REPORT OF INTERNAL AUDIT

Transcription

1 REPORT OF INTERNAL AUDIT PRESENTED TO AUDIT/TASK: #05-03, Pro Shop Inventories AUDIT CLIENT: Warm Springs Golf Course / Department of Parks & Recreation AUDIT DATE: February 25, 2005 REPORT DATE: June 23, 2005 AUDITOR: Steven R. Rehn CIA, CBA, CFSA APPROVAL: Steven C. Purvis CPA INTRODUCTION In accordance with Boise Municipal Code Title 1, Chapter 9; and at the general direction of the City Council, the Office of Internal Audit undertook a review of the processes and procedures in place at the Warm Springs Golf Course that provide for the management and control of inventories that are maintained for the purpose of resale to the public. The City of Boise acquired the Golf Course a number of years ago, and continues to operate the facility under the direction of the Parks & Recreation Department. The Warm Springs facility offers an 18-hole golf course, a snack bar, a Pro Shop, and a number of associated services such as lessons, cart rentals, etc Utilization of the facility has remained relatively stable in recent years, and the Course has generated approximately $1.4 million in gross revenues annually. Costs of operation have averaged approximately $1.15 million per year, leaving a residual of roughly $250,000 available for the support of other programs.

2 In order to more fully serve the public, Warm Springs maintains a Pro Shop on site. The Shop offers a wide array of high-quality equipment, apparel, and supplies at prices that are competitive in the local market. Annual sales in recent years have averaged approximately $230,000, and margins after accounting for cost of goods sold have averaged about $68,000 annually. Internal Audit undertook this project as a result of the sizable investment in inventory, and the risks inherent in situations where significant amounts of valuable product are maintained. Parks & Recreation s management team agreed with, and fully supported Audit s involvement in the project. SCOPE AND METHODOLOGIES For purposes of detail testing, Internal Audit established a scope period that included the final quarter of FY 04, and the first quarter of FY 05. This period was selected in order to obtain a more precise assessment of current practices and the accuracy of current inventories both physical amounts on hand and carrying values in the accounting records. Audit did extend its look backward for purposes of reviewing trends in sales, cost of goods sold, and margin contributed to operations. In performing these analyses, Audit reviewed selected data from FY 00 forward through the first quarter of FY 05. The overall purpose of the review was to determine whether the internal control environment was sufficient to safeguard the assets, and to result in an accurate accounting of the inventory on hand. Specific objectives in support of these overall goals were established as follows: Determine whether the inventory control system was functioning appropriately Determine whether the procedures were adequate to control and safeguard inventories Determine whether inventory quantities and values were accurately portrayed Determine whether unusual or unexpected trends were present in financial data Internal Audit utilized methodologies consisting of observations, interviews, detail testing, analysis, and reconstruction of activities. The methods employed and the evidentiary materials developed were deemed to be adequate to support the conclusions contained within this report. The audit was conducted in conformance with The International Standards for the Professional Practice of Internal Auditing, as established by The Institute of Internal Auditors. 2

3 EVALUATION AND COMMENTS During the review, Internal Audit noted a number of areas in Pro Shop operations where opportunities for improvement existed. Controls and procedures that need to be present in order to establish an adequate control environment were absent. As of the date of the Audit, the control environment surrounding the Pro Shop s inventories can best be characterized as Unsatisfactory. Deficiencies that developed in the Pro Shop s automated inventory control system were key contributors to many of the conditions noted, and to the rating that was ultimately assigned to this Audit. Computer System Integrity Approximately two years ago, the Course s automated sales- and inventory-control system underwent a major update and conversion. Despite considerable efforts expended by both management and staff since that time, the integrity of the information produced by the system appears to have degenerated to a point where it simply was not reliable. Audit noted the following concerns: The system produced inaccurate data. System-generated reports contained incorrect information, which in turn led to the generation and posting of incorrect accounting entries. Significant discrepancies existed amongst system reports, general ledger account balances, and the value of product actually on hand and available for sale. When various reports produced by the system were compared to each other, they appeared to provide different totals for the same product as of the same date. The on-going service agreement with the software vendor temporarily lapsed, which complicated efforts to obtain system support. One significant system capability electronic product scanning has never been fully functional. Internal Control Deficiencies Additionally, a number of procedural issues were noted that required management attention. These included: An inadequate segregation of duties with respect to receiving product, loading product data to the system, and counting inventory. Multiple employees possessed full access rights to the inventory control system. Product returns were accounted for off the books. Time frames between the return of product to vendors, and receipt of credit appeared to be excessive. 3

