Project Work Step

Pre-Audit

1. Review prior audit report and relevant press releases (acquisitions).

2. Obtain completed inventory internal control questionnaire from the plant controller. Document any potential control weaknesses or unusual practices and investigate upon arrival.
3. Obtain and document the following as of the audit date:
• Trial Balance
• Manufacturing Statement (YTD)
• Manufacturing Budget (YTD)
• Date of Last Physical
• Cycle Counting Accuracy History
• Inventory Turnover, Days Sales in Inventory, Margin
• Date and Scope external auditor's most recent visit
• Detail of Excess and Obsolete Inventory
• Detail of Inventory held on Consignment
• Detail of Inventory held at Subcontractor and Outside Vendor
• Type of inventory system
• Size of facility (square footage)
• Primary products
• Top 5 customers and competitors

4. Ensure Financial Statement Trial Balance agrees to the Trial Balance maintained by the facility. Obtain explanations for any differences with the plant controller upon arrival.

5. Obtain and quantify in ACL the following reports as of the audit date:
• Inventory Aging Report
• Perpetual Inventory Listing
• All Open Work Orders

6. Reconcile Perpetual Inventory Listing to the account balances that appear on the G/L. Obtain and document explanations for differences from the Controller upon arrival.

7. Obtain and document explanations from the Controller for all open work orders older than two months.

8. Describe procedures for developing current year material, labor and overhead standards and the date of the last revision. If a standard system is not used, obtain and document an explanation from the Controller and/or Corporate Operations as to why a standard system has not been implemented.

9. Compare and document budgeted variances to actual variances for materials, labor, and overhead. Obtain and document explanations for significant (5%+) variances from the controller and/or Corporate operations.

10. For facilities that do not employ a standard costing system, recalculate labor and overhead allocations and compare to the amount capitalized. Obtain and document explanations for significant (10%+) variances from the controller upon arrival.

11. Discuss conclusions/observations with the senior associate. Obtain and document T&B senior management concerns and ensure there are adequate procedures in the program to address those risks.

Receiving

1. Interview employees associated with the receiving process in order to gain an understanding. Process map this process and include all applicable financial journal entries.

2. Through inquiry and observation, ensure the following controls are in place and operating effectively and are included on the process map. Identify all control gaps.
• Goods are received at a designated receiving bay
• Receipts are checked for quantity and quality
• All goods received are based on a valid Purchase Order (PO) number
• PO is stated on delivery documents and is verified for validity
• The quantity of goods received is verified to the packing slip and bill of lading
• The receiver signs delivery documents
• All receipts are recorded in a log and can be cross referenced to the appropriate delivery documents
• The log is regularly reviewed
• Receipts are accurately, promptly and completely updated in the inventory system
• Raw materials are safeguarded
• Transfer of raw materials are documented
• Items not meeting qualifications are kept separate from other items

3. Process map procedures for vendor returns. Through inquiry and observation, ensure that returns are communicated to the purchasing department and debit memo's are prepared and forwarded to accounts payable in a timely manner. In most instances, this will require sampling returns during the audit period.

4. Through inquiry and observation, ensure that shipment discrepancy reports are pre-numbered and reviewed by the appropriate purchasing and accounting personnel in order to ensure that debit memos have been taken.

Production Process/ Physical Security

1. Interview employees associated with the production process. Map the production process and include all applicable financial journal entries. Ensure the following controls are present and are included in the process map. Identify all control gaps.
• Authorized persons approve material requisitions.
• Material requisitions coincide with the approved production plan.
• Disbursements from stockrooms are allowed only upon receipt of properly authorized requisition documents.
• Management approval is required for stock issuance of amounts above the amount necessary to support scheduled production requirements.
• Approved requisition documents and inventory movement forms are promptly used to update the inventory records.
• Prenumbered requisition forms or sequential logs are used to record issuance of materials from stores and inventory movement between locations.
• Warehouse/store is properly locked to prevent unauthorized access and usage
• Proper segregation of scrap and obsolete inventory

Physical Counts

1. Obtain and review information supporting the most recent wall to wall physical inventory. Ensure quantities on hand were not known to counters prior to the physical. Document compliance with Corporate Policy.

