General Audit Program

Process: Inventory Management

Process Note

Standard Operating Procedure

(SOP)

Inventory Receipt

Quality Check

Material Stacking

Material Issue

Inventory Level Management

Inventory Classification

Physical Verification

Dewan P N Chopra & Co

Chartered Accountants
General Audit Program
Process: Inventory Management
Sub Process- Standard Operating Procedure (SOP)
Suggested Risk Rating (Gaps Rating)
Documents Required (Includes
S. Control Nature of Control
Risk Audit Procedures reports, supporting documents High Medium Low
No. Activity Preventive/ Detective
etc.)

a.No material levels defined

a.SOP should be made with inventory level
leading to excess purchase
according to usage and category of stock a.Ask for details of inventory levels and SOP 1. SOP's
b.Delay in work due to non
1 b.No levels may lead to a nil stock situation b.Review the inventory levels with the store 2. Inventory Levels Preventive Major Impact Moderate NA
availability of inventory
where production might get affected and ledger. 3. Inventory Records
because of absence of
emergency purchases mave to be made.
levels.

a.SOP's should be circulated among the

1. Enquire that the employees are aware of No process followed and
employees. Not circulated but major
SOP's not circulated among the availability of SOP's. current practice is leading to
2 b.Non circulation will prevent 1. SOP's Preventive policies are followed with NA
the employees 2. Check whether SOPs available to all losses or significant
standardisation of procedures and weak several exceptions.
concerned persons ineffeiciencies in operations.
controls

a. SOP's should be documented to ensure

uniformity in operations.
b.Review should be made at Few exceptions to the
Several exceptions to the
Deviation from defined monthly/quarterly basis to check deviation Current practice is leading to general practice
Conduct a process walkthrough to verify that 1. SOP's general practice followed
3 procedures/outdated work from the defined procedures and necessary Preventive losses or significant followed resulting in
process defined in the SOP is duly followed. 2. Review records resulting in moderate
procedures actions should be taken. In case of ineffeiciencies in operations. moderate
ineffeiciencies.
exception to the defined process, the ineffeiciencies.
reasons of the same should be
documented

1.Short comings and/or uncovered areas

Current SOP is leading to
SOP should be evaluated that all aspects of should be informed to Management
4 SOP Incomplete 1.SOP's Preventive losses or significant Moderate Impact NA
Inventory Management is covered. 2.If already informed check for
ineffeiciencies in operations.
incorporation / correction

Note:- Check for Pre defined format/ particular Tcode used by client if any.
General Audit Program
Process: Inventory Management
Sub Process- Inventory Receipt
Suggested Risk Rating (Gaps Rating)
Documents Required
S. Control (Includes reports, Nature of Control
Risk Audit Procedures High Medium Low
No. Activity supporting documents Preventive/ Detective
etc.)

a.No material levels defined a.SOP should be made with inventory level
leading to excess purchase according to usage and category of stock
a.Ask for details of inventory levels
b.Delay in work due to non b.No levels may lead to a nil stock situation
1 b.Review the inventory levels with the store 1. Gate Entry Register Preventive Major Impact Moderate NA
availability of inventory where production might get affected and
ledger.
because of absence of emergency purchases mave to be made.
levels.

a.The timings for entry / receipt of materials 1. Check whether any timings are defined for
Un-authorized entry of
should be clearly mentioned and displayed. entry of vehicles. Major non Only few
2 material during Non-Office 1. Gate Entry Register Preventive NA
b.procedure for out of entry hours receipt 2. Examine gate entry stamp and MRN for compliances exceptional cases
Hours
should be laid with requisite approval level. goods received at non-office hours

a.Materials to be accepted at the gate by the

Receipt of material without 1. Gate Entry Register
security personal after matching the invoice 1. Conduct 3-way review of invoices, gate entry Major non Only few
3 appropriate documents 2. Purchase Orders Preventive NA
quantity with the challan and accompaning tax register and purchase orders/GRNs. compliances exceptional cases
(invoices, challans etc.) 3. Stores Records
documents.

