Question

Internal Audit

Question 1

The following information is extracted from a draft of an audit report prepared upon the completion of an audit of the inventory warehousing procedures for a division.

Findings

[#5]

We performed extensive tests of inventory record-keeping and quantities on hand. Based on our tests, we have concluded that the division carries a large quantity of excess inventory, particularly in the area of component parts. We expect this is due to the conservatism of local management that does not want to risk shutting down production if the goods are not on hand. However, as noted earlier in the report, the excess inventory has led to a higher than average level of obsolete inventory write-downs at this division. We recommend that production forecasts be established, along with lead times for various products, and used in conjunction with economic order quantity concepts to order and maintain appropriate inventory levels.

[#6]

We observed that receiving reports were not filled out when the receiving department became busy. Instead, the receiving manager would fill out reports after work and forward them to accounts payable. There is a risk that all items received might not be recorded, or that failing to initially record might result in some items being diverted to other places. During our tests, we noted many instances in which accounts payable had to call to receiving to obtain a receiving report. We recommend that receiving reports be prepared.

[#7]

Inventory is messy. We recommend that management communicate the importance of orderly inventory management techniques to warehouse personnel to avoid the problems noted earlier about: (1) locating inventory when needed for production; and (2) incurring unusually large amounts of inventory write-offs because of obsolescence.

[#8]

We appreciate the cooperation of divisional management. We intend to discuss our findings with them and follow up by communicating your reaction to those recommendations included within this report. Given additional time for analysis, we feel there are substantial opportunities available for significant cost savings and we are proud to be a part of the process.

Required

1. Identify deficiencies in paragraphs [#5] and [#7] relating to the completeness of the finding and issues in writing.
2. Identify a deficiency in paragraph [#6] relating to the completeness of a finding.
3. Identify deficiencies in paragraph [#8].

Answer 1