HomeMy WebLinkAboutPhysical Inventory observation
ROAD DEPARTMENT-
Observation of Physical Inventory
as of June 30, 2003
Presented to the
Deschutes County Audit Committee
by the
Internal Audit Program
David Givans, CPA – County Internal Auditor
Report# 03/04-2 Dated August 22, 2003
Deschutes Count y,
Oregon
Report# 03/04-2 (Dated August 22, 2003)
ROAD DEPARTMENT-
Observation of Physical Inventory as of June 30, 2003
TABLE OF CONTENTS:
INTRODUCTION ………………………...……………………………………………….. 1
OBJECTIVES, SCOPE, AND METHODS ………………………………………………... 1
OBSERVATION RESULTS ……..…………………………………………………........... 2
PROPOSED ADJUSTMENTS ………...……………………………………………........... 3
RECOMMENDATIONS ………....…………………………………………………........ 3-5
RESPONSE FROM MANAGEMENT ……..…………………………………………......6-8
Page 1
Report #03/04-2 (dated August 22, 2003)
INTRODUCTION
Audit Authorit y:
The observation o f the Road Department’s physical inventory was conducted pursuant to the
direct ion of the Audit Committee. The Deschutes County Audit Committee authorized the
audit by its approval o f the County’s internal audit workplan for fiscal year 2003/2004.
Introduction:
This observat ion was init iated in response to the County’s external auditors request that the
physical inventory be observed.
Since this observat ion was done only to support physical counts of items used in developing the
financial physical inventory, it is substant ially limited in scope and was performed only to the
overall specificat ions provided by Moss Adams. Therefore, the audit did not include all
elements required to comply wit h governmental audit standards.
The County auditor has significant experience in inventory observations and utilized judgment
in assessing the extent of addit ional procedures performed to complete the observat ion.
OBJECTIVES, SCOPE and METHODS
Object ives:
The specific agreed-upon procedures were:
1. To observe the June 30 physical inventory
2. Make fro m 25 – 50 test counts that could be traced through to the final co mpiled
inventory. These test counts were primarily in higher dollar areas and selected
judgementally fro m the floor and/or from the inventory sheets.
Scope:
Procedures were only for physical inventory counts surrounding the June 30 inventory. The
costing for inventory items was not reviewed.
Methods:
The observation was performed through re-testing or concurrent observat ion of physical counts.
Test counts or observat ions taken were then reviewed against the compiled inventory records.
Procedures included discussio ns with personnel responsible for various areas of the inventory
and its preparation.
Since the procedures performed were significant ly limited in scope and performed based on the
desires of the external auditors, this report was not conducted in accordance with Government
Auditing Standards issued by the Co mptroller General of the United States.
Page 2
Report #03/04-2 (dated August 22, 2003)
OBSERVATION RESULTS
Personnel at the Road Department were very conscient ious throughout the inventory process.
Observations indicated that staff were knowledgeable about the locations of items, description,
and process.
The fo llowing table summarizes the extent of observat ions recorded:
Deschutes County - Road Dept.
June 30, 2003 Physical Inventory
Coverage by observations
DESCRIPTION
Inventory
(as stated) %
Test
Counts
Relative
%
$
Observed
Relative
% Note
%
Inventory $
Coverage
Asphalt 185.22$ 0%$
Bridge 3,002.22 0%2 5%1,283.00 0%43%
Culvert 3,634.33 1%2 5%2,647.50 1%73%
Paint 16,884.65 2%1 2%13,946.40 4%83%
Signs 165,847.53 23%5 12%3,582.04 1%2%
Stockpiles 315,209.62 44%14 33%272,253.94 83%(a)86%
Weed 11,974.71 2%0%0%0%
Shop 192,427.22 27%19 44%33,614.32 10%17%
TOTAL 709,165.50$ 100%43 100%327,327.20$ 100%46%
(a) - Observations included 7 items that were tied to the aggregate contract recently delivered
and was not specifically measured during the observation. Accounting staff reconciled aggregate
delivery tickets to arrive at these figures.