4 Transfers of inventory items to supplies were not posted to the inventory control system, or to the accounting records. Error rates in inventory counts appeared to be unnecessarily high, and were not always actively pursued and resolved. Other Issues Internal Audit noted one additional issue during its review of the Pro Shop. Golf Course employees have traditionally been offered preferential pricing when purchasing products, or when playing at the course. Anecdotal evidence suggests this practice is fairly common at other city-owned courses in the state as well. The City Attorney s office reviewed the issue and determined the practice was not in conflict with either state statute or City code. However, the Attorney s office did recommend that this practice be reviewed and approved by City Council. Internal Audit concurs with that recommendation. As a result of the work performed, Audit recommended a number of fundamental improvements. Effective implementation of many of these recommended changes hinges on management s success in obtaining adequate support for the automated sales- and inventory-control system; and re-establishing the accuracy, effectiveness, and reliability of the system. The automated system is fundamental to processing inventory- and salesrelated transactions, and to providing meaningful information. An adequate control environment does not exist when system integrity is impaired to the degree witnessed during this review. As noted in the responses to the Audit Findings that appear in the latter sections of this Report, management has been very pro-active in terms of pursuing timely and effective remedial action. A large number of the procedural improvements recommended by Internal Audit have been implemented, and significant progress appears to have been made in rebuilding system functionality and reliability. Audit concurs with the steps taken to date, and encourages management to complete those corrective actions that are still underway. Doing so will result in a viable control environment within the Golf Course Pro Shop. Internal Audit would like to thank Golf Course management and staff, and Parks & Recreation management for their efforts and assistance during the performance of this review. A detailed presentation of Audit s Findings, and management s responses to those findings appear in the following sections of this Report. 4

5 FINDINGS AND RECOMMENDATIONS 1. FINDING: POS System Deficiencies The Warm Springs Golf Course utilizes a computerized application, the Smyth System (POS), to manage and control inventory, and to register the sales of Pro Shop products, green fees, etc... The system maintains a database of products available for sale on a perpetual basis, updates the data for product receipts, and accounts for retail sales of the products. Internal Audit noted a number of systemrelated issues that require immediate attention by management: System Functionality: Vendor performance has been sub-standard in terms of maintaining system functionality. For example, scanning is operational at the sales terminal; but the ability to receive product or to inventory via scanner has never been operational, even though the City invested in the equipment and software necessary to support this function. This feature could provide additional efficiencies if it were operational. System Support: The service agreement between the City and the vendor was allowed to lapse for more than five months. System support has been unavailable as a result. Also, any system updates made available to users during that period were not obtained and installed. Data Integrity: The POS system is utilized as a subsidiary ledger for the physical inventory, but it appears to produce inaccurate information; in some instances inventory reports do not agree with each other. It also contains a considerable quantity of erroneous and / or obsolete data, such as negative carrying values and quantities, and zero-balance items. Access Rights: System access rights do not appear to have been adequately controlled. All current staff members enjoy full rights to system maintenance and update capabilities. Current access rights granted to employees increase the risk that system data could be manipulated. Management Reports: Management-level reports are not routinely produced and reviewed. Management s ability to detect unauthorized activity, or to identify and correct developing trends is impaired as a result. 5

