Audit Program Finished-Goods-Inventory Audit Program - AuditNet

Audit Program
Finished-Goods-Inventory Audit Program
Background/Purpose
The purpose of this audit program is to identify specific audit procedures to be performed in
conjunction with our review of the finished-goods-inventory cycle count procedures and controls
over picking, staging, and shipping of finished goods inventory. The objectives of this review
are to:
1. Assess the effectiveness of the distribution center’s inventory cycle count program in
identifying inventory shortages and other count errors.
2. Test the accuracy of the book (system) to physical inventory balances at the _______
distribution center.
3. Observe and document the receiving and shipping processes. Assess the effectiveness of
these processes in ensuring the accuracy of the inventory balances.
Procedures Wkkpr
Ref.
Planning
1. Obtain and review prior audit for this location. All
2. Discuss the scope of the audit and background information with
management.
3. Request and obtain the following information from each
distribution center location:
a.) Current organization chart.
b.) Cycle Count Procedures.
c.) A copy of any policies on Physical Inventory processing.”
d.) Copy of YTD Cycle Count Results
e.) Request stock status report for ________ facility to make
Cycle Count selections. Copy team on selection
4. Send copy of prior year audit cycle count program
documentation including count frequencies, ABC classifications
etc. to the warehouse manager for review / update. The
warehouse manager should be ready to discuss any changes
when the audit team arrives.
5. Request that the _______ warehouse manager have YTD cycle
count results (unit quantity and $ value) available for review at
the time of the auditor’s arrival.
6. Select 3 scrap transactions processed within the fiscal year.
Communicate document no. to auditors.
7. Review latest month G/L to perpetual reconciliation with
Finished Goods Accountant. Communicate results to auditors.
8. Send copy of org. chart to auditors.
Performed
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Audit Program
Finished-Goods-Inventory Audit Program
Field Work:
1. Meet and identify management personnel. Perform a walk
through of the inventory floor.
2. Inquire about all inventory locations included in the cycle count
process.
Procedures Wkkpr
Ref.
3. Inquire on status of Solutions proposed from last March audit.
4. Discuss the organization. Specifically, identify the individuals
responsible for the cycle count program, including those
employees responsible for counting, reconciling, and reporting.
5. Inquire on any changes / dismissal of warehouse staff since last
March. Document the reason for any dismissals.
6. Inquire on any major systems changes at ________ facility or of
any major changes in the cycle count process since the last
audit. Thoroughly review the documentation from the last audit
and document any changes.
7. Review / update of Section II. D of the last Cycle Count Audit.
Review the cycle count frequencies and A,B, C classification
with the warehouse manager from the last audit and update the
documentation for any changes. Update the following points if
applicable:
a.) When was the last update of ABC codes performed?
b.) Who sets ABC codes for finished goods inventory parts?
c.) How are the ABC designations determined? Based on the
value of the inventory? Based on the bulk of inventory?
d.) When or how often are ABC calculations updated?
e.) How often are A, B, and C parts counted?
f.) Are there inventory items without ABC designations?
i.) Obtain documentation for the most recent re-assignment of
ABC classifications. Verify.
8. Review reported results for the year; accuracy levels,
discrepancies and adjustments:
a.) What are the value ($) and quantity accuracy goals?
b.) If calculated, what was the YTD accuracy level for value
and quantity.
c.) What are the tolerance levels for A, B, and C parts? Are
they used appropriately when reporting cycle count results?
d.) Inquire about the adjustment authorization procedure. How
is it used? When? How is it recorded?
e.) Obtain a copy of the most recent cycle count and review
adjustments (if any) posted to the SAP system and to the
general ledger. Review for appropriate approvals. If no
Performed
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Audit Program
Finished-Goods-Inventory Audit Program
adjustments from the last cycle count, look for prior
adjustments and audit for appropriate approvals.
f.) Review a summary of YTD cycle count differences and
variances. Obtain documentation representing recording to
SAP (and the General Ledger, if possible).
9. Update Section III. of the last audit report via discussion of the
cycle count program and observation of the warehouse
personnel in the normal cycle count routine. Note the following:
a.) Who coordinates the cycle count program?
b.) Is there a cut off process time?
c.) Who performs the cycle counts?
d.) Are the counts performed blindly? Watch for the following:
On 1st count, copying of perpetual count or actual counting.
On 2nd count, performed by another person other than 1st
counter. On 3rd count, who and how is this done (be
specific)?
e.) Frequency of the cycle counts? (# of times per week)
f.) What time of the day are cycle counts performed?
g.) Batch processing: identify the number of times per day the
transactions get booked.
h.) Do the number of counts vary per day? Are the number of
counts to date in line with the number required to meet the
objectives for number of A,B, C counts per year?
Randomly select 3 A parts, and 3 B parts and verify the
number of cycle counts performed on them through YTD
October.
i.) Is the location on schedule to meet the cycle count accuracy
requirements per MFP 301 for year-end?
k.) What is the acceptable error rate during the count
(individually for A’s B’s and C’s)so those items are not
recounted?
l) Observe the cycle counter in action. Is he following the
designed process?
10. If possible, document the reason for known shipping errors:
a) VCS 10’s to Toronto (arrived in Toronto on 10/03)
b) 141’s shipped to Toronto on delivery no. 82287209.
(product code 008796). (Same person / trend?)
11. Document / understand what over-packing is. (according to
_______, defined as consolidating multiple boxes or cartons of
product into one larger box for reasons including to cut down on
shipping costs, make the delivery process more user friendly for
the customer, reduce risk of product damage etc. The shipping
manifest system must be manually changed to produce the

