Lake County School District s Physical Inventory Audit Executive Summary & Detailed Audit Report Fiscal Year

Transcription

1 Lake County School District s Physical Inventory Audit Executive Summary & Detailed Audit Report Fiscal Year Completed By: Thomas A. Mock, CIA Date: August 31,

2 TABLE OF CONTENTS Cover Page 1 Table of Contents.. 2 Executive Summary A. Summary of Findings B. Objective and Scope.3 C. Overview. 3 Detailed Audit Report A. Objective and Scope.4 B. Overview. 4 C. Procedures and Findings D. Recommendations E. Conclusion Attachment A Findings & Recommendations with Management Comment 8 2

3 Executive Summary A. Summary of Findings The overall results for the physical inventory counts observed by Internal Audit were acceptable. Recommendations to improve processes and procedures are outlined in the detail section of this report recommendations section (pages 6 & 7). B. Objective and Scope The objective of the year-end physical inventory audit was to assess the procedures used, test the accuracy of the counts and review the inventory valuation for the close of fiscal year The scope of this audit included the physical inventories at Food Services, Transportation, Maintenance and Procurement that make up the balance sheet Inventories amount in the CAFR for fiscal year ending June 30, C. Overview Lake County Schools performed physical inventories in the following Divisions for the close of the fiscal year ending June 30 th, 2014: Food Services, Transportation, Maintenance and Procurement. Prior to the start of each Division s physical inventory, Internal Audit met with the Division heads and key personnel to shared best practices for a successful physical inventory. Internal Audit also coordinated the Inventory observations performed by the External Auditor (Purvis & Gray), the State Auditor and Internal Audit to ensure no duplication of effort would occur. The information in this report covers only the work completed by Internal Audit. If there are any findings by the External Auditor and/or State Auditor from the scope of their work, they will issue under separate cover once their work is finalized. The District currently uses three different management information systems to track and account for physical inventory in the four Divisions: The existing management information systems used are: Food Services utilizes Excel Spreadsheets, Transportation utilizes STIMS (School Transportation Information Management System), and Maintenance & Procurement recently (October 2013) started using the Skyward Management Information System. Currently, only Skyward provides complete perpetual inventory records that can account for incoming and outgoing history for each SKU in inventory. The other two systems do not provide complete product activity detailed for each SKU s movement (receipt, usage and/or transfers). 3

4 Internal Audit s Detailed Report A. Objective and Scope The objective of the year-end physical inventory audit was to assess if proper inventory procedures were employed, to test the accuracy of the Division counts and perform an evaluation of the inventory value. The scope for Internal Audit included physical inventories at Food Services and Maintenance (North & Grounds locations) as of June 30th, Note: Physical Inventory Audit s for Transportation was completed by the State Auditor and the External Auditor performed audits for the Main (Procurement) Warehouse and the Maintenance South location. B. Overview Internal Audit met with the heads of each Division four to six weeks prior to the start of their physical inventory counts to understand their inventory procedures. During this time, Internal Audit shared best practices to help in the preparation for the physical inventory and ensure proper paperwork cutoff. Inventory consist of items not consumed during the fiscal year 2013/2014. The purpose of taking a physical inventory is to obtain an accurate count of these items on-hand, so that the total dollars can be moved from current year Expenses to year-end Inventories. Internal Audit completed visits to each location during or prior to the completion of their physical inventory counts to review the inventory procedures employed and complete a review of final paperwork cutoff. C. Procedure & Findings Inventory Procedures Observations Internal Audit visited each Division prior to the conclusion of their physical inventory. The purpose of this visit was to gauge their compliance with proper inventory procedures and document any paperwork closing issues by the Division. Internal Audit noted excellent inventory counting procedures were found in the Main Warehouse and Maintenance. Food Services inventory counting procedures were good overall but need some improvements. Transportation inventory preparation and counting procedures need to be improved. All Divisions showed excellent paperwork cutoff procedures for the close of the fiscal year. Inventory Test Counts and Test Cost Assessment Internal Audit performed test counts after the physical inventory were finished at Food Services and Maintenance (North & Grounds locations). Internal Audit selections were made by judgmentally picking a sample of items and physically counting the products. The Division s inventory count report were used for the selection of items for count verification: 1. Food Services Excel Spreadsheets 2. Maintenance North & Grounds Skyward Inventory reports The audit sample of items tested were used to assess the level of accuracy in the counting completed by the Division s personnel. Each item test counted by Internal Audit was also used to assess the accuracy of the valuation of the inventory. To complete this, each item audited had the 4

