Copyright 2008 © ECG Enterprises, Inc. All rights reserved. www.ecgenterprises.com
Inventory Summary
W/P: Inventory Summary/History
W/P Summary
Current
Prior
Difference
Curr 12 Mo Avg
Prior 12 Mo Avg
Avg Diff:
Comparison Prd:
Row #
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Total
1,496
1,432
64
248
1 448
1,448
(1,200)
19
Month
Total
Dec-94
1,194
Jun-95
1,457
Dec-95
1,697
Jun-96
1,432
Dec-96
1,429
Jun-97
1,496
Jun-96
1,432
1,486
0
0
0
0
0
0
0
RM
FG
Container
s
530
544
(14)
90
547
(457)
361
353
8
60
355
(295)
28
34
(6)
5
32
(27)
RM
556
578
601
544
475
530
544
547
FG
292
299
426
353
398
361
353
355
Container
s
26
34
36
34
31
28
34
32
Consgnd
Other Trend Analysis-12 Month Mvg Avgs, Last Six Months
Notes
Contain Consgn
38
539
Date
Total
RM
FG
ers
d Other
22
479
Jan-00
748
270
187
16
16
258
16
60
Jan-00
606
220
152
13
13
209
6
88
Jan-00
487
175
122
10
11
169
32
483
Jan 00
Jan-00
368
135
89
8
8
128
(26)
(395)
Jan-00
243
91
59
5
5
83
Jun-97
248
90
60
5
6
88
12 Month Moving Average
O/S
Warehous
Labor &
e
OH Charlotte
Total
RM
WIP
FG
Sppls Misc Misc-2
Consgnd
30
75
215
1,194
556
292
26
30 75
0
33
91
188
234
1,326
567
296
30
32 83
94
40
104
226
264
1,449
578
339
32
34 90
138
22
81
190
208
1,445
570
343
33
31 88
151
38
86
224
177
1,442
551
354
32
33 87
166
38
93
224
222
1,451
547
355
32
34 88
175
22
81
190
208
1,448
547
355
32
32 87
177
34
88
210
220
1,453
547
355
32
32 87
182
1,291
486
315
28
29 78
161
1,162
438
284
25
26 70
145
1 057
1,057
398
258
23
23 64
132
969
365
236
21
21 58
121
869
318
212
19
19 52
121
748
270
187
16
16 44
105
606
220
152
13
13 36
87
Inventory Summaries are analyzed to
d t
determine
i how
h the
th categories
t
i behave
b h
over
time. Results can indicate a
deteriorating performance, the impact
of seasonality on inventory or an
improper mix of inventory components.
Analysis includes:
• Inventory balances by category
• Trend analysis of categories/totals
• Year to year comparisons
Copyright 2008 © ECG Enterprises, Inc. All rights reserved. www.ecgenterprises.com
Inventory Statistics
W/P: Inventory Roll forward/Statistics
W/P Summary
Last Phys. Date:
Beg. Balance
Purchases
Direct Labor
Direct OH
Misc./Phys adj
Cst of Gds Sld
Ending Bal.
31-Dec
1,429
5,112
1,691
214
6,994
1,452
Beg Row#:
1
End Row#:
10
Cntrl Comprsns
Trend Analysis- Last Six Months
G/L:
End Inv.