Observation coverage
All observed counts could be tied out to the inventory with the exception o f three items. These
items were as fo llows:
· Quart oil used as supply for small engines (should not be inventoried)
· CB radios already charged to specific vehicles and not yet installed (should not be
inventoried)
· Fuel tanks – cutoff on 6/24/03 and should have been cutoff on 6/30/03
In addit ion, stockpile measurements were very rough due to the irregular size o f most piles.
The value on the inventory sheet was retained if the amount was reasonably close.
Less sign observat ions were made due to the orderliness and organizat ion of the inventory
items.
Page 3
Report #03/04-2 (dated August 22, 2003)
Theses observat ions are discussed in the fo llowing proposed adjust ments and
recommendat ions.
PROPOSED ADJUSTMENTS
The fo llowing proposed adjust ments are based on observat ions of the physical inventory.
Sign Adjustment - Proposed
During the observat ion, it was noted that the sign inventory included a significant
amount of signs and equipment utilized by the construction trucks. These signs are
ident ified with an item code starting wit h “C”. Construction signs are used as needed
and are not normally costed out to projects. Management utilizes the inventory detail to
know what to order and to oversee the inventory of signs.
These signs are utilized like supplies or an asset and not like inventory. These signs are
never more than $300 individually and are generally much less than that. Therefore,
they would not meet the County’s capitalizat ion thresho ld individually for fixed assets
and should be accounted for as supplies. Therefore, it is proposed these construction
signs be removed from the inventory in the amount of $56,876.94.
Shop Adjust ment - Proposed
During the observat ion, the level o f fuel (unleaded and diesel) was taken. The observed
amounts were significantly lower than the compiled inventory amount. On review of
the activit y, it was apparent that transactions fro m 6/25/03 through 6/30/03 had not been
incorporated into the inventory records as well as the gallo ns held in the fuel truck.
There had been no fuel deliveries during this t ime.
The fuel act ivit y through June 30, 2003 was analyzed. This provided an expected
number of gallo ns on hand. Total gallo ns mult iplied by the underlying cost per gallo n
yielded an expected inventory value. A proposed reduction in fuel inventory of
$2,743.52 will more fairly state fuel inventory level.
RECOMMENDATIONS
During the physical inventory, so me areas were ident ified to improve the physical counting
process as well as improve the representation of the inventory for financial statement purposes.
These findings and observat ions are intended to also assist management in performing future
physical inventories and during day-to-day operations when dealing with inventory.
Inventory instructions not prepared
Inventory counters did not have formal written instructions on how to complete their respective
inventory counts.
Written procedures are particularly effect ive for controls over accounting and financial matters.
A well-designed inventory process enhances accountabilit y and consistency.
Page 4
Report #03/04-2 (dated August 22, 2003)
Written inventory instructions set the stage for a proper inventory count. Inventory takers
should understand the inventory process, the cutoff required, and how to record their counts.
Office staff should develop written inventory procedures. The procedures should emphasize
organization, proper cutoff, and counting procedures.
Office staff should also test compliance with procedures by testing counts and observing
inventory procedures prior to completion of the inventory. All inventory count sheets and
tags used should be collected only when office staff are assured the area has been properly
counted.
Additional preparation needed for physical inventory
Inventory preparation overall was very good. However, there are many items that
· Are not labeled (primarily stockpiles and larger items),
· Not easily measured (aggregate piles),
· Should not be included in inventory, and
· Not grouped together.
Inventory to be counted should generally be well organized.
· All items should be clearly marked by item# and description (especially needed for
aggregate stockpiles).
· Items that are difficult to count or measure should be prepared for easier counting
(especially needed for aggregate stockpiles).
· All items that are not to be inventoried should be clearly marked and/or segregated.
· All like items should be grouped together when possible.
· Like items in several areas should be identified by location.