5 vendor invoice(s) requested for the quantity counted. The outcome of the Divisions physical inventory reviewed by Internal Audit are as follows: Food Services Inventory Internal Audit randomly selected four out of forty-four schools for audit in Food Services. Internal Audit visited the schools selected and audited the Food Services physical inventory counts. The results of Internal Audit s test counts for Food Services at these four schools tested were as follows: Food Services # of Items Total $ Inventory $ % Excpt Net Net Gross Gross School's Test Counts Test Counted Test Counted Total Tested Noted Variance Var % Variance Var % Tavares Middle School 26 $ 1, $ 2, % 3 $ (20.99) -1.2% $ % Umatilla High School 27 $ 3, $ 10, % 2 $ % $ % Lake Minneola High School 20 $ 5, $ 12, % 3 $ % $ % Mascotte Elementary School 20 $ 3, $ 8, % 1 $ (13.49) -0.4% $ % Total 93 $ 14, $ 33, % 9 $ % $ % The nine (9) exceptions noted in the schools audited yielded an inventory understatement net variance of $ or.07% based on the sample completed. When this error rate is extrapolated for the total inventory for Food Services it results in an inventory understatement of $2, based on the June 30 th, 2014 inventory value of $307, For each of the items Internal Audit test counted at the physical inventory, a verification of the costing was performed. Internal Audit requested vendor invoices for each of the items counted to support the quantity on-hand at the physical inventory. The results of the audit for the costing of inventory is as follows: Food Services # Items Total Value of Total Value of % of $'s Test Cost % Total School Test Cost Completed Tested Items Tested Food Inventory Test Counted Net Variance Inv Var Tavares Middle School 26 $ 1, $ 2, % $ % Umatilla High School 27 $ 3, $ 10, % $ % Lake Minneola High School 20 $ 5, $ 12, % $ 1, % Mascotte Elementary School 20 $ 3, $ 8, % $ % Total 93 $ 14, $ 33, % $ 1, % The ninety-three (93) items test costed found an overstatement in the inventory value of 4.67% or $1, When this variance rate is extrapolated for the total inventory for Food Services it results in an inventory overstatement of $14, based on the June 30 th, 2014 inventory value of $307, The main reason for this costing variance was attributed to allowances provided for some food items that Food Services didn t reduce in their pricing. Based on the results of the audited physical inventory for Food Services, there is reason to conclude a medium level of risk exists related to the accuracy of the physical inventory reports. The deficiencies found in the physical inventory reports presents a minimal expose to the District based on the total dollar value of Food Services inventories. However, Food Services should still evaluate their procedures for counting and updating the cost of SKUs to ensure proper counting and valuation based on purchase price. Additionally, Food Services would benefit from a perpetual inventory system and should develop a plan for moving to Skyward. Proper evaluation should take in consideration the best procedures for maintain the accuracy of the perpetual inventory records on a daily bases. 5