6 A number of these deficiencies are potentially fatal to management s ability to control and monitor inventory-related activities. Risk is raised to an unacceptable level when these types of weaknesses are allowed to persist. Operational efficiency and effectiveness can be negatively impacted, and assets are more susceptible to misappropriation due to impaired levels of accountability. RECOMMENDATION: Audit recommends the following corrective actions be pursued in order to reestablish an adequate control environment. POS System: The software vendor should be engaged as soon as possible, and corrective action pursued. Problems associated with erroneous system reporting should be resolved so that the system can be relied upon to produce accurate information. Secondarily, system capabilities that are currently not functional should be brought to an operational status, and integrated into operations where it is advantageous to do so. Access Rights: Golf Course management should review each staff member s assigned job responsibilities. System access should only be granted for those functions that are necessary to the accomplishment of each individual s assigned responsibilities. Full maintenance and update capabilities should be reserved to managers and/or supervisory personnel only. Management Reports: Golf Course management should review the types of reports that are available on the system. Reports suited to monitoring and control activities, such as those detailing adjustments to inventory levels or product prices, or those detailing operating results should be identified, produced, and reviewed by management on a regular basis. MANAGEMENT RESPONSE: POS System: Due to ongoing problems with the system, we became frustrated with the lack of support from the vendor. A staff decision was made to withhold technical support payment as leverage to entice the vendor to become more responsive to our requests. As a result, all support for our system was cut off by the vendor with no negotiation. We relented and processed the necessary paperwork to reinstate the technical support, however, there was a considerable 6

7 time lapse because of the need to have Smyth Systems declared as a Sole- Source provider by city purchasing. This further delayed corrective action on the system. Staff is working with Smyth System on the continued corruption of reports produced by the system with respect to inventory reports. Smyth has sent a new version of their software and we are loading that version as of the writing of this report response. According to the vendor, this new version will correct all of the reporting issues associated with our inventory tracking. Staff is working daily with Smyth Systems to resolve the Point of Sales system problems and inventory reporting errors. Access Rights: Previously, we have had five staff members with access to all programs in the system. Effective March 29, 2005, management has restricted access to the entire system to only managers. Management Reports: This statement is not true. Management-level reports are indeed reviewed routinely. For example, Item Sales Reports are examined daily. This report shows what items have been purchased and if the items have been discounted. This report breaks down individual items into classes and allows managers to review daily sales margins. Gift Certificate Reports are reviewed monthly, and Revenue Reports are monitored daily through the POS Audit Reports and are scrutinized for any problems. Full Inventory Reports (Stock Ledger, On-Hand Inventory Report, etc.) have been rendered useless for the past several months while the system has been experiencing deficiencies with support issues. When the system deficiencies are corrected, staff believes there will be a benefit to utilizing the reporting functions of the system. Until then, those reports are essentially useless. However, as stated previously, management-level reports are indeed reviewed routinely. 7

8 2. FINDING: General Ledger Balances One objective of Internal Audit s review at Warm Springs was to determine whether inventory counts and carrying values were portrayed accurately in the accounting records. Given the presence of erroneous data in subsidiary reports produced by the POS system, the risk of misstatement was perceived to be elevated. As a result, Audit undertook a manual re-valuation of inventory for the preceding two quarter ends in an effort to prove / disprove the values reported on the primary POS inventory report, the Stock Ledger Report. Based on Audit s projections, physical inventories are not in agreement with either Stock Ledger totals, or with carrying values reflected on the general ledger. 9/30/04 Balances: Utilizing records of physical product counts, and corresponding product costs reflected in the POS system, inventory carrying value at 9/30/04 was projected by Internal Audit to be $105, The POS system s Stock Ledger Report that was utilized to book year end COGS and pilferage entries reflected a carrying value of $117, The difference amounts to $11, The cause of this variance is not easily determined, though inaccurate accounting entries resulting from faulty system data appear to be a significant causal factor. 12/31/04 Balances: Utilizing similar methods, and similar system data, Internal Audit projected the actual value of inventory on hand at 12/31/04 to be $89, No Stock Ledger Report was available due to system reporting problems. Alternatively, the general ledger balance was carried forward, which resulted in an updated balance of $103, The discrepancy amounts to $14, Again, the cause of this variance is not easily determined, though inaccurate accounting entries resulting from faulty system data are likely to be involved in the over-statement. The presence of inaccurate system data, and a large variance between book and actual inventory balances effectively defeats the value of the general ledger account as a control measure. The inability to draw meaningful comparisons between actual product inventory, the inventory control system, and the control account provides an opportunity for the misappropriation of assets to occur, and to potentially go undetected. Also, period financial statements have been misstated as a result of these issues. 8

