Internal Audit Report. Materials Inventory. October 31, To:

Transcription

1 October 31, 2001 To: F.W. Bennett D.D. Bidin L.M. Crampton J.L. McCabe M.P. Trigardi B.D. Leavitt R.J. Threlkeld G.N. Sherlock D.A. Harrison L.I. Bell M. Costello Audit and Risk Management Committee AU0208TD Audit Services Internal Audit Report Materials Inventory Prepared by: P.J. Howard R. Haack (Consultant) D. Snow A.Y. Lee

2 Contents 1 Background 2. Audit Objective and Scope 3. Observations and Recommendations 3a. Inventory Cycle 3b. Inventory System and Records 3c. Inventory Counts 3d. Inventory Obsolescence Provision Internal Audit Report Page 2

3 1. Background Materials Inventory is the responsibility of the Materials Management Business Unit (MMBU), within Transmission and Distribution. Store 1 is the primary store location, managing stock throughout the Province, warehousing over a third of the inventory, and distributing stock to 52 locations. At March 31, 2001, BC Hydro carried an inventory valued at $82 million ($78 million after providing for obsolescence) comprising 75,000 stock items. $49 million or 60% of inventory is classified as active. On average, active inventory items are issued at least once a year (1.27 turnover ratio). The remaining $33 million or 40% of inventory are spare parts held primarily to support installed capital equipment in the event of failure or replacement. Spare inventory has a very low issue rate. Internal Audit Report Page 3

4 2. Audit Objective and Scope Objective Provide assurance to management that controls are operational to ensure the physical safeguarding and financial integrity of inventory records. Scope The audit comprised of interviews and discussions with management and staff, review of inventory records, data analysis, and performance of test counts. The audit reviewed business risks, processes, procedures and controls, and focused on the following key areas: inventory purchases, warehousing, transfers and issues; perpetual inventory records including the average pricing formula; inventory counts and adjustments; monthly reconciliation with general ledger financial accounts; inventory obsolescence provision review process; and inventory safeguarding measures, physical and logical. Internal Audit Report Page 4

5 3a. Inventory Cycle The inventory system includes activities carried out for the procuring, warehousing and distributing of materials and supplies used by BC Hydro. In general, inventories are well controlled. Procurement and Purchasing of Inventory Majority of purchases are initiated by Store 1. Replenishment of inventory may be initiated when inventory levels reach predetermined order levels, or by requests of particular business units. Our tests of purchases confirmed that only authorized staff make inventory purchases in accordance with policy. Inventory Receiving, Warehousing and Issues Adequate segregation of duties exists at Store 1, the major purchasing and receiving location. Adequate physical security measures are in place at main store locations to safeguard inventories. Inventory items are issued when authorized to be charged to a project or department. Transfers are generally well controlled. However, transfers are recorded by the issuing store but not confirmed by the receiving store, which provides an opportunity for errors. Management acknowledges the weakness but no action is planned as the Indus programs scheduled for implementation in F2003 will resolve the issue. Internal Audit Report Page 5

6 3b. Inventory System and Records Perpetual inventory records are maintained in a Materials Inventory System which are periodically reconciled and adjusted to actual quantities. In general, we found the inventory quantities reported by the system to be correct. Our tests of the system confirmed that the weighted average price is being calculated correctly. Controls are also in place to detect potential pricing errors. Costs assigned to inventories received, transferred, and shipped have historically been correct, and a monthly reconciliation of the inventory records to the general ledger control accounts was performed. The implementation of the PeopleSoft accounts payable system in June 2001 has created a discrepancy between inventory records and the general ledger account of approximately $1 million at the end of June. We identified that the main reason for the difference is due to US dollar exchange and provincial sales taxes which are not being applied to the inventory records. Detailed reports are not yet available to fully resolve this issue. The record of system access has not been maintained. Some 51 individuals have access to the system, of which several appear to have access to functions beyond their job requirements. Some terminated employees are still showing as active users. Internal Audit Report Page 6

