A REPORT FROM THE OFFICE OF INTERNAL AUDIT

Transcription

1 A REPORT FROM THE OFFICE OF INTERNAL AUDIT PRESENTED TO THE CITY COUNCIL CITY OF BOISE, IDAHO AUDIT / TASK: #12-01, Inventory Audits REPORT DATE: May 14, 2012 AUDIT GRADE: Satisfactory REPORT AUTHORS: APPROVED FOR RELEASE: Craig E. Weathers CPA, CIA, CFF Steven Rehn CIA, CFSA Steven Rehn CIA, CFSA AUTHORITY: Boise City Code FY 2012 Work Plan

2 Task: #12-01, Inventory Audits Date of Audit: November 3, 2011 INTRODUCTION In accordance with the FY2012 approved Work Plan, the Office of Internal Audit undertook a scheduled review of the established operating processes and procedures for inventories at three separate locations that had been the subject of previous audits: (1) Fire Stores; (2) the Warm Springs Golf Course Pro Shop; and, (3) Idaho Ice World s Cutting Edge Pro Shop. The City of Boise Fire Department bears responsibility for the Fire Stores Inventory. The City s Parks and Recreation Department bears responsibility for both Warm Springs Golf Course and Idaho Ice World. Primary Inventories The following table provides an overview of the size of the inventories at the three respective locations, as well as usage / sales during the past fiscal year. Entity 9/30/11 Inventory Balance FY 2011 Cost of Goods Sold/ Issued FY2011 Sales Fire Stores 239, , n/a Idaho Ice World 281, , , Warm Springs Golf Course 122, , , The Fire Stores inventory is maintained as a storehouse to provide for basic needs of the stations, and the Department s front-line Fire Fighters. The Fire Stores Inventory was significantly larger when Internal Audit first reviewed it in Since that time the balance of materials on hand has been worked down to more manageable levels. The size of the inventory has remained fairly stable over the past two years, with year-end inventory balances of just under $240,000 noted for both FY2010 and FY2011. The Idaho Ice World (IIW) facility continues to serve a large number of patrons. During FY2011, Ice World hosted approximately 388,970 visitors; about 48% of those visitors, or 186,900, were youth. (Note: A visitor includes those participating as well as an estimated number of spectators). In order to provide equipment and services to its patrons, IIW maintains a Pro Shop that is stocked with resale merchandise for both the hockey, and the figure-skating markets. Since Audit s earlier work with this inventory during FY2005, new point-of-sale (POS) systems have been implemented that provide for enhanced tracking of sales and inventory items, providing improved controls and processes. 2

3 Similar to Ice World, Warm Springs Golf Course (WSGC) also maintains a resale merchandise inventory in order to provide patrons access to needed specialty clothing, equipment items, and supplies related to the sport. And, like IIW, Warm Springs has also implemented improved POS systems since earlier visits by Internal Audit. WSGC has realized benefits similar to Ice World s Pro shop as a result of improved systems. The Golf Course, which measures success in terms of the number of rounds of golf played, had the following results from the most recent three fiscal years: (1) 46,009 total rounds played during FY 2009; (2) 48,344 total rounds played during FY 2010; and, (3) 48,681 total rounds played during FY Secondary Inventories Inventories of parts and supplies are also maintained at a number of other locations throughout the City. Internal Audit selected a number of those locations / inventories for a general controls review during this audit. The table below presents a summary of those inventories and their year-end balances; and also indicates which areas were subject to the controls review. Responsible Business Unit Composition 9/30/11 Value Reviewed Airport Operations Parts / Supplies 611, Y DFA / Central Services Printing Supplies 43, Y Fire / Logistics Division Parts / Auto Supplies 76, Y DFA / Fleet Maintenance * Auto Parts 12, N Police Administration Uniforms / Equipment 34, Y Public Works Geothermal Parts / Supplies 162, Y Public Works Irrigation Parts / Supplies Y Public Works Lander Street WWTP Parts / Supplies 452, Y Public Works West Boise WWTP Parts / Supplies 747, Y Public Works Utility Maintenance Parts / Supplies 148, Y Public Works 20-Mile South Farm * Parts / Supplies 56, N Public Works Chemicals Inventory ^ Chemicals 68, N Total Value of Other Inventories 2,415, * - Reviewed at Audits conducted previously. ^ - Chemicals Inventories are distributed across four separate locations within Public Works. They are associated primarily with wastewater treatment functions, and are largely in bulk liquid form. 3