9 RECOMMENDATION: REPORT OF AUDIT Internal Audit recommends that management pursue the following corrective actions: Contact the software vendor and pursue immediate corrective action on the POS system. Determine the appropriate report to be utilized for summations of carrying value. In the interim, utilize the Physical Inventory Difference reports for inventory valuation. Audit confirmed the accuracy of these reports during its re-valuation of the inventories referred to above. The sum of the Difference reports appears to accurately reflect the actual value of inventory on hand. Perform a full, accurate, and independently supervised inventory as soon as practical. Establish an accurate carrying value for all goods on hand and available for sale. Once the carrying value from the physical inventory count is established, the general ledger should be adjusted accordingly, and the write-down properly recognized. MANAGEMENT RESPONSE: Smyth System reports that reflect inventory values are the Difference Reports and Stock Ledger Reports. These two reports should balance and show the same value of inventory. Currently, the Stock Ledger and the Difference Report do not match up and reflect the value of inventory on hand. (Staff is working with Smyth Systems on programming issues which would allow for accurate inventory numbers). Due to on-going system corruption, the Difference Report is our only accurate report because the inventory numbers (which we know are correct) were just entered into the system during the inventory process. This report is the least likely to be corrupt due to the limited time in the system before the report was generated. Once sales and inventory entries are administered in any way, the system inventory is immediately corrupted due to programming deficiencies in the Smyth System. As stated in our responses throughout this audit, we are working tirelessly with Smyth to correct many system issues. Smyth acknowledges the deficiencies and it is their opinion that those deficiencies are the root of most of the issues identified in this audit. 9

10 Scott McGeachin, Director of Golf Operations, supervised a complete inventory on 3/31/05. Additionally, a spot check on inventory items was performed on 20 items and no discrepancy was discovered on inventory counts. Warm Springs staff coordinated an additional inventory with Parks & Recreation accounting personnel, and scheduled a cutoff inventory for May 31st. The following steps were in place to get an accurate inventory cost. The cut off day was May 27th. Warm Springs Staff is working with the vendor on inventory accuracy. The goal is to have both the People Soft accounting system, and Warm Springs inventory reflecting the same cost. We set a back-up date of June 30th in case Smyth Systems failed to fix inventory corruption. Based on the May 31 inventory, which was successfully conducted, the general ledger balance adjustment was calculated at $11, by Parks & Recreation accounting personnel. The adjusting entry was posted on June 15,

11 3. FINDING: POS System-Related Procedures Internal Audit reviewed a number of the operating procedures that are currently in place with respect to the inventory at Warm Springs. Several areas that directly involve the POS system appear to be in need of management attention. Product Codes: The staff has developed a system of 4-digit product codes that are manually assigned to products acquired for resale. When the goods are sold, this code is entered to the POS system, the sale finalized, and corresponding inventory data updated. Pre-existing UPC Codes already on the products are not utilized. Product Returns: Vendor representatives frequently take product back for various reasons obsolescence, defect, etc Credit memos are issued some time later; the delay may extend for several months. In the interim, the product is not removed from the POS system, nor is it removed from the general ledger inventory account balance. Instead, it is accounted for manually by staff via a system of paper receipts that are used to adjust inventory counts for the absent product. Course Supplies: Warm Springs staff members do, on occasion, remove products from inventory and convert them to supplies for use by the course. The POS inventory system continues to show the product as in stock and available for sale. General ledger inventory account balances do not appear to be adjusted to account for this change. Operationally, these types of issues pose risks to the Golf Course. First, use of manually-created and manually-assigned product codes places an increased administrative burden on staff. It also increases the risk of error at the point of sale since codes are often manually entered to the system as sales are made. Second, the return of products off-the-books increases the chance that paperwork will be misplaced and /or credit not received reducing the net revenues generated by the entity. Finally, failure to properly recognize movements of product from inventory to supplies expense will result in an understatement of supplies expense, and an overstatement of shrink / pilferage at the end of the fiscal year. 11