Prchs
1,468 Month
Date: Nov-97
May-97
813
0
Diff:
16
Jun-97
1,449
1,016
Pct:
1.12%
Jul-97
1,416
530
Perp:
Aug-97
1,462
539
Date: Nov-97
Sep-97
1,519
470
Diff:
Oct-97
1,452
510
Pct:
1,352
511
0.00% Avg:
CurrT/O Days:
58.9
Prior T/O Days
0.0
Notes
DL
169
169
169
169
169
169
DOH
0
0
0
0
0
0
169
-
COGS
752
592
751
682
610
774
693
T/O Days
Labor and OH are booked directly to sales and cogs. June 97 includes activity for M
44.1
57.3
57.2
63.3
73.3
58.9
58.5
12 Month Moving Averages
Row #
Month
1 Jan-97
2 Feb-97
3 Mar-97
Mar 97
4 Apr-97
5 May-97
6 Jun-97
7
Jul-97
8 Aug-97
9 Sep-97
10 Oct-97
11 Nov
Nov-97
97
BOM Inv
1,429
1,366
1 370
1,370
1,471
1,396
813
1,449
1,416
1,462
1,519
1 452
1,452
Prchs
490
492
546
519
0
1,016
530
539
470
510
Dir Lab
169
169
169
169
169
169
169
169
169
169
Dir OH
Misc
18
18
18
23
0
42
19
21
28
27
Net
Sales
1,316
1,200
1 123
1,123
1,398
1,336
1,052
1,335
1,213
1,085
1,375
COGS%
56%
56%
56%
56%
56%
56%
56%
56%
56%
56%
COGS
740
675
632
786
752
592
751
682
610
774
0
Phys
Adj.
Inventory Statistics are prepared to
measure the performance of the Inventory
collateral.
ll t l Results
R lt off this
thi procedure
d
give
i
the lender an indication of how well this
asset is performing and if that
performance is improving or
deteriorating.
Pct
0.00%
0.00%
0 00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0 00%
0.00%
Inv
T/O
0.53
0.49
0 44
0.44
0.55
0.68
0.52
0.52
0.47
0.41
0.52
0 00
0.00
T/O Dys
Perp Bal
57
61
67
55
44
57
57
63
73
58
0
Diff.
1,429
1,366
1 370
1,370
1,471
1,396
813
1,449
1,416
1,462
1,519
1 452
1,452
G/L Bal
1,429
1,380
1 397
1,397
1,478
1,435
1,429
1,459
1,444
1,470
1,502
1 468
1,468
Diff. BOM Inv Prchs
(14)
(27)
(7)
(39)
(616)
(10)
(28)
(8)
17
(16)
1,429
1,397
1 388
1,388
1,409
1,406
1,307
1,328
1,339
1,352
1,369
1 377
1,377
490
491
509
512
0
511
513
517
511
511
0
DOH
169
169
169
169
169
169
169
169
169
169
0
Analysis includes:
y Comparison of reported activity to
Detail and or G/L totals
y Verification of perpetual and or G/L
balances
y Year to year comparisons and trend
analysis of key metrics including
GP% and Inventory turnover
Copyright 2008 © ECG Enterprises, Inc. All rights reserved. www.ecgenterprises.com
Inventory
The substantive testing portion of the an AR audit consists of the following procedures
y Test Test Counts
Counts
y Cost Test
C t T t
y GP GP Test
Test
y Reconciliations of reported collateral to sub ledger, general ledger and balance sheet
Copyright 2008 © ECG Enterprises, Inc. All rights reserved. www.ecgenterprises.com
Inventory Test Count
Inventory Test Count
W/P Test Count W/P 1
W/P Summary
Category Tested:
$/Last Consignment:
Date Last Consignment:
# of Items Tested:
$ Amt Tested:
Pct Tested:
Reserve: $0
Part Number
Description
Variance Analysis
Negative Variances
Positive Variances
$0 Net Variance
0.0% Absolute Variance
Adjstmnt:
Qty/Last
Cons
Unit
Cost Tot. Value
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0 00
0.00
0.00
0.00
000's omitte Net Variance Frequency Analysis
Items
Amount
Items
Amt Tst
0
$0
0
Over -10%
0
$0 -5 thru -10%
0
0
Amount
Percent
0 thru -5%
$0
0.0%
0
0 thru 5%
$0
0.0%
0
5 thru 10%
0
Net Res: $0
Over 10%
Quantity
Shipped
Test counts are completed to help
determine if reported
p
inventory
y qquantities
are accurate. Results can indicate poor
internal controls, problem inventory,
overstatement of inventory quantities,
bill and hold inventory and excess or
obsolete inventory.
inventory.
