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COTTON & COTTON

COTTON & COTTON

Internal Audit Report


Fabric Stock Count, Aug-Sep, 2012

INTERNAL AUDIT REPORT


FABRIC STOCK COUNT
AUG-SEP 2012

COTTON & COTTON

Internal Audit Report


Fabric Stock Count, Aug-Sep, 2012

Table of Contents
INTRODUCTION

OBJECTIVE & SCOPE

OVERALL EVALUATION

FINDINGS & RECOMMENDATIONS

1.DAMAGED FABRIC IN THEROLLS 3


2. A.REGALIA WAREHOUSE ACCESS UNRESTRICTED

3. INVENTORY RECORDS INACCURATE AT A.REGALIA

4. A.REGALIA WAREHOUSE PERSONNELS IGNORANCE


5
5. FABRIC ISSUANCE WITHOUT FORMAL APPROVAL
6. IMPROPER PLACEMENT OF FABRIC ROLL

AT

OF

AVAILABLE FABRIC

A.REGALIA WAREHOUSE

7. NO FABRIC TRANSFER RECORD & PROPER MAINTENANCE


WAREHOUSE
6
8. UNRESTRICTED ACCESSTO FABRIC AT C&C WAREHOUSE
9. NO

INITIAL

MEASUREMENT OF FABRIC AT C&C

AT

C&C

10. NO PACKING LIST OF FABRIC TRANSFERRED 8


11. DUBIOUS PURCHASE INVOICES 9
12. FABRIC BEING FRITTERED AWAY AT C&C WAREHOUSE
13. IMPROPER MANAGEMENT

OF

FABRIC DATA

GENERAL RECOMMENDATIONS

10

10

OUR OPINION 11
SUPPORTING PICTURES 12

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Internal Audit Report


Fabric Stock Count, Aug-Sep, 2012

Introduction
A.Regalia (Private) Ltd. operates awarehouse for fabric required in their
day-to-day productions. The Inventory contained in this warehouse
constitutes a significant quantity of fabric that belongs toCOTTON &
COTTON.Inventory records for the fabric aremaintained electronically.
The warehouse is inventoried on a perpetual basis.
Objective and Scope
The objective of this audit was to determine Quantity of the Fabrics and
the accuracy of the Warehouse inventory records. Specifically, we
inventoried 243 itemsas provided bytheInventory Stock Master Report.
The audit was conducted in accordance with Internal Audit Standards
andaccordingly, included tests of inventory records and such other
auditing procedures as weconsidered necessary in the circumstances.
Overall Evaluation

Inventory records at the A.Regalia Warehouse were not totally

accurate.
No inventory record at C&C Warehouse.
Further, there was no proper policy and procedure for performing the

perpetual inventory.
In addition, wefound access to the Fabric warehouses, both at C&C
and A.Regalia, were not restricted to warehouse personnel only,
everyone had access to it.

FINDINGS AND RECOMMENDATIONS


1. Damaged Fabrics
a. Finding
While unrolling the fabric, it has been observed that some fabric was
found damaged, i.e. half of the fabric roll was misprinted or damaged for
instance F.11.0654.
b. Recommendation

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Internal Audit Report


Fabric Stock Count, Aug-Sep, 2012

Before purchasing the fabric, the Merchandising Manager should


intimate the vender that any fabric found damaged or misprinted in the
roll would be returned and money be repaid for that quantity. These
terms should be agreed upon first before purchasing the fabric.
c. Department Comments
According to merchandising manager fabric once purchased can only be
returned, in case of damage, if the bill has not been paid of the
respective vender. If it is cleared then neither

damage fabric will be returned nor will money paid be refunded. Hence
the company will have to bear the loss, whatsoever.
d. Evaluation of Department Comments
The merchandising managers comments portrayed that as if there is no
way of mitigating the loss, whereas this may not be the case. There
should be some way to reduce such losses as they may accumulate to
huge effect.
2. A.Regalia Warehouse Access Unrestricted.
a. Finding
Access to the A.Regalias Warehouse was unrestricted. We found the
doorto the warehouse open to all. By notrestricting accessto only
warehouse personnel, fabric may be removed without
properdocumentation and hence may result in fabric being theft.
b. Recommendation.
The Management should consider limiting access tothe Fabric Warehouse
to essential warehouse personnel only to avoid any discrepancy relating
to fabric.
c. Department Comments
Regalia W.H management is of the view that at times it happens that
people from other departments often enter W.H and have easy access to
the fabric but this is not the usual case.