2. Complete the physical inventory checklist. Document control gaps, if any.

3. Document book to physical adjustments for the past three years. Inquire as to whether or not the adjustments were investigated prior to correcting entries being made. Document your understanding of this process. Determine when and if the adjustments were capitalized or expensed and if they were approved.

4. Evaluate propriety of reconciling items between the perpetual inventory listings and the G/L account balances. Examine supporting documentation for each item individually greater than 2.5% of the inventory account balance (or 50% of the items if individually none exceed 2.5%, but in the aggregate exceed 5%.)

5. Obtain, review, and document policies and procedures surrounding cycle counts. Observe 2 cycle counts and document the following:
• What was counted and how it was selected
• Cycle counter is not aware of quantity on hand prior to his count
• Agree test counts to perpetual inventory detail
• Examine adjustment to perpetual inventory detail/general ledger, if applicable
• Document historical accuracy rates

6. Based solely on the work performed, document observations regarding the physical security of inventory.

7. Based on the date and results of the most recent wall to wall physical count and the applicability of cycle counts, consider performing the following:
• Agree 10 inventory items per the perpetual to the quantity on hand
• Agree 10 inventory items on hand to the perpetual


Inventory Valuation

For facilities using standard costing system, perform the following:

1. Document procedures for developing current year standards (raw material, labor, and overhead) and the date of the most recent development. Document compliance with Corporate Policy.

2. On a sample basis (minimum of 30), test the accuracy of the standards by performing the following:
• Examine recent invoices supporting raw material component
• Examine payroll related information supporting labor component, if applicable
• Examine overhead estimate. Recalculate based on available information

3. On a sample basis, examine the method and accuracy of recording standard to actual variances. As of our audit date, obtain explanations for standard to actual variances greater than the budgeted amount. Examine entries to record variances and document whether the variances were capitalized or expensed.

For facilities not using a standard costing system, perform the following:

4. Document procedures for developing current year labor and overhead amounts.

5. Examine (minimum of 30) recent invoices supporting raw materials, and the raw material component of WIP and FG. Document results by quantifying unit cost variances and extrapolating to population.

6. Recalculate labor and overhead calculations and compare to amounts capitalized. Document limitations in ability to recalculate.

Inventory Reserves

1. Based on ACL reports, document inventory greater than 180, 270, and 360 days.

2. Document method for estimating reserve for excess and obsolete inventory. Document compliance with Corporate Policy.

3. Obtain calculation of E&O estimate for most recent quarter-end and agree to G/L. Agree significant components to supporting documentation.

4. Document inconsistencies, if any, between the calculation and aging analysis.

5. Ensure authorized persons adequately approve provisions or write-offs. Review for evidence of approval of inventory write-offs before they are recorded.

Consignment Inventory

1. Document policies and procedures for consigned inventory. At a minimum address the following items:
• Existence of perpetual detail
• Method of reporting, recording, and verifying changes (e.g. quarterly reports of inventory balances are obtained from consignees for reconciliation to the facilities’ perpetual records and that non-reconciling items are investigated and followed-up promptly)
• Method of accounting for scrap
• Results of recent physical counts
2. Document compliance with Corporate Policy on consigned inventories.

Scrap

1. Document method for accounting for inventory scrap. At a minimum address the following:
• Method used to quantify
• Method used to cost
• Method used to dispose

2. Through inquiry and observation, ensure that scrap proceeds are collected from the scrap vendor promptly after the collection of scrap materials.