12 RECOMMENDATION: Internal Audit recommends that management strengthen its controls and procedures with respect to these areas. UPC Codes: Once the POS system is fully functional and the scanner system is working, management should integrate the use of UPC Codes into its inventory practices. This will alleviate staff of the burden of maintaining the manual system currently in place. Scanning technology may well allow the Golf Course to scan in newly-received product, use the scanner in inventory counts, and more fully utilize existing scanner technologies at the sales terminal. Merchandise Returns: Management should work with Parks & Recreation Accounting, and develop an acceptable method for logging merchandise returns both on the POS system, and on the general ledger. Once product leaves the premises, it should be removed from POS inventory totals, removed from the general ledger inventory account, and posted to a receivable until credit is actually received. Pending credits are more effectively accounted for, and can be more easily tracked using this methodology. Inventory Transfers: Management should work with Parks & Recreation Accounting, and establish a methodology for recognizing the conversion of inventory to supplies, transferring the corresponding product costs to expense, and adjusting the POS system to properly reflect this movement of product. MANAGEMENT RESPONSE: UPC Codes: At the time of our system upgrade from a DOS based system to a Windows based system we were not made aware that there was an opportunity to scan in our inventory when received. It is highly probable that the cost/benefit of purchasing the new equipment may have been perceived by Smyth Systems as prohibitive for us to purchase at the time. When we upgraded, we purchased a handheld ipac computer to assist us with conducting our Physical Inventory. This piece of equipment has never been operable with our system, and Smyth Systems has not been able to get it integrated to be used by us. At the time we upgraded our system we were not 12

13 aware that we were the first Smyth Systems customer to use their new equipment. As a result, the new equipment was not battle tested and we were left with something that didn t work with our current hardware and software. Staff will look into the feasibility of implementing a scanner-based system to utilize product UPC codes. Warm Springs POS system has the needed capability and the equipment to utilize functional scanners that will receive, sell, and inventory all merchandise. Staff supports converting the system to a fully functional scanning system, and recommends the conversion take place in the fall of Merchandise Returns: Due to certain circumstances, Sales Representatives occasionally allow us to return merchandise for credit. This is a very beneficial opportunity for us because we are able to move out-dated and defective inventory out of our system at full wholesale cost and without having to sell the products at a loss or low margin. Often times, the Sales Representatives are independent reps instead of company reps and they are slow in issuing credit for the returns. During the waiting period for the credit, staff have routinely counted the items as being in inventory instead of removing them once they have been returned. Staff have waited for the official credits to be in hand before taking the items out of our inventory so as to match the Receipts History Report (transaction report) with the credit. Staff has discussed procedures with P&R Accounting, and developed a logging system for merchandise returns and credits. Procedures are complete, and have been implemented as of the date of this report. Inventory Transfers: WSGC will work with P&R Accounting in regards to merchandise removed from inventory to another expense line and will detail appropriate accounts to be expensed or credited. 13