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Internal Audit Report


Fabric Stock Count, Aug-Sep, 2012

d. Evaluation of Department Comments


Management comments showed a casual attitude towards noncompliance of SOP. However, they were responsive to the audit finding
and recommendation.
3. Inventory Records Inaccurate At A.Regalia
a. Finding
Our test of the inventory records at the A.Regalia Warehouse found
themto be inaccurate. Our physical measure of 243 items found
discrepancieswith 98 of them, a 40.33% error rate. The cut off mark
for discrepancy is considered greater than or equal to 1m. The lack of
policies and procedures as well as the unrestricted access tothe
warehouse may have contributed to these errors.
b. Recommendation
A.Regalia Warehouse personnel should ensure that inventoryrecords are
accurately maintained.
c. Department Comments
Warehouse Heads perspective was that staff issues fabric without formal
approval and that quantity is often not excluded from system, however
this should not happen.
d. Evaluation of Department Comments.
Management comments were responsiveto the audit finding and
recommendation.
4. A.Regalia Warehouse Personnels Ignorance of Available Fabric
a. Finding
A.Regalia Warehouse personnelswere unaware as to the presence
ofvariousfabrics in the store. When inquired from the store Incharge,
about few fabricsmentionedin the report,he was uncertain about its
presence at the store. He was of the view that those fabrics were at C&C
head office warehouse. However, these were later found at the A.Regalia
Store.

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Internal Audit Report


Fabric Stock Count, Aug-Sep, 2012

b. Recommendation
The Warehouse personnel should be fully aware of the presence of
various fabrics in the store.Especially the senior staffthat handles and
issues the fabric should be well informed of the fabrics in their vicinity,
what is being issued and what quantity is left.
c. Department Comments
The Head of Warehouse and Store Incharge were of the view that senior
warehouseperson was confused as to the availabilityof few fabric rolls at
store. He thought that fabric rolls not presenthave been fully consumed,
but it was not the case.
d. Evaluation of Department Comments
Management comments were responsive to the audit finding and
recommendation. However, management is unnecessarily
supportingcasual attitude of the employees.
5.Fabric Issuance without Formal Approval
a. Finding
At a certain situation it was observed that A.Regalia Warehouse
personnel issue the fabric required for production without formal email
and STN. Fabric was issued on just word of mouth; however this was
against the SOP for issuance of fabric. This may result in the discrepancy
relating to fabric available.

b. Recommendation
The Warehouse personnel should not issue any fabric without formal
email or STN from the person or department who requires it. There
should be strict compliance to the SOPs to avoid any fabric shortage.
There should not be informal attitude towards Sop compliance.
c. Department Comments
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Internal Audit Report


Fabric Stock Count, Aug-Sep, 2012

The Store Incharge told us that it is not the usual case but it happens at
times.
d. Evaluation of Department Comments
Management comments showed a casual attitude towards noncompliance of SOP. However, they were responsive to the audit finding
and recommendation.
6. Improper Placement of Fabric Roll at A.Regalia Warehouse
a. Finding
It has been observed that fabric rolls at A.Regalia Warehouse have not
been kept in the racks allocated by the system.
Moreover fabric rolls of different brands such as C&C, Redford etc. has
not been kept separately.
b. Recommendation.
Fabric rolls should be kept in the allocated racks so that complete track
of the fabric can be kept. Furthermore, fabric rolls of different brands
should be kept separately so that there is no confusion as to the
existence of any fabric at warehouse.
c. Department Comments
The A.Regalia Warehouse Head has also recommended that Fabric Rolls
of C&C should be kept intact at same place.
d. Evaluation of Department Comments
Management comments they were responsive to the audit finding and
recommendation.
7.No Fabric Transfer Record & Proper Maintenanceat C&C
Warehouse
a. Finding
C&CWarehouse personnel do not maintain any recordregarding the
fabric receivedand transferred to the A.Regalia Warehouse. Even