3. Through inquiry and observation, ensure that approval is granted before materials are sent to scrap.

4. Through inquiry and observation, ensure that accounting and the warehouse verify the weight of the scrap materials.

5. Through inquiry and observation, verify that scrap vendors are selected through a bidding process.

Shipping and Receiving (Including Returns)

1. For the most recent quarter-end, obtain the last and first 3 shippers and receivers and agree pertinent data to accounts receivable and inventory records ensuring that transactions are recorded in the proper period.

2. Explain the facility's procedures for ensuring proper cut-off.

General

1. Through inquiry and observation confirm that Management Corrective Action Plans have been implemented. If not, obtain explanation(s) and consider the necessity of including in current year audit report.

2. Complete Global Best Practices checklist.

3. Complete inventory diagnostic.


Download Word Document

Introduction

The following analysis will discuss the general risk attributes, organizational considerations, and suggestions for overall improvement of the product promotions process.

Be advised that every organization’s sales, marketing and related promotional activities are as unique as the products themselves and will depend upon the desired marketplace position, industry, and strategic initiatives of the entity. Promotions can range from dramatic new product launches in wholesale merchandise mega-stores to brand recognition promotions at pro sporting events. All these efforts have a common goal of inducing sales of company products.

However, keep in mind that it can be difficult to quantify the direct effectiveness of certain promotions on product sales increases. In addition, some promotional dollars are expended as strategic initiatives. For example, a key competitor’s promotion may prompt large expenditures that are hard to cost-justify or correlate to ongoing product sales.

In general, despite the challenge of precise measurement of return on investment, management must decide how to and how much money to spend on promotional advertising. The internal audit focus is to assist management to evaluate controls related to costs and the claims of sales promotion vendor deliverables.

Audit Team Planning

Planning a review in the sales promotion advertising area will require an understanding of the types of promotional activities, related procedures, and any advertising agency/other vendor relationships. It is important for internal auditors to understand the related agency’s function as an intermediary between the promoting company and the placement media that can include newspapers, television, radio, and magazines.

An agency will have supply relationships with media companies for placement space, air spots, or time for its client’s promotion at a percentage discount rate. Therefore, the advertising agency will purchase media at a discounted rate given by media companies, called a purchase allowance, which is not available to the client organization directly.

In addition to arranging media the agency will create a campaign based upon client company needs that includes specific advertising programs, media mix, and development of related promotion production materials. In essence, an advertising agency manages the program, provides creative input, and works with the sales, marketing, and promotion departments in return for a percent spread or “purchase allowance” and possibly other fees and services. Agency selection is typically a senior executive decision and based upon the creative approach and estimated costs. Internal audit can add value by reviewing the agency contract including the compensation for program services. By understanding the scope of program services and related contracts the internal audit team will create audit objectives for a work program specific to the risks and controls involved in the overall process.

Basic Audit Objective & Control Considerations

A primary audit objective related to the advertising and promotion process is to ensure that plans are executed in a controlled and cost-effective manner according to the agreed upon terms for media delivery and program execution.

The primary control concern is monitoring (authorization, fulfillment, budgeting) of advertising expenditures and related activities. Traditionally, there is a lack of consideration for cost containment and controls, both dollars and resources, since advertising professionals consider themselves a “creative” asset. There are several key control considerations in performing reviews to ensure company assets are protected, invested in an effective way, and contribute to shareholder value.

First, disciplined control reports should be utilized to ensure management understands the progress, ongoing planning and execution of the promotion(s). Management may consider making modifications depending upon conditions or results, commitments to media sources, and related analysis. Second, advertising billings should include adequate support, like any other payable expense. They should include data about of the advertising agency’s compensation that is tied directly to media usage. Be advised that advertising agencies, based upon their percent spread revenue model have natural incentives to drive media expenditures. Thus, the frequency/duration of media placement should be considered a critical cost driver as well as an area to ensure fulfillment or confirmation of agreed upon advertising. Finally, the consistency of actual billings with the original plan, agreed upon rates, and approvals is a key control consideration.