6 Maintenance Inventory Internal Audit performed inventory observations at two of the three locations for the Maintenance Division. Internal Audit visited the Grounds and North locations and audited the physical inventory counts. The results of Internal Audit s test counts for Maintenance completed at the North and Grounds locations were as follows: Maintenance # of Items Total $ Inventory $ % Excpt Net Net Gross Gross Test Counts Test Counted Test Counted Total Tested Noted Variance Var % Variance Var % Maintenance North 25 $ 66, $ 327, % 2 $ % $ % Maintenance Grounds 10 $ 16, $ 30, % 0 $ - 0.0% $ % Total 35 $ 82, $ 358, % 2 $ % $ % The two (2) exceptions noted at Maintenance North yielded an inventory understatement net variance of $ or.08% based on the sample completed. When this error rate of.08% is extrapolated for Maintenance North & Grounds it results in an inventory understatement of $2, based on the June 30 th, 2014 inventory value of $358, (note: Maintenance South was not included in Internal Audits observation, as it was performed by the External Auditor). For each of the items Internal Audit test counted at the physical inventory, a verification of the costing was performed. Internal Audit requested vendor invoices for each of the items counted to support the quantity on-hand at the physical inventory. The results of the audit for the costing of inventory is as follows: Maintenance North & Grounds # Items Total Value of Total Value of % of $'s Test Cost % Total Inventory Test Cost Completed Tested Items Tested Inventory Test Counted Net Variance Inv Var Maintenance North Location 25 $ 65, $ 338, % $ (529.11) -0.81% Maintenance Ground Location 10 $ 16, $ 29, % $ % Total 35 $ 81, $ 367, % $ (145.82) -0.18% The thirty-five (35) items test costed found an understatement in the inventory value of.18% or $ When this variance rate is extrapolated for the total inventory for Maintenance North & Grounds it results in an inventory understatement of $ based on the June 30 th, 2014 inventory value of $367, for these two locations in Maintenance. Based on the results of the audited physical inventory for Maintenance North & Grounds, there is reason to conclude a very low level of risk exists related to the accuracy of the physical inventory reports. The deficiencies found in the physical inventory reports were negligible and do not expose the District to risk related to accuracy of record keeping by Maintenance. D. Recommendations 1. Food Services inventory preparation procedures should be improved to ensure better counts. Procedures such as making sure like products are stored together will lead to better counts. This is important in all storage areas, however higher emphasis should be placed in areas such as the freezer where conditions require swifter counting by staff. Additionally, procedures such as using highly visible colored dots will provide a visual assurance all items have been counted. This will assist management/supervisors a quick way to validate each item was counted. 2. Food Services should review their costing procedures for recording the cost paid for each items. When allowances are provided from the vendor that reduces the amount paid, it should be reflected in the costs of the item. 6

7 3. Food Services should develop a plan to move to a perpetual inventory method. Implementation of a perpetual inventory method would provide management useful information on usages and shrinkages throughout the fiscal year. 4. Transportation should implement well-defined preparation procedures for inventory prior to the Physical Inventory count that includes cleaning and organizing all areas where items are stored. Additionally, inventory counting should be completed in no more than three days. This will assist in a smother and accurate final inventory count. Conclusion: Overall physical inventories in the District were completed in an acceptable manner, with good preparation procedures and accurate counting methods employed. Internal Audit s observations and recommendations are offered to strengthen the overall results. Sincerely, Thomas A. Mock Director of Internal Audit 7

8 Attachment A Internal Audit's Findings Internal Audit's Recommendations Management Comments Date Implemented Dec-14 1 Nine (9) exceptions or approximately 10% of items test counted noted exceptions in the audit count verses Food Services count. Food Services should improve its inventory preparation procedures to improve counts. Procedures such as making sure like products are stored together will lead to better counts. Also the use of highly visible colored dots will provide a visual assurance all items have been counted. Procedures will be implemented to make sure like products are stored together and highly visible colored dots will be tested at pilot schools to determine if it helps inventory accountability. 2 In the review of pricing for some of the items test counted in Food Services, the vendor provides "allowances" that reduce the amount paid for certain types of food purchased. These "allowances" were not used to reduce the cost of the food items for year end. 3 Currently Food Services completes monthly reconciliations each month to assist in tracking inventory. Perpetual Inventory system tracking receipts, usage, transfers, etc. are not tracked for each SKU (Stock Keeping Unit). Food Services should review costing of food items that receive "allowances" provided by the vendor to assure they are reflected in the costs for these items. Food Services should develop a plan to move to a perpetual inventory method. Implementation of a perpetual inventory method would provide management useful information on usage and shrinkage throughout the year. Costing of food items that receive allowances will be reflected in the final cost of products. Perpetual inventory software from vendors will be researched and purchased this school year and implemented in some pilot schools next school year. Nov-14 Sep-15 4 Internal Audit visited all physical inventory locations during the physical counting. It was noted at this time Transportation's preparation procedures need to be enhanced to provide for proper counting practices. Transportation should implement well-defined preparation procedures for inventory prior to the Physical Inventory count that includes cleaning and organizing all areas where items are stored. Additionally, inventory counting should be completed in no more than three days. This will assist in a smoother and accurate final inventory count. Inventory preparation procedures will be implemented prior to the physical count. Inventory counts will start and be completed within the recommended timeframe of three days. May-15 8