4 SCOPE AND METHODOLOGIES For purposes of detail testing, Internal Audit established a scope period that included 10/1/2009 to 9/30/2011 Fiscal Years 2010 and The overall purpose of the review was to gain a reasonable degree of assurance that the control environment over inventories is adequate. The environment should ensure that the units are functioning in an efficient and effective manner, that resources are properly safeguarded, that goals and objectives are being met, and that activities comply with applicable policy, law, and/or regulation. Based on discussions with supervisors and managers responsible for the functions and consistent with a focus on inventory issues, Internal Audit defined the following objectives for detail testing of resale inventories, and the materials maintained at Fire Stores: To determine whether the inventory system is functioning appropriately. To determine whether the procedures are adequate to control and safeguard inventories. To determine whether inventory quantities and values are accurately portrayed. To determine whether unusual or unexpected trends are present in inventories and inventory financial data. Internal Audit also established secondary objectives, subject to staff resource availability, of documenting control processes and procedures surrounding other inventories within various departments. Those were determined to be located at City Hall, the Police Department, at the wastewater treatment facilities within Public Works, at the Fire Department s Maintenance Shop, and at the Boise Airport. Relative to those other inventories, the following secondary review objectives were established: To determine whether the procedures are adequate to control and safeguard inventories. To determine whether inventory quantities and are reasonable within the context of the business model. To document the systems in place, and assess their ability to maintain reasonable control over ordering and quantities on hand. Internal Audit utilized methodologies consisting of observations, interviews, detail testing, and analysis of activities. The methods employed and the evidentiary materials developed were appropriately designed to adequately support the findings and general comments contained within this report. 4

5 EVALUATION AND COMMENTS Primary Inventories Based on the work performed, Internal Audit believes that Fire Stores Inventory, Idaho Ice World Inventory, and Warm Springs Golf Course Inventory operational delivery of service, management oversight, and accounting control is best characterized by a performance level of Satisfactory. Audit grades are formally established in the Office s approved policies and procedures, with a Satisfactory grade being defined as follows: Reportable issues may exist within the audited area, but they are not deemed representative of pattern or practice within the area. Issues are typically of an isolated nature. Overall, the systems of internal control are effective and management oversight is adequate and supportive of the accomplishment of goals and objectives Generally, Fire Stores, Idaho Ice World, and Warm Springs Golf Course were found to have implemented adequate oversight mechanisms to guide operations in achieving performance objectives. Audit performed an extensive amount of fieldwork, which resulted in the issuance of Audit Findings for each entity related to segregation of duties. These findings were provided to management, and are also included in the body of this report. In addition, Internal Audit issued informal comments to management, and recommended that additional follow-up occur at their discretion. The issues that gave rise to these comments pertained to greater use of management reports, the disposal of obsolete / dated inventory, and the carrying of excess inventory items. These issues tended to center around a limited number of inventory items they did not appear to be widespread. Secondary Inventories Relative to other inventories that were identified and documented during the course of the review, processes in place appeared to be appropriate to ensure materials were safeguarded, and materials and supplies were carried at reasonable quantities and values. Audit provided management with informal observations where it was deemed appropriate to do so, and left any follow up to management s discretion. No findings of a material nature were noted. (Refer to Appendix A for additional details concerning Internal Audit s existing grading scale.) 5

6 FINDINGS AND RECOMMENDATIONS Audit s Findings are detailed below; including any recommendations that were made, and management s responses to those suggestions. 1. FINDING: Segregation of Duties There is an inadequate segregation of duties at Fire Stores. Staff members are completing inventory-related tasks that are incompatible from the standpoint of separation of duties. RECOMMENDATION: Limit the number of functions performed by any one or single group of employees. In addition, the annual physical inventory should be verified by an employee who is independent of Fire Stores. MANAGEMENT RESPONSE: It is true that there is some lack of segregation of duty functions at the Fire Stores. This predominantly occurs due to the fact that there are only two employees at the store. Those employees not only maintain the store and its inventory, they are also assigned multiple other duties. They deliver supplies, do research, assist in purchasing contracts and respond to fire emergencies. It is our intent with the use of the new Lawson software coming on line this year that we will be able to improve tracking of incoming and out going supplies. We are now completing spot inventory counts on a quarterly basis. To assist the store staff in conducting these counts, when available we will be utilizing modified duty personnel. The doors into the store are key pad secure doors. As of November 2011 there are only three personnel that have access to the store and entry is track able by city security. 6