14 4. FINDING: Inventory Controls and Counting Procedures Internal Audit reviewed the procedures currently in place with respect to controlling inventories, and the performance of periodic fine-counts of the products on hand. The Pro Shop s merchandise represents a significant investment of resources, and effective control mechanisms should be in place in order to safeguard that investment. Audit noted several areas where improved controls should be actively pursued: Segregation of Duties: One staff member has essentially taken on responsibility for all aspects of inventory and storekeeping. This includes receiving, invoice approvals, product costing and pricing, inputting product data to the POS system, and supervising and performing inventory counts. Inventory Frequency: Physical counts of the inventory vary based on seasonal business demands at times 60 days, at other times 90 days. Error Rates: Audit tests indicate there is an unacceptable error rate in inventory counts. The 9/30/04 inventory contained 517 individual products 158 of which reflected either a shortage or an overage when actual counts were compared to system projections. The 12/31/04 inventory contained 432 individual products at least 88 of which reflected either short or over positions. Error rates appear to be in the range of 20% to 30%. Resolving Discrepancies: Discrepancies between the POS system s projected totals and physical quantities on hand do not appear to be pursued and resolved by management in all instances. Audit noted three instances where products were double-counted during the 9/30/04 inventory a $589 overstatement of inventory with no indications that management had attempted to resolve the differences. Accountability: Physical count sheets are undocumented as to who performed the actual counts. Supervisory reviews of the sheets are likewise not documented. Both risk of loss and exposure to loss are increased when these types of deficiencies are allowed to persist. Control over valuable inventory is diminished: Inventories are more susceptible to misappropriation where there is an inadequate segregation of duties, and where account balances are incorrect; Unresolved 14

15 errors and discrepancies may misstate expense, financial performance, and associated general ledger accounts; and, Establishing accountability for count and review activities is a fundamental best practice. RECOMMENDATION Audit recommends management pursue corrective actions that address the conditions noted above: Segregation of Duties: Management should revise procedures in order to ensure that the various duties associated with receiving, booking, and inventorying product are either segregated, or are cross-checked in some fashion. Management should consider: Supervisory swaps with other Parks & Recreation venues when inventory is counted; Selected, random spot checks by the Golf Course Manager; Re-assigning some of these duties among existing staff members; Some feasible combination of the above. Procedural Changes: Procedures should be established and formalized in the following areas: Inventory frequency establish and follow a 90-day schedule that coincides with fiscal quarter-ends; Acceptable error rates errors between system projections and actual quantities should be < 5% of the items counted; Resolution of discrepancies discrepancies that are > $100, or that exceed 5% of the value of a product category, whichever is the lesser, should be pursued and resolved; and, Establishing and documenting accountability staff should sign off on counts they have performed, and management should sign off on the documents to signify their review and approval of the counts. Given the types of issues that have been encountered, Internal Audit believes the standards suggested above should be established and followed initially. Once inventory processes and procedures have been stabilized, and error rates have been reduced to reasonable levels, management may consider lengthening the inventory count cycle to 180 days, with spot checks on randomly selected products performed by management in the interim. 15

16 MANAGEMENT RESPONSE Segregation of Duties: The Director of Golf Operations supervised a complete inventory on 3/31/05. Additionally, a spot check by the Director on inventory items was performed on 20 items and no discrepancy was discovered on inventory counts. This process will continue as policy. Staff responsibilities have also been restructured to meet this recommendation. Procedural Changes: The following procedural changes have either been implemented, or are being considered. WSGC will establish a 90-day inventory schedule beginning As stated in several responses in this audit, WSGC has been working with Smyth Systems on our programming issues with little success. To date, Smyth recognizes that there are some definite programming glitches with the software, which is causing our high error rate. The system has had open years of 2003 and 2004 that have not been properly closed and posted. The system also had open months in 2004 that have not been closed. The system was closing and updating inaccurate months in Smyth Systems believes that not updating and closing out months and years will have a direct affect on our inventory numbers. As stated by the Auditor, the most accurate report generated is the Physical Inventory Difference Report. This report shows the physical counts generated by the Physical Inventory process. The system should automatically update the inventory to the physical count numbers just received. Unfortunately, the system has not been properly updating the inventory, so once we begin a new month, the counts are corrupted again. Since the system hasn t been properly updating the inventory, it hasn t been recognizing our new receipts or our sales for the months in question. Because of these problems, On-Hand Inventory counts may not match up with the actual inventory that the system recognizes. Therefore, when we print the Difference Report at Physical Inventory, it reports a high number of inventory items that do not match and shows a large number of errors and items that appear to have shortages. This report looks like we did not take a good physical inventory count. In actuality, the counts taken have been accurate and true, however, the system has not been re-setting the 16

