Project Work Step


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.


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.


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.


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.

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