Management might want to utilize tags to assist in the inventory process. This might be
especially helpful in areas like the shop. Inventory tags (an index card sized piece of paper)
allow for the recording of counts by item and location. The tags are prenumbered. Staff
can visually see if items are missed by those inventory items without tags. On completion of
the physical inventory, the tags can be pulled, the number of tags issued and received
controlled, and the inventory compiled. Count sheets can also be used and cover larger
physical areas but are not as useful in making sure all inventory is properly counted.
Inventory tags can allow for taking the physical inventory over a couple of weeks prior to the
fiscal year-end. This is because the tags can be in place and updated as inventory is pulled.
The tags can be checked or audited as of year-end.
Weeks prior to the physical inventory, office staff should do a pre-review of the inventory by
item and research those items with negative amounts. Many of those items probably have
been incorrectly charged. Having these items corrected will provide better accounting for the
underlying charges. Variances from the physical inventory are one of many variances in the
costing system and are not charged out. It would be better if these costs could be ultimately
allocated out for better accountability in the system.
Page 5
Report #03/04-2 (dated August 22, 2003)
Slow moving and potentially obsolete inventory identified
The shop has a significant number of items they warehouse for use by mechanics in the shops.
It was noted during the inventory observat ion that a number of items had dust on them and/or
were flagged by the part clerk as not moving. These items were included in the inventory.
Part supplies should be act ively managed for obso lete and/or non-moving parts.
Parts identified by the part clerk were about $3,600. It is not clear whether these parts are
returnable for full value and/or can be salvaged for some value.
Reports should be developed to identify slow moving or obsolete parts. This might include a
turnover analysis. Parts that cannot be used should be returned for value where possible.
Infrequently used parts should be identified for just in time ordering and minimal stock
retained. Management should consider just-in-time inventory practices when possible to
limit inventory carried and managed.
Inventoried parts that have been salvaged or have no market value should be marked as do
not inventory. Management might consider having them in the system so they can be located
but with no stated cost/value.
Inventory takers utilized count sheets, which included expected counts
Inventory counters were provided with count sheets without the expected counts. Some
inventory takers had sufficient access to print out count sheets with the expected counts and did
so. This occurred only in a couple o f instances.
In a properly planned inventory, it is prudent to have inventory taken without any preconceived
expectation of the quant ities.
During the observat ion, nothing indicated that counts were performed incorrectly. Staff
appeared to be very diligent in their efforts. In some situat ions, since inventory items were
difficult to ident ify (stockpiles) having expected quant it ies helped in ident ificat ion. This
should be addressed through ident ificat ion markers noted in the previous finding.
Inventory takers should utilize count sheets with expected quantities omitted. Inventory
takers will not need the quantities if pre-inventory procedures include removing unused
inventory item numbers and making sure the inventory is properly identified.
Page 6
Report #03/04-2 (dated August 22, 2003)
RESPONSE FROM MANAGEMENT
DATE: August 19, 2003
TO: David Givans, CPA, County Internal Auditor
FROM: Tom Blust, Road Department Director
RE: Road Department – Observation of Physical Inventory (June 30, 2003)
Management Response
CC: Deschutes County Audit Committee
________________________________________________________________________
This memo is in response to your report regarding the Road Department observation of
physical inventory as of June 30, 2003 (Report # 03/04-2). The Department is very
appreciat ive of the time and effort that was put into this report and the professio nal manner
with which the observat ions were conducted. Overall, Depart ment staff has reacted very
posit ively to the inventory observat ion and is very receptive to implement ing the suggested
improvements.
The report ident ifies a number of proposed adjustments to the physical inventory and
recommendat ions to improve the physical count ing process and representation of the inventory
for financial statement purposes. My response addresses each o f the adjust ments and
recommendat ions in the order presented in the report:
Proposed Adjustments:
Sign Adjustment – Proposed
We are in agreement with the proposed removal o f construction and other temporary / mult i-
use type signs fro m the inventory. The total amount ident ified is $56,876.94.
