Apollo Shoes Case Inventory Observation Memo

Inventory Observation MEMO

Before verification, management should issue instructions to stock personnel that covers all phases of physical verification. This instruction should be in writing. Then the auditor should examine these instructions to verify their efficiency.

In this case, Andrew Jacobs issued instructions to count inventory but he made no considerations to:

1. Any stock held by the company that is related to other parties. For example goods to be returned to the supplier but haven't been done yet.

2. Stock in transit and process

3. Obsolete items and scrap stock

Hand count instructions were followed by the count team. (Refer to attachment 1)

There also should be well designed procedures when it comes to identifying defective, damaged, obsolete, and slow moving inventory. Write offs of excess or scraps should be valid and authorized first.

I also observed that the Company does not have any polices regarding these procedures. There were plenty of instances where slow moving goods were identified. I also noticed that slow moving goods were purchased even though there were plenty of them in stock. (See Attachments 2 and 3)

The Company also doesn't have any policies that relate to identification and disposal of obsolete goods. It has been noted that pallets of obsolete shoes were found near the back of the warehouse with no written notes attached to them. This leads to risk of loss of obsolescence, and non-identification of inventory theft. The inventory is also at risk for physical deterioration. Employees could also use inventory without authorized use or dispose of it.

For count procedures to be effective there should be at least one person who is independent of the regular storekeepers and the auditor that also does test counts. And when doing test counts, the auditor should give consideration to stocks that have high value. Proper sampling needs to be done here.

With this Company, none of the peopled involved were independent of the regular storekeepers. Out of 98 count sheets, only 7 were rechecked on a random basis without being pre-information to Apollo personnel. There were no differences observed between the test counts and those counted by the client. The numbers on the boxes in the warehouse were open to be sure there were shoes inside of them.

When the physical verification is being done, there shouldn't be any movement of stocks. In this Company, employees were instructed that no sales and no movement of inventory was to take place during the count. However, the records show that 8,434,889.09 shipments of shoes were received on December 31. This was counted into inventory.

Employees need to take consideration to physical condition of inventories as well. Some pallets of shoes stacked near the back of the warehouse were covered with dust and looked very old.

Other observations I noticed was that original physical verification sheets were reviewed and some valuable items were traced and selected for the final inventories. Details of final inventory were compared to stock records. The Companies procedures put into place to account for the movement of inventories from one location to another were reviewed.

The warehouse was arranged nicely and well maintained. The stock was protected against weather and other losses.

There was also an examination of sample documents for evidencing the movement of stock into and out of stores.