TO:Stephen Stewart, Distribution Manager

MEMORANDUM

TO:Stephen Stewart, Distribution Manager

Enterprise Warehouse, #8006

FROM:Timothy D. Harrell

DATE:May 6, 2013

SUBJECT:Audit of Enterprise Warehouse

Internal Audit has completed a Scheduled Audit of the Enterprise Warehouse. The audit report is attached.

The purpose of the audit was to evaluate the effectiveness of the systems of management control by:

reviewing and appraising the adequacy, accuracy, and soundness of accounting, financial, and operating controls

determining the extent of compliance with established policies and procedures

determining the extent to which assets and resources are accounted for and safeguarded

We thank you and your staff for your assistance and cooperation during this audit. If you have questions or need further assistance, please contact our office.

TH/sh

Attachments

cc:Audit File #8006

MAILING ADDRESS:OFFICE LOCATION:

4201 MailServiceCenter512 N. Salisbury Street

Raleigh, NC27699-4201Raleigh, NC27604-1159

Telephone: (919) 733-2126Fax: (919) 715-8477

www.ncdps.gov

An Equal Opportunity employer

Stephen Stewart

May 6, 2013

Page 2

ec:Bennie Aiken

W. David Guice

Tim Moose

Karen Brown

Robert Leon

Michael Baldwin

Marvin Mervin

Jean Burke

Joan Taylor Saucier

Roberta Morgart

Council of Internal Auditing

TABLE OF CONTENTS

I...... EXECUTIVE SUMMARY 1

II...... INTERNAL AUDIT RATING SCALE 3

III.FINDINGS AND RECOMMENDATIONS...... 6

A.ACCOUNTS PAYABLE AND PROCUREMENT...... 6

B.FIXED ASSETS...... 9

C.incentive wage FUND...... 10

D.TELEPHONES...... 10

E.TRAVEL AND OTHER REIMBURSEMENTS...... 11

F.MANUFACTURING INVENTORIES...... 11

i. executive summary

The Enterprise Warehouse is located in Apex, North Carolina. The warehouse provides jobs for approximately twenty-nine minimumcustody inmates housed at WakeCorrectionalCenter and has twenty-six employees.

Internal Audit conducted a Scheduled Audit January 8–16, 2013. The previous audit was completed in November 2009. A Scheduled Audit is a full audit performed to ensure the adequacy and effectiveness of the facility’s internal controls and the quality of performance in carrying out assigned responsibilities in accordance with fiscal policies and procedures.

The scope of the audit included examination of the Accounts Payable and Procurement, Fixed Assets, Incentive Wage Fund, Telephones, Travel and Other Reimbursements, and Manufacturing Inventories areas.

Our audit disclosed no exceptions, strong internal controls and a knowledgeable staff in Travel and Other Reimbursements.

A few exceptions, minor in nature, were noted in the Accounts Payable and Procurement, Fixed Assets, Incentive Wage Fund, Telephones, and Manufacturing Inventories areas. In the Accounts Payable and Procurement area, the control register and log for DC-702s did not contain all the required information; DC-702 documentation was not complete; P-Card purchases were not always pre-approved; invoices/receipts were not signed and dated by cardholders; and open purchase orders were not reviewed monthly. In the Fixed Assets area, one Great Dane trailer was not listed on the Equipment Report and surplus requests and approvals were not available for review. In the Incentive Wage Fund area, hours worked by inmates were not entered in OPUS daily. In the Telephones area, the AT&T bills and some cellular phone bills were not reviewed and approved. In the Manufacturing Inventories area, our test count of finished goods did not match the perpetual inventory on NCAS.

These appraisals are reflected in the Internal Audit Rating Scale and the Findings and Recommendations included with this report.

We held an exit conference on January 24, 2013, to inform management of our findings and recommendations. The following were present.

• Mike Baldwin, Director II
• Stephen Stewart, Distribution Manager
• Lisa Lewis, Logistics Manager
• Andrea Millington, Internal Audit Manager
• Sue Hill, Regional Audit Supervisor
• Siew Lee, Internal Auditor

During the course of the audit, we provided office personnel with schedules as needed to explain exceptions and serve as supporting information.