7 2. FINDING: Segregation of Duties Idaho Ice World There is an inadequate segregation of duties at Idaho Ice World. Staff members are completing inventory-related tasks that are incompatible from the standpoint of separation of duties. RECOMMENDATION: Limit the number of functions performed by any one or single group of employees. In addition, the annual physical inventory should be verified by an employee who is independent of Idaho Ice World. MANAGEMENT RESPONSE: Management agrees that the separation of duties within the Ice World and Warm Springs Golf Course retail shops is not consistent with best practice. This condition is due to limitations imposed by the current staffing models in those facilities. In order to help ensure the accuracy and integrity of the inventory process, staff will either conduct or supervise each others' annual counts going forward or schedule other alternative, non-iiw or WSGC staff to assist in the inventory process such as department accounting staff. 3. FINDING: Segregation of Duties Warm Springs Golf Course There is an inadequate segregation of duties at Warm Springs Golf Course. Staff members are completing inventory-related tasks that are incompatible from the standpoint of separation of duties. RECOMMENDATION: Limit the number of functions performed by any one or single group of employees. In addition, the annual physical inventory should be verified by an employee who is independent of Warm Springs Golf Course. MANAGEMENT RESPONSE: Management agrees that the separation of duties within the Ice World and Warm Springs Golf Course retail shops is not consistent with best practice. This condition is due to limitations imposed by the current staffing models in those facilities. In order to help ensure the accuracy and integrity of the inventory process, staff will either conduct or supervise each others' annual counts going forward or schedule other alternative, non-iiw or WSGC staff to assist in the inventory process such as department accounting staff. 7

8 CONCLUSION Overall, the management teams responsible for the Fire Stores Inventory, the Idaho Ice World Inventory, and the Warm Springs Golf Course Inventory have implemented effective internal control systems. If the recommendations and suggested corrective actions contained within this report are pursued and implemented, they will represent improvements to the processes processes that are already functioning at acceptable levels. Internal Audit would like to express its appreciation for the assistance provided by the management and staff of the Fire Department, and Parks and Recreation during the course of this review. MANAGEMENT PARTICIPANTS PRIMARY INVENTORIES Martin Knoelk, Deputy Chief of Logistics Boise Fire Department Stan Peterson, Supply and Inventory Specialist Boise Fire Department Doug Holloway, Recreation Superintendent Parks & Recreation Tommy Scott, General Manager Idaho Ice World Travis James, Assistant Manager Idaho Ice World Scott McGeachin, Golf Course Manager Warm Springs Golf Course Blake Mason, Assistant Manager Warm Springs Golf Course 8

9 MANAGEMENT PARTICIPANTS SECONDARY INVENTORIES Airport Garry Beatty, Interim Director Sarah Comfrey, Operations Manager Mike King, Airport Facilities Manager Gary Allen, Airfield Operations Supervisor Richard Jensen, Custodial Supervisor Central Services Sylvia Marmon, Supervisor Fire Maintenance Martin Knoelk, Deputy Chief / Fire Logistics Police Department Candy Towne, Accounting Supervisor Linda Perryman, Supply and Inventory Specialist Public Works Glen Schwenke, Manager / Lander WWTP Bill Duncan, Manager / West Boise WWTP Karla Lippincott, Warehouse Supervisor Rod Rodriguez, Supply & Inventory Specialist / Lander WWTP David Shumway, Inventory Supervisor / Utility Maintenance 9

10 APPENDIX A Evaluation and Grading of Audits Each audit will be evaluated or graded, and will receive one of the five following ratings. Grades will be assigned based on the perceived best fit. Thus, not all attributes associated with an assigned grade may be present within a given Department or Division. High Satisfactory No significant weaknesses or deficiencies were noted during the audit. If any issues were noted, they were clearly insignificant or inconsequential. The audited area displays a high degree of control and management oversight is effective. Satisfactory Reportable issues may exist within the audited area, but they are not deemed to be representative of pattern or practice within the area. Issues are typically of an isolated nature. Overall, systems of internal control are effective, and management oversight is adequate and supportive of the accomplishment of goals and objectives. Low Satisfactory Reportable issues exist within the audited area, and are encountered frequently enough to lose the appearance of isolated. Systems of internal control appear to be marginally adequate at best. Management oversight is not always effective to ensure the quality of operations. Needs Improvement Weaknesses or deficiencies are encountered on a relatively frequent basis within the audited entity or function. Issues noted, and their frequency, are suggestive of a pattern or practice of inadequate oversight. Internal control mechanisms may not be universally in place, implemented, or actively observed. Management oversight is weak, or is not always effective. Unsatisfactory Material or significant deficiencies are noted within the operations under review. Issues may pose risks that are either missioncritical or mission-fatal. Management has failed to implement appropriate internal controls. Management oversight is ineffective, absent, or willfully avoided. 10