There are several controls approaches to ensure program costs are contained and appropriate. These controls are the joint responsibility of management and the internal audit function. Initially, all contracts should include “right to audit” clauses to provide internal auditors the opportunity to examine detailed records of promotional programs undertaken.

For example, if questions arise concerning advertising billing statements then supporting documentation should be provided before payment. The two main control elements are the adequacy of documentation (reviewed by accounting and the agency) and field review of operations of the agency. If the agency of choice does allow full access to documentation and field operations (which is ideal) then the company’s marketing/advertising department along with internal audit personnel can be sure to review documentation related to all services or operations rendered. This information may include detailed agency worksheets, invoices, media schedules, time sheets, program plans, etc. to help determine if related billings are reasonable.

The same control considerations associated of services from an outside agency should likewise apply to internal advertising departments. The key control considerations are supporting documentation related to costs and activities, comparison of actual expenses to budget, and auditing promotional fulfillment. Advertising fulfillment refers to confirming actual advertising delivery consistent with billings – for example, reviewing copies of advertisements in periodicals/magazines, viewing billboards, or visiting events to ensure that you got the promotion that you paid for.

At a minimum, the organization should have a process for confirming the placement of advertising even if on a sample basis. Often, radio spots, for example, can be bumped due a common industry practice of overselling available inventory.

Information Technology
IT considerations should be part of every internal audit area. The advertising and promotion process may include specialized applications and systems for graphical design and advertising tracking that may exist in a stand-alone processing environment.

This typical function may not be part of the overall corporate network and may not, therefore, benefit from the pervasive company–level controls. There may also be vendor agency or project contractor access to systems that may increase risk profile in this area.
• User access security – authorization and authentication network, database, application access controls
• Data file protection and data base management (sensitive new product data)
• Business continuity & disaster recovery (back up, application/data recovery)
• Change control
Business Risk & Process
Considering internal audit teams may perform off-site review of advertising agency operations, take extra care to communicate with management in the planning phase and to understanding the nature of the relationship. Be advised that these “right to audit” agreements should be part of the overall agency contract and an important management consideration when finalizing such agreements. Internal audit should remind management of this important control consideration during contract review to help build accountability into the process.

The budgeting process is the most important process and also presents the biggest risk. Reviewing the budgeting process and determining if procedures are followed are very important. The budget is a key control in monitoring advertising costs. For example, tracing media placement confirmation information back to the budget will help determine if the budget process is reasonable, controlled, and used to monitor costs. However, some budgets may be developed as a lump-sum percent of sales from previous periods based upon industry norms.

Many marketing and advertising functions will generate financial analysis to both cost justify expenditures and support ongoing decisions for additional campaigns. This analysis and the related assumptions should be reviewed considering the results will naturally tend to justify the overall function, budget, and headcount. In addition, there may be conflict of interest issues with external agencies considering it is not uncommon for agency personnel to be hired by the organization to manage or implement programs. Advertising is a relationship driven business and selection of service providers an often subjective decision based upon creative factors and difficulty in measuring effectiveness of promotional efforts.

Project Timing:
Planning
Fieldwork
Report Issuance (Local)
Report Issuance (Worldwide)

Project Work Steps

Planning

Audit Objective: Develop an understanding of the promotion and Ad process, related budget measurements, and interfaces.

1. Obtain management reports for ad & promotion by:
• Major product line
• Product Managers/Segment and Sales (as applicable)
• Web programs (where applicable)

2. Review product ad & promo policies and procedures.
• Product Lines
• Product Channels
• Product Managers

3. Meet with advertising management team to discuss overall strategy, directives, and scope of programs.
• Review how function fits into overall entity
• Discuss the recent accomplishments and future plans for products or organizational changes
• Review and discuss mission statements, roles and responsibilities, budgets and staffing
• Refine detailed audit objectives based upon session.
• Review samples of advertising, discuss overall process, components of program development, etc.
Note: Consider following up on discrepancies from prior discussions with management and understanding to date based upon planning activities or other data like the financial statement MD&A or footnote disclosures.