The Distribution Manager acknowledged agreement with all findings and recommendations.

In addition to our normal distribution, we may send excerpts from this report to other DPS managers, as deemed appropriate.

1

II. Internal Audit Rating Scale

Scheduled Audit

Enterprise Warehouse

#8006

Listed below are the major areas examined in this audit and overall ratings assigned by auditors. Major areas are comprised of individual categories as listed on the following pages. Ratings given to categories or major areas are not averages. Ratings are based on standard audit procedures, and reflect the auditors’ assessment of the facility’s performance in various categories. The risk associated with individual findings is a large component of this assessment and may significantly impact a rating.

Rating Scale Guidelines

1 -No exceptions, strong internal controls, staff appears knowledgeable

of policies and prescribed procedures

2 -Meets expectations, a few exceptions minor in nature

3 -Some improvement needed to strengthen controls or minimize risks

4 -Below expected performance level, significant improvement needed

Overall Rating

Rating

2

2

2

2

1

2

1

II. Internal Audit Rating Scale

Rating Scale Guidelines

1 -No exceptions, strong internal controls, staff appears knowledgeable

of policies and prescribed procedures

2 -Meets expectations, a few exceptions minor in nature

3 -To minimize risk, some improvement needed to strengthen controls

4 -Below expected performance level, significant improvement needed

Accounts Payable and Procurement

1. Separation of Duties

1. Direct Processing (DC-702) Purchases

1. Procurement Card (P-Card) Purchases

1. Purchase Orders

1. NCAS/E-Procurement Security Access

Fixed Assets

1. Separation of Duties

1. Annual Fixed Asset Inventory

1. Inventory Controls

1. Changes, Updates, and Follow-up

1. Transfers and Disposition of Assets

1. Vehicle Mileage and Maintenance Records

Incentive Wage Fund

1. Pay Grades

1. Time Reporting

Telephones

1. Internal Controls

1. Review and Approval

1. Cellular Phone Procedures

Travel and Other Reimbursements

1. Allowance for Meals, Lodging, and Other

1. Complete and Accurate Documentation

1. Signatures and Approvals

Manufacturing Inventories

1. Standard Operating Procedures

1. Perpetual Inventories

1. Physical Inventories

1

IIi. FINDINGS and recommendations

A.ACCOUNTS PAYABLE AND PROCUREMENT

We reviewed the procedures used for purchase orders and local purchases processed on Direct Processing Forms (DC-702s) and Procurement Cards (P-Cards) for compliance with the DPS Fiscal Policy and Procedure Manual at .2600. The following exceptions were noted.

1.Control Register for Blank DC-702s

Condition: A review of the DC-702 Register revealed that it did not include the required date and name of the individuals that the packages were issued to.

Criteria: As new Direct Processing Form (DC-702) packages are received from Apex Enterprise Warehouse, they should be stored in a secure area with limited access. A Register should be maintained at the facility showing the date of receipt from the warehouse, the beginning and ending numbers of each package received, and the issuance of packages to usersincluding date and individual issued to. [Reference: .2610 A.1.]

Cause: The Office Manager informed DPS Auditorsthat she was unaware of this requirement.

Effect: Failure to maintain a current and complete register for new incoming DC-702 packages results in a lack of accountabilityfor incoming purchases and could result in inappropriate and unauthorized expenditures.

Recommendation: Warehouse Management should ensure new DC-702 packages are maintained in a secure location and the register is properly completed to decrease the risk of loss, theft, or misuse.

2.Incomplete Direct Processing Form (DC-702) Log

Condition: DC-702s were not issued and recorded in the DC-702 Log at the time the purchases were initiated. The Log did not contain the requestor’s name, and the date processed and sent to General Accounting. A similar finding was noted during the prior audit and corrective action continues to be needed.

Criteria: A log of all DC-702s used during the fiscal year should be established and maintained at each location. At a minimum, the log should contain the DC-702 number, requestor’s name, date of issue, vendor name, vendor number, invoice date, invoice number, invoice amount, the date processed and sent to General Accounting, and the date paid (if required by respective Division). As each Direct Processing Form DC-702 is used, the DC-702 number, Requestor’s name, and Date of Issueshall be immediately entered in the Log. Upon receiving the invoice, or upon receipt of the goods or services, the remaining information should be entered. [Reference: .2610 A.2.-4.]