Audit Program
Finished-Goods-Inventory Audit Program
reduced box count on the shipping paperwork in this case as the
original carton count coming over from the SAP delivery would
include the separate boxes.) How common is “over-packing”?
12. Does the cycle count exclude any locations from parts selection
(e.g. Dock, Consignment, or Bulk areas)? Review reports to see
if these are not physically counted. Are they recorded as 100%
accuracy on the monthly and YTD reports?
13. Internal Audit independent test counts:
a.) Select at least 5 part numbers from the floor and 5 part
numbers from the system. Count and compare physical
count to the system. Note and document the reasons for any
variances.
b.) Compare accuracy levels to policy.
c.) Note and document any discrepancies in accordance with the
calculations from the latest audit, Sections III. and IV.
d.) Verify the title of the system report used to obtain on hand
units.
14. Observe and thoroughly document the picking and staging
process:
a) What forms are generated for picking and how are they
distributed. How does the shipping manifest system get the
request from SAP?
b) What determines which area of the dock the product will be
staged at?
c) What are the checks at the dock that ensure the correct
product has been picked for the order? Bar code scan
against the order? Independent count? If a count, who
performs the count?
d) What stages does the order go through in the shipping
manifest system? Picked / staged / packed and loaded on
truck / shipped? Are transactions executed in the shipping
manifest system for each stage? What has to happen to the
status of the order in the shipping manifest system to send a
message to SAP to create the Goods Issue document?
e) What happens to the product in SAP if a product is picked
but not shipped? Is this tracked on an exception report?
f) At what point is the specific truck the goods will be shipped
on updated in the shipping manifest system for tracking
purposes? How does the data for the specific truck get
loaded into SAP? Who does the input?
g) Inquire about problems with the SAP or AAT system. Any
problems with the communication link between the two?
Document if any.
h) Observe deliveries to the staging area or dock for two orders