1. Check whether gate entry stamp is affixed on

a.Material should be received only after Gate 1. Goods inward note
MRNs
Un-Authorised Material Entry seal is put. and Register
4 2.Check the gate entry date with the PO date Preventive High NA NA
receipt b. Gate should confirm with Store whether 2.GRN Report
3. If material difference is found then discuss
material at gate is on order. 3.PO
with process owners

1.Conduct 2 way check between purchase

a.If less than ordered. Whether part shipment
Weight/ quantity orders and MRN. If alternate
was allowed. If not or excess Material should not 1. Weighment
differences between the 2.Verify on sample basis the PO Quantity & the controls like
5 be accepted. certificate Preventive Major Impact Moderate
material ordered and weighment quantity counting of bags,
b.Minor discrepancies should be intimated to 2.Store records
received. 3.If material difference is found then discuss exists.
the vendor and at the gate entry.
with process owners

a.Periodic reconciliation of gate entry and a.Conduct review of gate records, receipt and
1. Gate Entry Register
Unauthorized movement of receipt entry. movement/issue records
6 2. Receipt Entry Preventive Major Impact Moderate NA
material b.Movement / Issue slip should be properly b.Check time inwards and out going time of
Register
authorised. Trucks / material cariers

a. Does the company have a Blanket Goods-in-

Transit Insurance Policy or are these taken out
7 Insurance Insurance for goods in Transit for specific instances. Insurance Policies Preventive High NA NA
b.The policy covers the goods till which stage of
receipt.

Note:- Check for Pre defined format/ particular Tcode used by client if any.
General Audit Program
Process: Inventory Management
Sub Process- Quality Check
Suggested Risk Rating (Gaps Rating)
Documents Required (Includes
S. Control Nature of Control
Risk Audit Procedures reports, supporting documents High Medium Low
No. Activity Preventive/ Detective
etc.)

a.Materials should be received/accepted

only after matching the quality 1. Review quality verification records.
Receipt of Sub-standard 1. Quality inspection report and Few exceptions
1 requirements and specifications. 2. Identify major vendors where significant Preventive Major Deviation NA
material MRN report. observed.
b.Reporting to appropriate level on receipt rejection exists
of sub-standard material.

Materials are not tested as

a.Quality parameters and testing norms 1. Review quality check records.
per the quality manual or 1. The quality inspection report and
2 should be defined for the various items and 2. Perform comparision between Norms Preventive High NA NA
sampling method is not Parameters defined.
followed strictly to ensure quality. (like FSSAI ,etc) and actual tests.
correctly applied.

a.Review of TAT (Turn around Time) in

Substantial delay in testing a.TAT (Turn around Time) of quality
conduting quality test. 1. The quality inspection report and
3 of the material leads to inspection should be defined and complied Preventive High NA NA
b.Date of receipt of material and date of MRN book.
delay in production with.
receipt of quality certificate be compared.

a.Checklist should be made and circulated Conduct check at stores and at quality 1.Checklist for inspection records
Major Impact
Quality Inspection report among the quality department control department whether all quality tests 2. The quality inspection report / Moderate
4 Preventive (High Returns/ NA
not documented properly b.Inspection records should be properly are being done and the results are being Register Impact
wastage, etc.)
documented. properly documented and communicated

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General Audit Program
Process: Inventory Management
Sub Process- Material Stacking/Storage
Suggested Risk Rating (Gaps Rating)
Documents Required (Includes
S. Control Nature of Control
Risk Audit Procedures reports, supporting High Medium Low
No. Activity Preventive/ Detective
documents etc.)

a.SOP should be made with inventory level according

to usage and category of stock a. Ask for details of inventory levels
Moderate
1 No Process Defined b.No levels may lead to a nil stock situation where b.Review the inventory levels with the store 1. Inspection Records Preventive Major Impact Low Impact
Impact
production might get affected and emergency ledger.
parchases mave to be made.

a.Continuous monitoring of all stores material to keep 1. Conduct physical verification of inventory.
all material in usable condition ABC analysis to be done.
Spoilage of material due to
b. Depending on the category of inventory 2. Review the issue records and reconcile with
improper storage and/or 1. Inventory Valuation process. Moderate /Low
2 (Perishable/High Value/High usage) location should be receipt records Preventive Major Impact NA
non-stacking as per FIFO 2.Issue & receipts records Impact
made in store. 3. Ageing analysis of inventory
Basis.
c.Discarding of unusable and unsaleable inventory as 4.During Physical verification verify whether or
scrap not storage is as per requirements or not.

a. Only authorised personnel to be allowed in Store

a.Check whether any insurance policies have
area.
been taken.
b. The goods should be maintained properly in the 1. Insurance policies and
Loss due to theft, fire, b.Check if unauthorised personnel are found in
3 store and the store department should have the valuation sheets Preventive High NA NA
pilferage etc. Store area
records of the location of the material. 2.Physical verification
c.Ask & review the records of the location of the
c. Stock in hand insurance should be taken to ensure
material. Conduct a physical verification.
minimal loss due to theft or pilferage.

a.Review the issue slips and reconcile the

Inaccuracy in issue of a.Issue slip to have proper area for code, description requisitions from user departments 1. Issue Sheet Material non-
4 Preventive Few instances NA
material and quantity of item required. b. check for material returned from production 2. Material requisition slips. compliances
because of i) quality and ii) incorrect quantity

a. Check if unauthorised personnel are found in

Unauthorized access to Storage area needs to be under control of authorized Store area and why they are there Material non-
5 1. Authority matrix Preventive Few instances NA
storage area person, entry for others should be barred. b. Check whether temporary access register is compliances
maintained.