Cause: The Office Manager informed DPS Auditorsthat she was unaware of this requirement.

Effect: Failure to maintain a current and complete log with all required information results in lack of accountability and could result in inappropriate expenses.

Recommendation: Warehouse Management should ensure that the log contains all the required information and is properly completed as required by policy.

3.Direct Processing Forms (DC-702s)

Condition: A review of eighteen processed DC-702s revealed:

• Eleven (61%) were not properly pre-approved
• One (6%) invoice was not date stamped indicating the date the invoice was received
• Four (22%) did not have a signed and dated packing slip or invoice indicating receipt of goods or services

Criteria: A pre-approval worksheet for direct processing purchases is required by fiscal policy. All incoming invoices and other business correspondence should be date stampedon the day it is received. Proof of receipt is either a dated delivery ticket with the signature of the employee receiving the items or a dated signature on the original invoice. [Reference: 2609 B.1., 2610 B.2., B.4., and C.1.]

Cause: The Office Manager informed DPS Auditorsthat she was unaware of all the requirements for processing DC-702s.

Effect: Failure to properly complete purchasing procedures increases the risk of improper purchases and payments and may result in misappropriation of funds.

Recommendation: Warehouse Management should implement procedures to ensure all purchases are processed and maintained in accordance with DPS policy requirements.

4.Procurement Card (P-Card) Purchases

Condition: A review of five P-Card statements and twenty-one transactions for the period October 2012 through December 2012 revealed receipts/invoices for eleven (52%) purchases were not signed and dated by the cardholder. Seven (33%) transactions were not properly pre-approved.

Criteria: A pre-approval worksheet for P-Card purchases is required by fiscal policy and the DC-704 or a similar form may be used for this purpose. Original receipts should be signed and dated by the cardholder. All original documents relating to a purchase should be given to the cardholder’s supervisor for signature acknowledging the purchases. [Reference: .2608 E. and E.4.c.]

Cause: The Distribution Manager informed DPS Auditorsthat he was unaware of the requirements.

Effect: Failure to process P-Card purchases within the guidelines of DPS policy results in a lack of accountability and increases the risk of improper use of P-Cards.

Recommendation: Warehouse Management should ensure all procurement policies and procedures are followed as stated in the criteria above.

5.Purchase Order Documentation

Condition: A review of ten closed purchase orders revealed one (10%) packing slip was not properly signed and dated.

Criteria: If a packing slip is included with the shipment, the Receiver should verify the items received against the packing slip, then sign and date the packing slip as verification of inventory and inspection. If a packing slip is not included with the shipment, a Substitute Packing Slip, Form DC-706, or equivalent should be completed. Once the goods have been receipted into E-Procurement, the packing slip (or substitute) should be filed at the Facility/Section with the Purchase Order, and available for audit purposes. [Reference:.2606 E.1.b., 1.c., and 1.f.]

Cause: The Office Manager informed DPS Auditors thatthis was an oversight.

Effect: Failure to properly document purchases increases the risk of improper payments and a loss of assets.

Recommendation: Warehouse Management should implement procedures to ensure all procurement policies and procedures are followed as stated in the criteria above.

6.Outstanding Purchase Orders

Condition: The Warehouse staff were not printing, reviewing, and maintaining the CORCOS Open Purchase Orders Report monthly. A review of purchase orders having an open status in the North Carolina Accounting System (NCAS) disclosed one remained open with a zero balance and was more than sixty days old.

Criteria: Each section should review the CORCOS Open Purchase Orders Report each month and take appropriate action to correct problem purchase orders that remain open after delivery or in which errors are noted. The CORCOS Open Purchase Orders Report should be signed and dated by the individual reviewing the report each month and maintained on file within the facility. [Reference: .2606 G.3.–5.]

Cause: The Logistics Manager informed DPS Auditors that she was unaware of the CORCOS Open Purchase Orders Report and the requirement that it needed to be reviewed monthly.

Effect: Failure to close outstanding purchase orders results in unnecessarily encumbering funds that could be used for other purposes.