Audit Program
Finished-Goods-Inventory Audit Program
done by two different warehouse personnel. Assess whether
or not all steps documented in c) above are being followed.
Reconcile the pick list generated by the shipping manifest
system for the observed picks to the related sales order in
SAP (VA03 screen) to ensure the shipping manifest system
got the correct information passed from SAP.
15. Observe the process of shipping/logistics.
a.) Who determines what truck the orders should be loaded on?
b.) Inquire about the use of exception reports (i.e., orders
shipped through AAT, but not entered into SAP, etc.).
c.) Inquire about problems with the SAP or the shipping
manifest system relative to actual shipping. Document if
any.
d.) Document the process, including paperwork or electronic
data generated, data entry performed and problems
encountered.
e.) Who signs / approves box counts for the various types of
shipments (TL, LTL, SLC etc.)?
f.) What are the controls to ensure the right product for the
right order is loaded onto the right truck?
g.) What data does the shipping manifest system pass on to the
shipper? To the Logistics department? Does the shipper
pass any data back to the shipping manifest system?
h.) Select a shipment that includes over-packing. Verify that
the shipping documentation includes the manual change for
the revised box count.
i.) For at least one shipment, ask the trucker to remove the last
two pallets loaded and count the products on those two
pallets and compare the counts to the shipping
documentation. Note any discrepancies.
j.) Select five shipments including the one from h) above
which physically left the warehouse on day one of the audit.
Retain all of the shipping documentation including product
no. and quantities shipped. On day 2, ensure that invoices
and Goods Issued were generated for the same products
shipped. With the order no. or delivery no., you can research
the document flow in SAP via the VA03 screen. Document
any discrepancies.
k.) Observe the sealing of a TL truck. Does a Bose person
place the seal before the truck leaves the dock?
l.) Pick a TL and an LTL order on the dock and observe it
being loaded onto the truck (if possible, 1 from 14h above).
Observe whether or not the trucker and warehouse person
signs for the box count on each and all related shipping
documentation goes with the product. Retain copies of all
shipping documentation for the two orders selected.

Audit Program
Finished-Goods-Inventory Audit Program
m.) Do cameras cover activity on all of the docks?
n.) After return to home office, request Logistics obtain signed
copy of BOL after customer delivery from the carrier for the
two shipments in 15L above. Verify that the carrier and
customer signs for the same number of product as was
referenced in the shipping info. retained from 15L.
16. Observe the process of receiving inventory into finished goods.
a.) Inquire about problems with the SAP system. Document if
any.
b.) Inquire about communications with manufacturing plants
and vendors. Are there PO’s on the system for both? Are
receipts processed against the PO’s?
c.) Document the process, separately for outside vendor vs.
Mfg. Plant deliveries including paperwork received with the
goods and paperwork or transactions processed in SAP.
Document the data entry performed and problems
encountered.
d.) Select one receipt and observe processing into the
warehouse.
17. Select 3 product scrap transactions processed this fiscal year
from the _________ facility inventory before the trip. Pull
documentation to support the transaction and validate that the
correct level of approvals were obtained in accordance with the
corporate scrap policy.
18. Research controls for change / delete deliveries:
a) Who, outside of DC personnel has access to these
commands? Do they have valid business reasons to have
these commands?
b) Is there a published work instruction on how to change or
delete a delivery? Does it include directions to
simultaneously change the shipping manifest system? =
c) Interview member of the IT department to see how often
Idoc error reports are reviewed. Does she have a protocol to
run through to clear problem dos with the Distribution
Centers?
d) Run the reports for 30 days and up through 90 days? Are
there any open items on the report that could cause a
variance in the warehouse?

Reporting Results
Audit Program
Finished-Goods-Inventory Audit Program
Procedures Wkkpr
Ref.
1. Summarize audit findings and discuss with local management
on the last day of fieldwork. Develop and agree to proposed
solutions with local management.
2. Draft audit report using agreed upon format designed by
Internal Audit Services and submit to Audit Manager.
3. Submit draft report to local management for review and
comments. Incorporate comments into report as considered
appropriate.
4. Finalize audit report and issue to the distribution list.
Prepared by: ____Tom Clarke____________________
Approved by: _________________________
Performed
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