Quantity
Received
Adjusted
Quantity
0
0
0
0
0
0
0
0
0
0
0
0
0
Adjst'd
Value
0
0
0
0
0
0
0
0
0
0
0
0
0
Notes
Percent
Quantity --------Variance
--------Auditor Net Unts
Net Amt
Net Pct
0
0
0.0%
0
0
0.0%
0
0
0.0%
0
0
0.0%
0
0
0.0%
0
0
0.0%
0
0
0.0%
0
0
0.0%
0
0
0.0%
0
0
0.0%
0
0
0 0%
0.0%
0
0
0.0%
0
0
0.0%
Procedure includes:
y Physically
y
y verifying
y g the existence of
inventory reported
y Identifying conditions of inventory
and storage facility
y Testing the validity of activity
posted to the perpetual
Copyright 2008 © ECG Enterprises, Inc. All rights reserved. www.ecgenterprises.com
Inventory Cost/Price Test
Inventory Cost/Price Test
W/P Cost Test W/P 1
W/P Summary
Variance Analysis
Category Tested: RM & FG
$/Last Consignment: $
Date Last Consignment:
5
# of Items Tested:
$102
$ Amt Tested:
0.0%
Pct Tested:
Reserve: $0
Part No.
100650
100880
102000
102620
107050
Description
p
ISO Octyl Alchohol
Phosphoric Anhydride
Sodium Gluc Tech
SM-2162
Trycol 6720
Qty/Last
Cons
40045
43745
20391
7235
16018
Negative Variances
Positive Variances
Net Variance
Absolute Variance
Adjstmnt:
Unit
Cost
0.51
0.85
0.65
2.49
0.85
Tot. Value
20,422.95
37,183.25
13,254.15
18,015.15
13,615.30
000's omittedNet Variance Frequency Analysis
Items
Amount
Items
Amt Tst
2
($1) Over -10%
0
0
$0 -5 thru -10%
0
2
50.4
Amount
Percent <0 thru -5%
($1)
-0.9% 0 thru 5%
3
52.1
$1
0.9% 5 thru 10%
0
$0
0
Net Res:
Over 10%
Cost per Auditor
Material
0.51
0.84
0.63
2.49
0.85
Labor
The cost test is completed to help
determine if the reported carrying costs are
accurate and/or approximate the market or
replacement
l
t costs.
t Results
R lt can iindicate
di t
poor internal controls, problem
inventory, overstatement of carrying
costs,, and excess or obsolete inventory
costs
inventory..
Over Head
Misc
Notes
Percent
0.0%
0.0%
49.2%
50.8%
0.0%
0.0%
Total Cost --------Variance
----------------Per Audit
Cst/Unt
Net Amt
Net Pct
Abs/Unit
0.51
0.00
0.00
0.0%
0.00
0.84
-0.01
-437.45
-1.2%
0.01
0.63
-0.03
-509.78
-3.8%
0.03
2.49
0.00
0.00
0.0%
0.00
0.85
0.00
0.00
0.0%
0.00
Procedure includes:
y Tracing carrying costs to recent
vendor invoices or market costs
y Identifying components that
comprise the total cost of an item
y Identifying old/excess product
y Determining methods used to value
inventory items.