4. Review and develop an understanding of the budgeting process for each major advertising and promotion program
• Review budget to actual analysis
• Review supporting documentation
• Review related application and reports

5. Create product development process maps. Create or obtain organization chart that incorporates those responsible for product planning and development:
• High-level process maps for advertising, promotions
• Detailed process maps for product development: programs, systems, protocols
Note: Product promotions and advertising may be segregated by major product line, assigned agency, product promotion or delivery channels (web, channel/partner sales, etc.) This may create a scope consideration to ensure critical components of product promotion are incorporated or risks adequately managed.

Fieldwork

Audit Objective: Determine if the advertising and promotions groups are operating in compliance with entity policies and procedures including contract approvals (agency & promotional vendors), travel and expense policies, desktop security, and project budget reporting.
Note: see Appendix A – Control Considerations as a guide to customizing review to applicable process(es)

6. Review main ad agency contracts; to include:
• “Agree to audit” clause; language concerning reporting of accountability
• Measurable results linked to product performance
• Management use a process for competitive bidding, selection criterion, and overall measure of effectiveness

7. Review policies and procedures for media purchasing including related materials, services, and promotion/event management. Review:
• Purchase approvals
• Assignment of expense to appropriate program
• Coverage in budget

8. Select a month or quarter accounting period (sample):
• Trace all advertising copy development, media placement expenditures to related sub-ledgers and general ledger to evaluate appropriateness of process, accounting, and accuracy.

9. Review contracts in place (including sub-contractor with primary contractor/agency) to determine:
• Mark ups are reasonable
• Sub-contractor relationships are managed appropriately
• Delivery of advertising is confirmed

10. Discuss and review procedures for verifying or auditing print and sound (radio) media.
• Examine records of tests, documentation
• Procedures accomplish objectives
• Follow up on discrepancies as appropriate

11. Evaluate the presentation of billing from agency and contractor; match to confirmation of work performed, and agreement with related contract including:
• Subject matter
• Price
• Terms, timing
• Monitoring by management
• Process of monitoring deposits and credits for non-performance (common in radio advertising)

12. Select five vendor contracts (agency, promotions, contractors) for compliance with applicable policy and procedures including:
• Contract review and approval (authority limits)
• Adequate Service Level Agreements (SLA) for deliverables, service, etc.
• Billing and payment terms with contract

13. Select 20 expense invoices (agency/contractor) and/or employee expense reports to determine compliance with related procedures.
• Approvals, expense type, expense limits
• Services/products received for amounts paid
• Consistent with related contracts for price, quantity/duration, and deliverables

14. Review project budgets and reporting results to actual
• Determine if variance are reasonable
• Budgets approved
• All related costs/cost centers incorporated

15. Determine if desktop security policies and procedures are being adhered to including:
• Use of passwords: no sharing, posting, etc.
• Access/data security to LAN/desktop related files as sensitive product plans, designs/copy, etc.
• Back up & Disaster recover procedures
• Change control documentation for proprietary or customized applications

16. Review HR policies for advertising, media production, and related processes to ensure personnel are assigned to specific promotional projects/campaigns, related allocation of time/resource costs/per project, and other confidentiality controls.

Audit Objective: To ensure that new and existing promotions are authorized, lawful, and accurate including related expenditures.

17. Determine effectiveness of preventing expenditure on unauthorized advertising and promotion
• Review authorization procedures and instances where decisions are made that circumvent procedures

18. Do measures exist to ensure sales, marketing and promotional staff are trained about products, promotions, and lawfulness of advertising efforts?