Inventory should be classified and segregated:

Capital Goods
Check during Physical Verification whether such
Spares ABC classification and
6 Segregation of Inventory classifications is there and segregation has been Preventive High NA NA
Raw Material Segregation list
done.
Consumables
Perishable/Explosives Goods

7 Insurance Insurance for inventory to cover all stocks and risks Check and evaluate Insurance policy Insurance Policy Preventive High NA NA

Note:- Check for Pre defined format/ particular Tcode client used by client if any.
General Audit Program
Process: Inventory Management
Sub Process- Material Issue
Suggested Risk Rating (Gaps Rating)
Documents Required
S. Control Nature of Control
Risk Audit Procedures (Includes reports, supporting High Medium Low
No. Activity Preventive/ Detective
documents etc.)

1. Authorization Matrix
a. Authorization matrix is defined and followed. a.Ask for Authorization Matrix. 2. Issue Request Moderate
1 No Documented procedure Preventive Major Impact Low Impact
B. Without requistion slip no material is issued. b.Review the inventory levels with the store ledger. 3. Stock Register Impact
4.Material requisition slips

a. Review of TAT for issue of material

a.Continuous monitoring of all stores material to keep
b.Check the issue slip and stock register for the time gap 1. Issue Request
all material in usable condition.
between them. Is it within the standard time. If not ask for 2. Stock Register Material non-
2 Delay in Production/task. b.Discarding of unusable or non-saleable or obsolete Preventive Fewer instances NA
explanation 3.Material requisition slips compliances
inventory
c. Analyze reasons for delay in issue for the 4. Material Return slip
c. Issue time variation report
production/Task.

a.The process of issue of material on RGP and NRGP

should be strictly followed. Material sent on RGP 1. Check authorization for issue for RGPs and NRGPs
Lack of controls over RPG
should be properly authorized and be received back in 2. Obtain reasons for long outstanding RGPs and NRGPs 1. RGP & NRGP with relevant
3 and NRGP may result in Preventive High NA NA
the stipulated time frame 3. Check RGPs for items of major value supporting documents.
pilferage of material.
b. Approval Authority should be different for RGP and
NRGP

No follow up Inadequate
Material sent on RGP 1.Ask for the RGP details & prepare a ageing of the same 1.Details of RGP in excel
4 a.RGP register to be maintained.Reconcillition should Preventive/Detective made Review NA
pending to receive for long. 2.Followup to be checked / monitored sheet.
happen monthly/quarterly. /documented procedure.

a. All issues to be against issue slips duly requested

and approved/authorised
b. Ensure that material is issued on FIFO basis. 1.Review stock ledgers of major items.
1. Stock ledger
Unauthorized issue of (Raw) c.Non-moving stock should be identified and cleared 2. Check the issue slip and stock register for any difference
5 2.,Material issue slips on Preventive High NA NA
Material regularly. in quantity between them. If variation is there ask for
sample basis.
d.Material issue slip should be signed by the user explanation
department head & should be verified by the store
officer.

a.All the goods entering the premises should be first

1. Gate Entry Register
Direct issuance of material recorded in the stores. 1 Reconcile gate entry records with Store records.
6 2. Store register Preventive High NA NA
without receiving in store b.Reconciliation of gate entry records with store 2. Obtain reasons for direct issuance of material, if any.
3. Purchase Register / Ledger
records should be done periodically.

Note:- Check for Pre defined format/ particular Tcode client used by client if any.
General Audit Program
Process: Inventory Management
Sub Process- Inventory Level Management
Suggested Risk Rating (Gaps Rating)
Documents Required (Includes
S. Control Nature of Control
Risk Audit Procedures reports, supporting High Medium Low
No. Activity Preventive/ Detective
documents etc.)

a.No material levels defined

a.SOP should be made with inventory level
leading to excess purchase
according to usage and category of stock a.Ask for details of inventory levels
b.Delay in work due to non a.Inventory levels details Moderate
1 b.No levels may lead to a nil stock situation b.Review the inventory levels with the Preventive Major Impact Low Impact
availability of inventory b.Store ledger. Impact
where production might get affected and store ledger.
because of absence of
emergency parchases mave to be made.
levels.

