INVENTORY OBSERVATION MEMO

  1. Before commencement of verification, the management should issue appropriate instructions to stock taking personnel. Such instruction should cover all phases of physical verification and preferably be in writing

Auditor should examine these instructions to assess their efficacy

In the given Case; Manager, Andrew Jacobs issue said instructions to count team.

But, while issuing instructions, no consideration was made to:

  • Stock held by company but related to other parties, like goods to be returned to the supplier but not yet done, Goods sold but delivery not yet taken by customer.
  • Stock in Transit
  • Stock in Process
  • Stock with customers, in case of sales return or in case of sales on the sale or approval basis.
  • Stock of obsolete items and scrap.

However, other issued instructions had been followed by count team.

{Annexure I: Copy of these Instructions}

  1. The procedures for identifying defective, damaged, obsolete, excess and slow moving items of inventory should be well designed and must operate properly. There should be appropriate policies regarding these. Write offs of either excess, scrap or obsolete stocks should be valid and authorized.

As working capital blocked in Slow moving Goods lead to loss in interest and defective, damage and obsolete items also lead to financial loss to company.

In the given case, it had been observed that Company does not have any appropriate policies regarding these. Many instances of slow moving goods were identified. Also, there were some cases where slow moving goods were purchased; in spite of the fact that, such goods were already in stock in large quantities. {Annexure II and Annexure III}

Company does not have any policies regarding identification and disposal of obsolete goods. Some pallets of obsolete shoes were foundnear the back of the warehouse, with no written records. Such ineptitude of Company gives rise to risk of loss of obsolescence, non-identification of inventory theft, scrap of good inventory, etc. and inventory is subject to risk of physical deterioration and from unauthorized use or disposal

  1. In order to ensure the effectiveness of the count procedures, there should be at least one person who is independent of the regular storekeepers and the auditor should also perform test- counts. In carrying out the test counts, the auditor should give particular consideration to those stocks which have a high value either individually or as a category of stocks. Thus there is need of proper sampling.

In the given Case, none of the persons involved were independent of the regular storekeepers.

Out of the total 98 count sheet, 7 attached count sheets are rechecked. These 7 count sheets were selected on Random basis, without being pre-information to Apollo Personnel. No differences had been observed between test counts and those counted by the client. Also numbers of boxes throughout the warehouse were made open to ensure that shoes were in each of them.

  1. Ideally there should be no movements of stocks when the physical verification is carried out. On occasions, however, it may be necessary for the entity to continue the production, receiving or dispatch operations during the physical verifications. In such circumstances, it essential that the entity as the procedures to identify and record such movements. It should also be examined whether the entity has instituted appropriate ‘cut-off Procedures’ to ensure that – Good purchased but not received have been included in the inventories and the liability has been provided for. – goods sold but not dispatched have been excluded from the inventories and credit has been taken for the sale

In the given Case, It was instructed that there should be no sales and no movement of inventory during the count. However, shipment of shoes costing $8,434,889.09 was received on December 31 from the Anglonesia Rehabilitation and Reprogramming Institute these are also counted in inventory.

  1. Count Tag on every pallet was observed to avoid double counting of single item. But information listed on tags was not subject to review by any second count team
  1. Proper consideration should be paid to the physical condition to the inventories

In Given Case, some pallets of shoes stacked were near the back of the warehouse which were covered with dust and looked very old.

  1. Various other procedures were followed, in order to ensure working of controls and to test their adequacy.
  • Original physical verification sheets were reviewed and some valuable items were traced and selected into the final inventories.
  • Details of final inventories were compared with stock records and other corroborative evidences like stock statement submitted to banks for hypothecation.
  • The procedures adopted by the entity to account for the movement of inventories from one location to another within the entity were reviewed.
  • Inquiry had been made relating to the security procedures to prevent unauthorized removal or materials from the site by either employees or others.
  • It was being ensured that warehouse or storeroom was orderly arranged and maintained and the stock adequately protected against the weather or other losses.
  • Examination of sample of documents was made for evidencing the movement of stock into and out of stores, including documents pertaining to period shortly before and shortly after the cut-off dates, and checked whether the stock represented by those documents were included or excluded as appropriate.

These were the Control objectives:

  • To ensure that all the adjustment to stock valuations are suitably investigated and authorized
  • To ensure the accounting system and statutory accounts accurately reflect the value of current inventory stocks
  • To ensure that all stock purchases, issues and other movements are valid and correctly reflected in the inventory accounts

.

  • That inventory items utilized in either production or customer sales activities are correctly charged out of the inventory accounts and accounted for in target system
  • To ensure stocks are correctly priced

Annexure I

Apollo Shoes

Inventory Count Instructions

1.Counts will be performed in teams of two, consisting of a counter and a writer.

2.For each bin, identify the item located in it and the count of that item. If more than one item is in the bin, write in the bin number, the additional item description, and the count in the open space at the bottom of your count sheet.

3.After counting a bin, place an inventory count tag on the bin to mark it as having been counted.

4.After a team finishes its counts, each count team member should write his/her name in the "Count Team" line on each count sheet and the team should then turn in the sheets to the inventory manager.

5.After receiving the count sheets(s), the inventory manager will review and sign them, and then submit them to the inventory clerk for processing.

6.The inventory clerk will enter the counts into the computer system, run a variance report, and submit the variance report to the inventory manager.

7.The inventory manager will assign recounts for variances to the count teams. Each team will then recount the assigned bins and initial beside the recount on the count sheet.

8.The recounts will be resubmitted to the inventory manager, who will review and sign them, and then submit them to the inventory clerk for final entry.

9.There will be NO sales and NO movement of inventory during the count.

Annexure II

Slow Moving Inventory

Sku# / Style / Type / Size / Quantity / Unit Price / Ext Price
10080 / Siren / Men's / 10 1/2 / 4585 / 139.76 / 640,799.60
20060 / Speaker / Men's / 8 1/2 / 15,273 / 116.71 / 1,782,511.83
20070 / Speaker / Men's / 9 / 15,425 / 116.71 / 1,800,251.75
30260 / Spotlight / Women's / 8 1/2 / 4,489 / 205.27 / 921,457.03

Annexure III

Gratuitous Purchase of Slow Moving Goods

Description / Invoice No. / Date / Unit Purchased / Sold / Balance
20050 Speaker Men's- 8 / 1004345 / Aug 8 / 6116 / 4162 / 1954
1004346 / Dec 2 / 6902 / 0 / 8856
1004347 / Dec 26 / 2684 / 0 / 11540
TOTAL / 15702 / 4162 / 11540
30250 Spotlight Womn's-8 / 1004345 / Aug 8 / 2013 / 179 / 1834
1004346 / Dec 2 / 1945 / 0 / 3779
Dec 26 / 0 / 0 / 3779
TOTAL / 3958 / 179 / 3779
10200 Siren Women's- 6.5 / 1004345 / Aug 8 / 2580 / 1648 / 932
1004346 / Dec 2 / 2936 / 0 / 3868
1004347 / Dec 26 / 1132 / 0 / 5000
TOTAL / 6648 / 1648 / 5000
10210 Siren Women's- 7 / 1004345 / Aug 8 / 3027 / 1470 / 1557
1004346 / Dec 2 / 2896 / 0 / 4453
1004347 / Dec 26 / 1328 / 0 / 5781
TOTAL / 7251 / 5781

Assumption: First in First out basis