17 inventory to the appropriate counts that are counted and entered during our Physical Inventories. This is clearly a software issue, not a staff error issue. Staff is working with Smyth Systems on resolving these issues. Discrepancies at the time of Physical Inventory entry are pursued at the time they are noticed. If an item shows a quantity that is different from that observed during the Physical Inventory taken, the items are recounted and checked. Because of the lack of credibility from the software system, numbers generated by it are suspect. The Physical Count sheets employed by our staff are accurate and the Physical Inventory Difference Reports will verify the information. When staff enters a physical count, the system will not allow us to re-enter them again as a separate quantity. The box pre-fills with the last quantity recognizing that the item has already been entered. However, if a number is not keyed properly or the staff member has to go back to fix a typing error, the spreadsheet that is generated within this physical inventory entry has caused certain errors. These errors have included blank cells appearing and the order in which items were entered to become out of order within the entry. These actions can cause the system to count items twice but not enter them twice. A procedure has since been implemented to correct the potential mistake made on the 9/30/04 inventory count. This procedure was implemented on the 3/31/05 inventory, and management has reviewed to ensure that items were not entered twice. This procedure is as follows: - The manager will read the inventory count as another staff member keys the entries into the physical inventory. - The manager will review the generated count slips in detail after entry to ensure that there are not any errors in the items that were keyed in. - The manager will again verbally read the inventory count as another staff member visually reviews the entries on the count slips to ensure that every item was entered correctly. - This will enable each individual to double-check the entries with the count and ensure that items are precisely entered in the POS system. Warm Springs Staff has 3 to 4 staff members taking physical inventory each time. Staff can easily recognize who counted the inventory on any particular count sheet. However, Staff will begin to sign all count sheets beginning with the March 31, 2005 inventory. 17

18 5. FINDING: Pricing Policies / System Cost Data In order to determine whether management s product costing and pricing objectives were being met, and whether product data was being input to the POS system accurately, Internal Audit tested a sample of recently purchased items. Procedures call for inputting product information to the POS system only after receipt of invoice(s) in order to ensure accuracy of cost data. Also, management has established specific gross margin targets for hard goods (clubs, balls, etc ) available for sale, as well as separate targets for soft goods (apparel items, etc ) carried by the Pro Shop. Of the 15 items that Audit tested, one appeared to have varied from the established procedures. On 10/26/04 a shipment of Chino hats was purchased. The product was apparently boarded to the POS system before the invoice was received. The product cost was inflated by 15.8% as a result of using incorrect product information. The correct cost of the product was actually lower than the cost that was input to the POS system. Maintaining incorrect cost data on the POS system results in erroneous carrying values for inventory, and incorrect statements of cost of goods sold and net income when financial performance is measured. RECOMMENDATION Management should strengthen controls and procedures in the area of data entry and maintenance. Procedures should also be established and reinforced that result in the input of product data to the POS system only after all pertinent information has been received and verified. 18

19 MANAGEMENT RESPONSE Product Data: Staff put items out on the sales floor before the invoice for the merchandise was received. Staff assumed that the cost of the hats would be the same as other similar hats from the same company. However, when the invoice came in, it showed a different cost than that boarded into the computer. As a result, the hats were entered at a higher cost than they should have been entered at. Staff will implement a new procedure to only receive and price merchandise once the invoice has been received. 19

20 MANAGEMENT PARTICIPANTS James Hall, Director / Department of Parks & Recreation Doug Holloway, Superintendent / Department of Parks & Recreation Scott McGeachin, Manager / Warm Springs Golf Course 20