Recommendation: Warehouse Management should implement procedures to ensure that the CORCOS Open Purchase Orders Report is reviewed monthly and that invoices are paid timely, and purchase orders and encumbrances are appropriately closed. Staff should continue to work with DPS Purchasing and Logistics as appropriate, to ensure any purchase orders marked complete or having a zero balance are closed in the system. Corrective action was initiated by Warehouse staff during the audit.

B.FIXED ASSETS

We conducted a 64 percent test count of fixed assets, valued at $1,000 and over, to provide assurance that assets were properly accounted for. We performed additional testing to verify internal controls and to ensure compliance with the DPS Fiscal Policy and Procedure Manual at .2700. Our sample included high-risk items such as computers and maintenance equipment. Copies of all schedules relative to our physical inventories were provided to facility personnel. The following exceptions were noted.

1.Equipment not Listed on the Report

Condition: A 48 foot Great Dane trailer valued at over $1,000, located at the Warehouse parking lotwas not listed on the Equipment Report. The asset was assigned in OPUS to John Umstead Hospital Laundry.

Criteria: All equipment purchased with a value over $1,000 should be listed on the facility’s Equipment Report. [Reference: .2703 B.]

Cause: The Distribution Manager informed DPS Auditors that he was unaware that the 48 foot trailer was not listed on the Warehouse Equipment Report.

Effect: Failure to have all equipment listed on the Equipment Report results in a lack of accountability for the assets located at the facility and may result in loss or theft of the equipment.

Recommendation: Warehouse Management should ensure a proper review is conducted and appropriate forms are properly completed and submitted to the Controller’s Office Equipment Control Section. This practice will ensure any assets not shown on the equipment list will be properly added. Facility management should also follow-up with the Equipment Control Section to verify that the asset was added as requested.

2.Surplus Documentation

Condition: Surplus documentation, such as the surplus request and the approval memorandum, were not available for review during our audit.

Criteria: The Facility/Section shall request surplus action by submitting a memorandum through appropriate channels to the Controller’s Office, Equipment Control Section. A copy of the surplus request and approval documentation shall be kept on file at the Facility/Section. [Reference: .2713 B., B.2 and D.]

Cause: The Distribution Managerinformed DPS Auditors that Correction Enterprises Administration processes surplus requests and does not return the signed approved requests to the Warehouse.

Effect: Failure to adequatelymaintain documentation for surplused assets results in inadequate accountability and increases the risk of misappropriation of assets.

Recommendation: Warehouse Management should ensure proper documentation is maintained at the warehouse for all Equipment Control transactions.

C.INCENTIVE WAGE FUND

We reviewed incentive wage operational and accounting procedures for compliance with the DPS Fiscal Policy and Procedure Manual at .0200 and Prisons Policy and Procedure Manual. The following exception was noted.

1.Inadequate Posting of Inmate Hours

Condition: Hours worked by inmates assigned to the Enterprise Warehouse were not entered in OPUS on a daily basis.

Criteria: Inmate’s actual hours worked must be recorded in OPUS on screen IJ61, Weekly Activity Attendance, on a daily basis, as late in the inmate’s shift as possible. [Reference: .0206 B.1.]

Cause: The Warehouse Manager informed DPS Auditors that he entered the inmates’ time at the end of the week and was unaware that hours needed to be entered daily.

Effect: Failure to enter hours worked on a daily basis could result in underpayment of inmates’ incentive wages.

Recommendation: Warehouse Management should implement procedures to ensure actual hours worked by inmates are entered as required by the above criteria.

D.TELEPHONES

We reviewed internal controls over telephones and cellular phones assigned to the facility for compliance with the DPS Fiscal Policy and Procedure Manual at .2400 and .3200. We examined telephone records for the months of September, October, and November 2012 for evidence that charges were reviewed for appropriateness. The following exceptions were noted.

1.Inadequate Review of Local Phone Charges

Condition: Warehouse Management did not properly review and certify the correctness of the monthly local AT&Ttelephone bills.

Criteria: Facility/Section Heads or designees shall review all telephone company bills to ensure all charges are accurate. Any incorrect charges shall be resolved with the local telephone carrier. All long distance calls shall be approved by the Facility/Section Heads or designees. [Reference: .2404 B.1.]