Audit of inventory

Audit of inventory process on the food complex share company

Dire Dawa Food Complex Share Company, a food products company, manufactures and markets pasta
under the brand Vera. In addition, the company manufactures macaroni and biscuits. Dire Dawa Food
Complex Share Company is based in Dire Dawa, Ethiopia. As of December 10, 2011, Dire Dawa Food
Complex Share Company operates as a subsidiary of Barok Food Complex.

Food complexes Company maintain complete and accurate accounting records. The best method to ensure
such accounting records is to hire and train competent and honest individuals. Periodically, supervisors
evaluate an employee’s performance to make sure the employee is following company policies.
Inaccurate or inadequate accounting records serve as an invitation to theft by dishonest employees
because theft can be concealed more easily.

The company documents support most accounting transactions. These source documents are an integral
part of the internal control structure. For optimal control, source documents are serially numbered.

Since source documents serve as documentation of company transactions, from time to time firms check
the validity of these documents. For example, to review a purchase transaction, they check the documents
used to record the transaction against the proper accounting records. When the accounting department
records a purchase transaction, it should receive copies of the following four documents:

 A purchase requisition is a written request from an employee inside the company to the
purchasing department to purchase certain items.

PURCHASE REQUISITION format in dire dawa food complex share company

Purchase requisition NO 256

From raw material supplier Date

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  A purchase order is a document sent from the purchasing department to a supplier requesting
that merchandise or other items be shipped to the purchaser.
 An invoice is the statement sent by the supplier to the purchaser requesting payment for the
merchandise shipped.
 A receiving report is a document prepared by the receiving department showing the descriptions
and quantities of all items received from a supplier in a particular shipment. A copy of the
purchase order can serve as a receiving report if the quantity ordered is omitted. Then, because
receiving department personnel do not know what quantity to expect, they will count the quantity
received more accurately

These four documents together serve as authorization to pay for merchandise and should be
checked against the accounting records. Without these documents, a company might fail to pay a
legitimate invoice, pay fictitious invoices, or pay an invoice more than once. The food complex
Company accomplish proper internal control only by periodically checking the source
documents of business transactions with the accounting records of those transactions.

Inventory Audit Objectives of dire dawa food complex company

Inventory audit objectives and the weight each objective carries depend on what the business considers
most important. In general, however, an inventory audit centers on accuracy and control objectives. Audit
activities include comparing the results of a physical count against inventory records, evaluating the
effectiveness of warehouse processes, measuring performance and service levels and determining whether
warehouse operations are complying with safety policies and procedures. Audit results are then used to
improve warehouse processes and as evidence for justifying, for example, space or time-saving capital
expenditures.

Warehouse Inventory Counts of dire dawa food complex company

The warehouse count of inventory in dire dawa food complex company conducts a full of physical
inventory count often uses a periodic inventory system. Periodic systems rely on manual records and a
schedule of manual inventory counts throughout the year to determine the inventory balance. Because of
this company that uses a periodic system are more likely to conduct a full physical count of its warehouse
inventory.

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Conducting a Warehouse Inventory Audit of dire dawa food complex company

Auditors typically gather data by observing warehouse operations, interviewing employees and inspecting
warehouse records. Observation and personal interviews allow auditors to gather data relating to
warehouse process, efficiency and adherence to safety compliance policies. A records inspection is
conducted to check for instances of fraud, waste or abuse, calculate an inventory valuation and to get
financial data to use in setting the next year’s warehouse budget. Auditors may reach out to suppliers and
customers, using confirmation letters to validate transactions or surveys to measure levels of customer
satisfaction

Audit Evaluation of dire dawa food complex company

Once the warehouse inventory audit is complete, an audit evaluation identifies process or cost controls
requiring modification, makes suggestions for improvements that can increase productivity and efficiency
and sometimes establishes a case for warehouse capital expenditures. Auditors may determine, for
example, that warehouse productivity can be increased by extending warehouse hours or adding another
shift, combining processes such as staging and storage to eliminate redundancies, improving procedures
to save time and increasing the use of technology to save on both time and labor costs.

The internal control over inventor of food complex company

Internal control structure for inventory includes plan of organization and all the procedures and actions it
takes to:

 Protect its assets against theft and waste.

Protect Assets:_ Companies protect their assets by (1) segregating employee duties, (2) assigning
specific duties to each employee, (3) rotating employee job assignments, and (4) using mechanical
devices.

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Segregation of employee duties Segregation of duties requires that someone other than the employee
responsible for safeguarding an asset must maintain the accounting records for that asset. Also, employees
share responsibility for related transactions so that one employee’s work serves as a check on the work of
other employees.

The company segregates the duties of employees, it minimizes the probability of an employee being able
to steal assets and cover up the theft. For example, an employee could not steal inventory from a company
and have the theft go undetected unless someone else changes the inventory records to cover the shortage.
To change the records, the employee stealing the inventory must also maintain the inventory records or be
in collusion with the employee who maintains the inventory records.

Assignment of specific duties to each employee When the responsibility for a particular work function
is assigned to one employee, that employee is accountable for specific tasks. Should a problem occur, the
company can quickly identify the responsible employee

The company gives each employee specific duties, it can trace lost documents or determine how a
particular transaction was recorded. Also, the employee responsible for a given task can provide
information about that task. Being responsible for specific duties gives people a sense of pride and
importance that usually makes them want to perform to the best of their ability.

Rotation of employee job assignments Some companies rotate job assignments to discourage employees
from engaging in long-term schemes to steal from them. Employees realize that if they steal from the
company, the next employees assigned to their positions may discover the theft.

Frequently, food complex company has the policy that all employees must take an annual vacation. This
policy also discourages theft because many dishonest schemes collapse when the employee does not
attend to the scheme on a daily basis.

