Inventory Narrative

The Inventory process covers the following sub-processes: Inventory Master File Inventory Purchase Inventory Return Inventory Physical Count Inventory Obsolete & Mark Out of Stock Inventory Reconciliation Inventory Costing (Finished Product)

Inventory Master File To add a new item of Inventory or to modify the existing inventory master file, the Inventory Clerk (at the Storage Facility Both Raw Materials and Finished Goods) needs to complete an Inventory Request Form and obtain necessary documents for supporting the request (request from Manufacturing Facility and details of inventory). The Inventory Request Form is sent to the Inventory Manager (at the Storage Facility Both Raw Materials and Finished Goods) for approval. On approval of the form, the Inventory Manager sends the form to the Inventory Clerk for processing. The Inventory Clerk adds/modifies (modification includes deactivation of Inventory from Inventory Master File) the Inventory into the ERP Inventory Master File. Inventory Purchase Items of Inventory are requested by the Production Department based on the Bill of Material (BOM). Inventory Clerk receives the inventory request electronically based on material requirement for production. The Inventory Clerk then verifies the stock availability in the ERP. If the requisitioned items mentioned in the BOM are available, the inventory is issued to the Production Department and updates are made to the ERP. In case of unavailability of items requested in BOM, a purchase requisition is created by the Inventory Clerk. The purchase requisition is approved by the Inventory Manager before being sent to the Purchase Requisition Clerk (at the Purchasing Department), for procurement. The ERP system is configured to perform a 3-way match for goods purchased. The invoice, purchase order (PO) and Goods Receipt Note (GRN) for the good received are matched within the ERP prior to payment (R_INV_1); (R_INV_3); (R_INV_4); (C_INV_1); (C_INV_3).

Note: This document is an illustrative example and is for information and education purposes only. It is not a substitute for professional advice, services, nor an entitys own internal control procedures and should not be used or relied on as such.

Inventory Return Upon receipt of goods, quality inspectors perform an inspection of the goods before they are received into the system. Any goods that are rejected during this review are marked in the system as a return to the vendor (R_INV_22); (C_INV_14). Inventory returned to suppliers is separately logged in the ERP (R_INV_23); (C_INV_15). On a monthly basis, Inventory Return Log is printed by the Inventory Clerk from the ERP. The Inventory Clerk reconciles the Inventory Return Log to the Inventory Records. The reconciliation is reviewed by the Inventory Manager (R_INV_25); (C_INV_16). Inventory Physical Count Inventory is stored in a secured Storage Facility (both Raw Materials and Finished Goods) with access to the Storage Facility restricted to authorized personnel. The security measures are to reduce the risk of shrinkage caused by theft. Warehouse Clerks have access to inventory at the store and have access to view the inventory records but not modify inventory records. On the last day of the month, the Inventory Clerk downloads an On-Hand Inventory Report from the ERP for physical inventory counts. Using the Inventory Report for the month, the Warehouse Clerk (at the Storage Facility Both Raw Materials and Finished Goods) performs a Full Physical Inventory Count. The Physical Inventory Count Sheet is sent to Warehouse Manager (at the Storage Facility Both Raw Materials and Finished Goods) for approval. Any differences, including timing differences, require explanation by the Warehouse Clerk in the Physical Inventory Count Sheet (R_INV_2); (R_INV_6); (R_INV_24); (C_INV_2). Adjustment entries, if required, are prepared by the Inventory Manager and approved by the Inventory Controller prior to sending it to the Financial Clerk for recording in the ERP (R_INV_7); (R_INV_9); (R_INV_10); (C_INV_5). Inventory Reconciliation All Inventory accounts and Cost of Goods Sold accounts are reconciled from the stock ledger to the GL monthly by the Financial Clerk and reviewed by the Finance Manager and Finance Controller (R_INV_5); (C_INV_4). Inventory Obsolescence & Mark Out of Stock A Mark Out of Stock (MOS) is a reduction of value for items that have been deemed nonsaleable or nonusable. The quality of goods for sale/production is assessed on a quarterly basis. The Inventory Clerk downloads the quarterly Inventory Aging Report from the ERP. The ERP ages inventory based on parameters setup in the ERP (R_INV_18); (C_INV_12). Based on inquiry with Operations & Sales Managers, the Inventory Clerk finalizes the Inventory Aging Report to determine whether a reserve is required. The inventory aging is reviewed by the Inventory Manager & Inventory Controller (R_INV_16); (R_INV_17); (C_INV_11). Once the quarterly inventory aging reports are approved, they are sent by the Inventory Controller to the Financial Clerk for recording to the ERP system, who then prepares an Inventory Obsolescence and MOS calculation based on the approved Inventory Aging Report. The
Note: This document is an illustrative example and is for information and education purposes only. It is not a substitute for professional advice, services, nor an entitys own internal control procedures and should not be used or relied on as such.

Inventory Obsolescence and MOS calculation and Journal Entry are approved by the Finance Manager. On approval, the Journal Entry is posted in the ERP by the Financial Clerk (R_INV_15); (R_INV_19); (R_INV_20); (R_INV_21); (C_INV_10); (C_INV_13). Inventory Costing (Finished Product) Standard costs are established during the budget process occurring at the end of the previous fiscal year. Standard costs are determined for material, labor, and overhead costs. Standard costs are reviewed and approved by the Finance Controller based on the approved budget. Upon approval, they are entered into ERP (R_INV_13); (C_INV_8). A report is generated of the inventory standard costs and reviewed by the financial controller to validate the accuracy against source documents. On a quarterly basis, the Financial Clerk computes the valuation of inventory. The inventory value is reviewed by the Finance Manager. Inventory is recorded at standard cost. Inventory variances (Standard Cost versus Actual Costs) are analyzed by the Financial Clerk to determine adjustments required to properly state inventory at actual cost. Variances, if any, are investigated. The inventory variances are reviewed by the Finance Manager and recorded in ERP (R_INV_12); (R_INV_14); (C_INV_7); (C_INV_9). The actual cost of production is compared to the market price. The Financial Clerk prepares a lower of cost or market (LOCM) analysis for the inventory whose cost price exceeds the net consideration for sale. The analysis is reviewed by the Financial Manager before the Financial Clerks records a provision in the ERP (R_INV_11); (C_INV_6). On quarterly basis, once the financial statements have been compiled, the Controller performs a review of the financial statements, including all footnote disclosures. As part of this review, the Controller checks references to supporting documents (R_PDI_16); (C_PDI_1). IPE: INV_IPE_1 Inventory Request Form INV_IPE_2 Inventory Return Log INV_IPE_3 On-Hand Inventory Report INV_IPE_4 Inventory Aging Report INV_IPE_5 Inventory Obsolescence & Mark Out of Stock Analysis INV_IPE_6 Inventory Variance Analysis INV_IPE_7 LOCM Analysis

Note: This document is an illustrative example and is for information and education purposes only. It is not a substitute for professional advice, services, nor an entitys own internal control procedures and should not be used or relied on as such.

Notes: 1. The risk R_INV_8 has not been mapped in this narrative as it has been mapped in the Cost of Sales narrative.
Formatted: Normal, Indent: Left: 0.25", No bullets or numbering

Note: This document is an illustrative example and is for information and education purposes only. It is not a substitute for professional advice, services, nor an entitys own internal control procedures and should not be used or relied on as such.