Signs in this category will be costed out as an overhead item. This adjust ment will help
streamline the inventory process for signs.
Shop Adjust ment – Proposed
We are in agreement with the proposed reduction in fuel inventory of $2,743.52.
Page 7
Report #03/04-2 (dated August 22, 2003)
RESPONSE FROM MANAGEMENT - Continued
Recommendations:
Inventory Instructions Not Prepared
Department emplo yees responsible for inventory counts have been with the Department for a
considerable number of years and have developed reasonably effect ive procedures for
complet ing their inventory counts. However, as pointed out in the report, formal written
instructions do not exist. Department staff will work to develop written inventory procedures.
We would ask for assistance fro m the internal audit program in the review of the written
procedures.
Office staff and management will mo nitor compliance wit h procedures by testing counts and
observing inventory procedures prior to complet ion of the inventory.
Addit io nal Preparat ion Needed for Physical Inventory
Aggregate stockpiles were ident ified in the report as an area in need of clearer ident ificat ion
and organizat ion to expedite the inventory process. The Department will work to provide clear
marking to identify stockpiles by item number and descript ion (type / size o f aggregate, such as
¾”-0). We will also work with staff to organize and shape stockpiles in a manner that will
make physical measurement more practical.
We have also ident ified other areas, such as herbicides, where a clear system of labeling will be
helpful both for daily cost accounting and inventory control.
We will look into the use of inventory tags to assist in the inventory process. We agree that this
may be especially helpful in the shop parts inventory. Again, assistance fro m the internal audit
program would be appreciated in developing and reviewing the inventory tag process.
As suggested, a pre-review o f the inventory by item in the weeks prior to the physical inventory
will be conducted.
Slow Moving and Potentially Obso lete Inventory Ident ified
Our exist ing cost accounting / inventory software is capable of providing the reports and turn-
over analysis needed to ident ify slow moving and obsolete parts. Our IT staff is working to
make these reports more useful.
An analysis o f inventory that cannot be used has been co mpleted and parts that could be
returned for value have been returned. A number of unusable or obso lete parts could not be
returned and will be placed in the next auction. Our parts clerk is making an effort to minimize
stock on hand, using just-in-t ime inventory practices.
Page 8
Report #03/04-2 (dated August 22, 2003)
RESPONSE FROM MANAGEMENT - Continued
Inventory Takers Utilized Count Sheets, Which Included Expected Counts
Our standard practice has been to provide the inventory count takers with count sheets without
the expected results. However, as indicated in the report, there have been situat ions where staff
has made use of expected count data during the inventory process in order to help ident ify and
locate inventory items. Hopefully, this will not be necessary in the future as the recommended
pre-inventory procedures are implemented. Inventory takers will ut ilize count sheets without
the expected quant ities during the next inventory cycle.
Report #03/04-2 (dated August 22, 2003)
To: Audit Co mmittee
CC: Mike Daly, Tom DeWolf
From: David Givans, Count y Internal Auditor
Subject: Observation of physical inventory at the Road Department 6/30/2003
(Report #03/04-2)
Date: August 22, 2003
The enclosed audit report provides informat ion concerning the observat ion of the physical
inventory of the Road Department. The observat ion was designed to meet the object ives
developed by Moss Adams LLP who are responsible for providing an opinio n on the
County’s fiscal year ended June 30, 2003 financial statements. The observation was
substant ially limited in scope. It was not performed in accordance with governmental audit
standards.
The results have been discussed with the Road Department and associated personnel. The
Road Department has addressed substant ially all of the findings included in this report and
their responses are at the end of this report.
The cooperation and assistance received fro m the Road Department in conduct ing and
preparing this report was appreciated.
Deschutes Count y,
Oregon
Internal Audit Program
David Givans, CPA
County Internal Auditor
Deschutes County-Administration building
1130 NW Harriman
Bend, OR 97701
Phone: 541-330-4674
Fax: 541-388-4752
davidg@co.deschutes.or.us