Use of mechanical devices Companies use several mechanical devices to help protect their assets. Bar
codes scanners make it difficult for employees to steal inventory and alter company documents and
records.

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Inventory Management Systems of food complex share company

An inventory management system of food complex is a series of procedures, often aided by computer
software that tracks assets progression through inventory. Assume a set of raw material is acquired by the
company. When the company receives that material, the amount should be noted in the inventory
management system. As the material is processed into the goods for resale, the amount of raw material
used should be deducted from the “raw material inventory” and the amount of goods that result from the
process should be added to the “finished goods inventory.” As each finished item is sold, the “finished
goods inventory” should be decreased by that amount.

The benefit of a properly used and maintained inventory management system is that it allows
management to be able to know how much inventory it has at any given time.

Physical Inventory Count of the company

Physical inventory counts are a way of ensuring that a company inventory management system is accurate
and as a check to make sure goods are not being lost or stolen. A detailed physical count of a company’s
entire inventory is generally taken prior to the issuance of a company’s balance sheet, to ensure that the
company accurately reports its inventory levels.

Cycle Counts of the company

Companies usually conduct cycle counts periodically throughout an accounting period as a means to
ensure that the information in its inventory management system is correct. To conduct a cycle count, an
auditor will select a small subset of inventory, in a specific location, and count it on a specified day. The
auditor will then compare the count to the related information in the inventory management system. If the
counts match, no further action is taken. If the numbers differ, the auditor will take additional steps to
determine why the counts do not match.

Cycle counts contrast with traditional physical inventory in that a full physical inventory may stop
operation at a facility while all items are counted at one time. Cycle counts are less disruptive to daily
operations, provide an ongoing measure of inventory accuracy and procedure execution, and can be
tailored to focus on items with higher value, higher movement volume, or that are critical to business
processes. Cycle counting should only be performed in facilities with a high degree of inventory accuracy.

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 Here are some of the inventory audit procedures that followed by the food complex company

 Cutoff analysis. The auditors examine company procedures for halting any further receiving into the
warehouse or shipments from it at the time of the physical inventory count, so that extraneous inventory
items are excluded. They typically test the last few receiving and shipping transactions prior to the
physical count.
 Observe the physical inventory count. The auditors want to be comfortable with the procedures that the
company uses to count the inventory. This means that they will discuss the counting procedure with the
company, observe counts as they are being done, test count some of the inventory themselves and trace
their counts to the amounts recorded by the company's counters, and verify that all inventory count tags
were accounted for. Since the company has multiple inventory storage locations, the auditors test the
inventory in those locations where there are significant amounts of inventory. They also ask for
confirmations of inventory from the custodian of any public warehouse where the company is storing
inventory.
 Reconcile the inventory count to the general ledger. The auditors trace the valuation compiled from the
physical inventory count to the company's general ledger, to verify that the counted balance was carried
forward into the company's accounting records.
 Test high-value items. Since there are items in the inventory that are of unusually high value, the auditors
likely spend extra time counting them in inventory, ensuring that they are valued correctly, and tracing
them into the valuation report that carries forward into the inventory balance in the general ledger.
 Test error-prone items. As the auditors have noticed an error trend in prior years for specific inventory
items, they will be more likely to test these items again.
 Test inventory in transit. There is a risk that the company have inventory in transit from one storage
location to another at the time of the physical count. Auditors test for this by reviewing your transfer
documentation.
 Test item costs. The auditors need to know where purchased costs in accounting records come from, so
they compare the amounts in recent supplier invoices to the costs listed in inventory valuation.
 Test for lower of cost or market. The auditors must follow the lower of cost or market rule, and will do so
by comparing a selection of market prices to their recorded costs.

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 Finished goods cost analysis. a significant proportion of the inventory valuation is comprised of finished
goods, then the auditors review the bill of materials for a selection of finished goods items, and test them
to see if they show an accurate compilation of the components in the finished goods items, as well as
correct costs.
 Direct labor analysis. Direct labor is included in the cost of inventory, then the auditors want to trace the
labor charged during production on time cards or labor routings to the cost of the inventory. They also
investigate whether the labor costs listed in the valuation are supported by payroll records.
 Overhead analysis. The auditor use overhead costs to the inventory valuation, then the auditors verify that
are consistently using the same general ledger accounts as the source for overhead costs, whether
overhead includes any abnormal costs (which should be charged to expense as incurred), and test the
validity and consistency of the method use to apply overhead costs to inventory.
 Work-in-process testing. For a significant amount of work-in-process (WIP) inventory, the auditors test
how you determine a percentage of completion for WIP items.
 Inventory allowances. The auditors determine whether the amounts have recorded as allowances for
obsolete inventory or scrap are adequate, based on procedures for doing so, historical patterns, "where
used" reports, and reports of inventory usage (as well as by physical observation during the physical
count).
 Inventory ownership. The auditors review purchase records to ensure that the inventory in warehouse is
actually owned by the company (as opposed to customer-owned inventory or inventory on consignment
from suppliers).
 Inventory layers. The company uses a FIFO or LIFO inventory valuation system; the auditors test the
inventory layers that have recorded to verify that they are valid.
 As the company uses cycle counts and physical count, the auditors can still use the procedures related to a
physical count and cycle count. They simply do so during one or more cycle counts, and can do so at any
time; there is no need to only observe a cycle count that occurs at the end of the reporting period. Their
tests also evaluate the frequency of cycle counts, as well as the quality of the investigations conducted by
counters into any variances found.
 The extent of the procedures employed decline if inventory constitutes a relatively small proportion of the
assets listed on a company's balance sheet.

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