Copyright 2008 © ECG Enterprises, Inc. All rights reserved. www.ecgenterprises.com
Gross Profit Test
W/P: Gross Profit Test
W/P Summary
G/P Per Client:
G/P per Test:
Less Cash Dil:
Less Misc Dil:
Net G/P Per Test:
Min G/P%:
Max G/P%:
Customer Name
Delta Plant #3
Stevcoknit-Carter
Delta Plant #3
Russell Corporation
Bristol Myers Squibb Co
Cross Creek Apparel
Delta Plant #2
Brittany Dye & Print
44.9%
44.9%
4 6%
4.6%
61.0%
Items Tested:
Sales $ Tested:
Cost $ Tested:
Avg Price/Unit:
Avg Cost/Unit:
Avg G/P per unit:
Fixed Costs/year:
B/E Units:
Cust. # Description
40061 Calvodene KTF
201950 Clavodene ALF Conc
40061 Clavodene KTF
190110 Dextralube FRM
20840 Dextrol 230
180010 Dextrol Defoamer NT-5
41530 Dextrol DL-2
20470 Dextrol FOM Soft NVSC
24
$318.3
$175.4
$13.3
$7.3
$6.0
0
Inv #
40699
40853
40942
40744
40403
40674
40584
40895
G/P Percentage Analysis
Items $ Amt Tst
0% and less:
0
1
14.9
over 0% to 10%
0
over 10% to 20%
1
9.9
over 20% to 30%
5
73 3
73.3
over 30% to 40%
Over 40%
17
220.2
Inv
Date
11/5
11/20
11/26
11/12
10/9
10/31
10/30
11/24
The gross profit test is completed to help
determine if the reported gross profit is
accurate and to identify
y individual items or
classes of inventory that may be driving the
GP up or down
down.. Results can indicate
problem inventory, items sold at a loss
and excess or obsolete inventory.
inventory.
Item #
Price per
Unit
1.09
1.84
1.09
0.50
1.35
1.53
5.50
0.99
Unts
Sold
9200
17840
13800
40140
23040
2200
1800
18560
Notes
Pct Tst Cost per pound is material cost plus 12.5 cen
0.0% overhead.
4.7%
0.0%
3.1%
23 0%
23.0%
69.2%
Total Sale
10,005.00
32,825.60
15,007.50
20,070.00
30,988.80
3,366.00
9,900.00
18,337.28
Cost per
Unit
0.54
0.72
0.54
0.34
0.58
1.06
4.06
0.39
Total Cost
4,922.00
12,826.96
7,383.00
13,446.90
13,390.85
2,321.00
7,299.00
7,145.60
G/P $
5,083.00
19,998.64
7,624.50
6,623.10
17,597.95
1,045.00
2,601.00
11,191.68
Procedure includes:
y Comparing the calculated gross profit to interim and FYE income statement
y Identifying items sold at a loss or materially below normal margins
y Determining reasons for variances
Copyright 2008 © ECG Enterprises, Inc. All rights reserved. www.ecgenterprises.com
Inventory Ineligibles
Throughout the review and during all procedures the examiner is on the constant lookout for items which can encroach on the liquidity of the accounts receivable. Reserves or ineligible recommendations are made for all transactions or balances which are deemed to be above average risk. d
d t b b i k •Slow Moving
•Obsolete
•Excess
•Outside Contractors
•Public Warehouses
•Bill and Hold
•Consigned Consigned Inventory
Inventory
•Contra
•Perpetual Perpetual ‐‐ G/L G/L Rec.
Rec.
•Test Test Count Variances
Count Variances
yCost Test Variances
ySupplies
yPackaging
yPrivate Label
Copyright 2008 © ECG Enterprises, Inc. All rights reserved. www.ecgenterprises.com
ECG Enterprises, Inc.
ECG Enterprises, Inc.
info@ecgenterprises.com
Please feel free to contact ECG Enterprises to arrange for a collateral examination. ECG is a new and young company, built on Greg Isenberg's extensive experience in the commercial finance industry,. ECG specializes in protecting lenders by designing and implementing audit programs that:
y Identify collateral risk lenders may not be aware of
y Identify favorable and unfavorable trends in a borrower's Id if f
bl d f
bl d i b
' financial and/or collateral performance
y Provide relationship managers with strategic information not readily available elsewhere.
readily available elsewhere
Copyright (c) 2008 ECG Enterprises, Inc. All rights reserved. www.ecgenterprises.com