19. Review controls over development of promotional materials to ensure up-to-date, accurate, and lawful
• Legal sign-off
• Use of trademark/copyright

20. Determine appropriateness of controls surrounding analysis, cost justification, and approval of sponsorship arrangements.
• Agreement compliance; defined obligations
• Analysis of “value” of benefit derived

Audit Objective: To ensure that the activities of all the related processing areas (i.e. agency, promotion, advertising, marketing, and sales teams) are coordinated in order to achieve the defined objectives;

21. Review the number of product promotion projects in the past year (& three year periods) considered successful versus those considered failures.
• Review and discuss the product promotion decision process including project initiation measures for determining success.
• Comment as appropriate. Consider in light of organizational goals, related budgets, and decision criteria.

22. What promotional and advertising reporting controls help ensure that campaign issues, cost overruns, and agency/contractor issues would be promptly detected and reported in a timely manner?

23. Determine what type of status reports are utilized to keep managers informed of campaign results
• Does the information provide management with relevant information; agency performance
• Budget to actual – overrun justification, approvals (as applicable)
• Accounting treatment and line item costs to date according to plan; exception reporting

24. Review the roles and responsibilities of promotion and advertising team(s) including those committed from peripheral departments or functions
• Are roles and resource allocations clearly defined by department or program FTE
• What is the measurement process such as SLA or agency agreements, inter-departmental roles
• Review related documentation and interview a sample of participants to determine if there are an adequate number of check points or milestones to report/evaluate progress
• Inquire about level of cooperation, work product coordination, and accountability measures

Audit Objective: To ensure that all information about the firm's product promotion and advertising remains confidential

25. Determine if policies and procedures are adequate to ensure that product promotion and advertising plans and related business development strategies remain confidential
• Is information about new products and promotions shared on a need to know basis?
• Determine if security considerations include:
a. Physical security in work area
b. Logical access security for workstations and related applications, databases, etc.
c. Document shredding and retention procedures and related policies
d. Data transmission encryption (where appropriate especially with agency and publisher partners)
e. Adequate confidentiality measures for print outputs and meeting rooms, etc.

26. Are employees trained on ethics and code of conduct mandates?
• Vendor/contractor provisions for confidentiality and control of access to need-only information

27. Are key staff involved in product advertising and promotion subject to fidelity bonding or commercial confidentiality clauses in their employment contracts?

28. Document narrative of process for ensuring adequate protection of intellectual property.
• Legal analysis involved early in the process
• Appropriate patent protections in place
• Patent analysis to avoid/protect against patent infringement

Audit Objective: Documenting Management Controls

29. Document management controls around the product develop process.
• Clearly defined Policies and Procedures
• Audit trails of approvals, especially specialist contractors (deliverables & documentation), relationship with channel partners, and outside vendors (software tools SLA), etc.
• Is there sufficient level of management oversight into the expenditure and contract process?
• Analysis of budget to actual expenditures
• Over reliance on marketing department analysis of expenditure cost justification?
• Consideration of conflict of interest between marketing/product promotion and agency firms
• Consider if the Company has a process in place for identifying manual overrides. Authority levels and audit trails should be evident.
• Are there indications of undue pressure in the product promotion area that could create bias in management reporting?
• Do those involved receive training and confirmation of understanding of the Company Code of Conduct, Code of Ethics?


APPENDIX A - Key Control Considerations Advertising & Promotion Processes

Operational Control Considerations

Internal audit must have a solid understanding of the overall process to effectively evaluate the advertising and promotions. The following are general control points for consideration:

Program Objectives
Advertising management & executive management
• Target audience attempting to impact
• Demographics of targets & customer location
• Most effective strategy to execute
Budget Development & Approval process
Planning & Control
Management review & approval
Expenditure limits
Budget vs. Actual Analysis & Reporting
Supplier Procurement Process
Agency Selection
Vendor management
Purchasing/marketing department responsibilities
Confirmation of media & services received
Monitoring procedures & reporting
Settlement & Results
Billings versus Agreements Program Plan
Feedback & evaluation of results
Reconciliation & Follow up of exceptions, billing questions, etc.