7 3b. Inventory System and Records Recommendations Resolve the current discrepancy between the general ledger and the detailed inventory. Develop usable reports to facilitate the timely reconciliation of inventory. Update system access for current users based on job requirements. Management Action Plans MMBU is working with the PeopleSoft Financial sustainment team, Accounts payable, Transmission and Distribution Decision Support and Audit Services to resolve the interface and reconciliation issues, and make the required corrections. To be completed by November 30, Accounts payable is working to develop and improve report information. To be completed by November Users have been reduced from 51 to 31 and user access is now aligned with job requirements. Internal Audit Report Page 7

8 3c. Inventory Counts Physical inventory counts which confirm accuracy of records are not being done annually as required by policy. Our review of the 20 locations carrying inventory greater than $500,000 indicated that half of the locations, carrying inventory of $16.2 million had not conducted an inventory count in the last year. Furthermore, three of these locations had not conducted a count in over 5 years. Cycle counts are being performed at Store 1, but were not fully completed in the past year. Currently, there is no means to identify cycle counts performed to ensure that all inventories will be counted over a set period. We conducted test counts of selected inventory items and found that they were generally in agreement with the inventory records with only minor exceptions. Our review of inventory count adjustments indicated that some were not properly explained or authorized by individuals with the proper authority limits. Also, adjustments were not reviewed and significant variances are not followed-up. Internal Audit Report Page 8

9 3c. Inventory Counts Recommendations Ensure annual inventory counts are performed as required by Corporate Policy Procedures. Track cycle counts performed to ensure all inventories are counted over a set period. Scrutinize the reasons for overages and shortages during review of inventory adjustments. Ensure that adjustments made are consistent with approval levels. Management Action Plans A plan has been developed with additional resources to ensure inventory counts are done on regular basis. Progress will be reviewed at the end of the fiscal year. An interim process will be in place by December 15, Indus programs scheduled for implementation in Fiscal 2003 will identify cycle counts completed. When reviewing adjustments, the reasons will be considered. Management has modified the adjustment process to require approval and review at the appropriate level. Internal Audit Report Page 9

10 3d. Inventory Obsolescence Provision Active Inventory At March 31, 2001, $3.6 million was set up in the active inventory to reflect obsolete items, as follows: (in $ millions ) T&D Power Supply Total Active Inventory $ $ 2.10 $ Provision $ 3.60 $ 0.04 $ 3.64 Provision % 8% 2% 7% The T&D provision is based on full value of items not moved in the past 18 months while the Power Supply provision is based on 2% of total inventory value. Management believes that the provision has been adequate to reflect obsolete inventories and market value declines. Inactive Inventory Spare parts inventory comprises items which are less than $100,000 each. Over a third of these items have not moved since the system implementation in At March 31, 2001, only $220,000, or less than 1% has been set up to provide for obsolescence, as follows: (in $ millions ) T&D Power Supply Total Spare Inventory $ $ $ Provision $ - $ 0.22 $ 0.22 Provision % 0% 2% 0.7% There is no annual process to evaluate the operational benefit against the cost of holding these inactive inventories, nor is there an annual assessment of obsolescence. We believe the current provision of $220,000 is insufficient. Furthermore, the current financial statement classification of spare inventory as a current asset should be reviewed. Internal Audit Report Page 10

11 3d. Inventory Obsolescence Provision Recommendations The 2% flat rate used as a provision for Power Supply active inventory should be reviewed to ensure it continues to be appropriate. The $33 million in inactive inventory should be evaluated to confirm the operational benefits justify the level of inventory and holding costs. A provision for any decline in value should be recorded. For spare inventory not expected to be utilized within the current year, the financial statement classification as a current asset should be reviewed. Management Action Plans The flat rate provision used for Power Supply active inventory will be reviewed for adequacy for the Fiscal 2002 provision. An initiative will be undertaken to review spares inventory to identify spares no longer required for operations, and a provision for obsolescence will be developed. Estimated completion by March The Corporate Controller Division will review the financial statement classification. Estimated completion by March Internal Audit Report Page 11