a.Ask of details of inventory levels

a.Continuous monitoring of issue quantity
b.Criteria for current inventory level. a.Inventory levels details
a.Delay in work due to non and frequency of high and regular usage
c.Review the inventory levels with the (including safety levels)
updation of inventory levels material.
2 store ledger. b.Any ABC analysis done by Preventive High NA NA
with growth or increase in b.Reorder and minimum levels not changed
d.Compare the inventory level with management.
the production. from time to time leading to non moving
consuption (average) during audit b.Store ledger.
inventory.
period

1.If ABC analysis is not being done do

analysis the material mostly
purchased/consumed.
2. Identify the stock out cases and a. Inventory records in Excel or
No predefined inventory
1. Inventory levels are maintained as per reasons therof. b. ABC analysis from High Impact
management system
criticality / ABC analysis basis 3.On basis of 1 & 2 identify the critical Company's ERP (Regular Stock Moderate
3 leading to frequent stock Preventive Low Impact
2. Sufficient inventory level is maintained inveotry and do ABC analysis. (ABC c. Stock out records/ out/ delay in Impact
outs/ stoppage of
to avoid stock out situations. analysis: production reports work)
production
a.Value-wise d. Lead time reports
b.Frequency of issue-wise)
4. Also consider the lead time
(procurement time for supply)

Note:- Check for Pre defined format/ particular Tcode client used by client if any.
Conduct 2 way check between purchase orders and MRN. Verify on sample basis the PO Quantity & the weighment quantity.
General Audit Program
Process: Inventory Management
Sub Process- Inventory Classification
Suggested Risk Rating (Gaps Rating)
Documents Required (Includes Nature of Control
S. Control
Risk Audit Procedures reports, supporting Preventive/ High Medium Low
No. Activity
documents etc.) Detective

a.No material levels defined a.SOP should be made with inventory level according
High Impact
leading to excess purchase to usage and category of stock a.Ask for details of inventory levels
1. Stock register (Regular Stock Moderate
1 b.Delay in work due to non b.No levels may lead to a nil stock situation where b.Review the inventory levels with the store Preventive Low Impact
2.list of critical items out/ delay in Impact
availability of inventory because production might get affected and emergency ledger.
work)
of absence of levels. parchases mave to be made.

1. Inspection Records
a.Continuous monitoring of all stores material to keep 1. Conduct physical verification of inventory
2.Physical verification report Moderate
2 Loss because of obsolescence. all material in usable condition. 2. Opinion of required department should be Preventive High Impact NA
3.Written opinion of Impact
b.Discarding of unusable or obsolete inventory taken regarding obsolence
concerned department

a.The usability of raw materials should be assessed

regularly including a review during physical inventory 1. Review the store ledger to see the inventory
counts. which is not used for long time and physically 1.Store Ledger
Increase in Non-Usable and Non- b.Inventory ageing reports to be prepared and verify the condition of such stock 2.Physical Verification
3 Preventive High NA NA
Saleable inventory analyzed regularly and unusable stock should be 2. Opinion of required department should be 3.Written opinion of
discarded taken regarding obsolence and whether non- concerned department
c.Reason for increase should be found and kept on usable
record

a.Peroidic ageing analysis of inventory should be done

1 Review stock ledgers
b.Non moving and slow moving inventory should be
Blockage of working Capital on 2.Do ageing analysis and identify non moving Moderate
4 segregated 1.Store Ledger Preventive Major impact NA
account of non moving inventory items Impact
c.Identify reason for purchasing and holding on items
3.Calculate interest blocked.
which have turned non movers

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General Audit Program
Process: Inventory Management
Sub Process- Physical Verification
Suggested Risk Rating (Gaps Rating)
Documents Required
S. Control Nature of Control
Risk Audit Procedures (Includes reports, supporting High Medium Low
No. Activity Preventive/ Detective
documents etc.)
a. No physical verification process. a. Ask for Physical verification report. High ( if Medium (If
Regular physical verification is done and 1. Inventory records
1 b. Physical verification done but not b. Do a sample Physical verification consist of all Detective significant inventory is not NA
documented. 2. Physical verification records
documented. kinds of materials. value) material)

a. Ask for Physical verification report. 1. Inventory records

On basis of physical verification, a
Wrong inventory due to non-adjustment b. Do a sample Physical verification consist of all 2. Physical verification records Moderate
2 reconcilation is made and corrective action Detective High Impact NA
of gaps in physical verification kinds of materials. 3. Adjustment entries/ Impact
is taken
c. Review Stock ledger/ adjustment entries. Reconcilation

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