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Internal Audit Report


Fabric Stock Count, Aug-Sep, 2012

quantity offabric left at C&C warehouse is also not known to the store
incharge.It is a real dilemma. This is a significant and critical issue.

Considering FABRIC being the MOST PRECIOUS ASSET of our


company, its security and management ishighly questionable at H.O
warehouse! Moreover the loose fabric is piled up in dusty place and this
may damage or get the fabric dirty.
b. Recommendation.
Immediate action needs to be taken to restructure the job description of
C&C Warehouse Incharge which should include the responsibility of
fabric as well. Proper documentation of the fabric issued and left at store
should be maintained by H.O warehouse personnel. Moreover proper
SOP needs to be structured for the issuance of fabric for different orders
to A.Regalia. This may avoid fabric theft,if any.
Moreover, fabric should be reserved at some neat and clean place to
avoid any damage or spoilage.
c. Department Comments
When inquired, the store Incharge told us that it is not his responsibility
to look after the fabric only the helper keeps track of it. Moreover, even
the Manager Merchandising says that its not Store Incharges
responsibility to keep an eye on fabric. Manager further added that they
dont have enough time to keep record of fabric movement only A.Regalia
people should do it.
d. Evaluation of Department Comments
It seems from the management comments that it does not want to take
responsibility of the fabric at C&C Warehouse due to work load and
limited staff.
8. Unrestricted Access to Fabric at C&C Warehouse
a. Finding

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Internal Audit Report


Fabric Stock Count, Aug-Sep, 2012

Access to the fabric, at C&C Warehouse, is unrestricted.It has been


observed that at a certain time warehouse personnel has also tore away
small piece for personal use. This is just a small incidence, but by
keeping fabric at open place may even result in fabric theft of large
quantity, as this has happened in past at other companies.

b. Recommendation.
The C&C Store Incharge should consider limiting access tothe Fabric to
essential warehouse personnel only to avoid any discrepancy relating to
fabric. Moreover, arrangement should be made to keep fabric at some
closed and restricted place.
c. Department Comments
Merchandising Manager was of the view that it is not possible to stop any
one room accessing fabric. Moreover, he affirmed that it is possible to
keep a separate space at C&C Warehouse which will be locked and
restricted to essential personnel only.
d. Evaluation of Department Comments
Management comments were lessresponsiveto the audit finding and
recommendation.
9.No Initial Measurement of Fabric Purchased
a. Finding
Fabric purchased by the merchandising department at C&C, is not
metered when it is initially received at C&C Warehouse. This may not
discover any shortage of fabric in new purchase. However a shortage has
been identified while measuring a packed fabric roll by the auditor.

COTTON & COTTON

Internal Audit Report


Fabric Stock Count, Aug-Sep, 2012

b. Recommendation.
Any fabric purchased should be measured at C&C warehouse. This would
elude any fabric shortage in new purchases. Moreover, this would not
only minimize the losses of the company even the cost of purchasing
extra fabric to compensate the short fabric would also be reduced.
c. Department Comments
Merchandising manager was of the view that fabric rolls cannot be
measured at C&C Warehouse due to non-availability of Meter and rolling
machine.
d. Evaluation of Department Comments
Management comments were responsive to the audit finding and
recommendation.
10.No Packing list Of Fabric Transferred
a. Finding
According toC&C Warehousepersonnel, A.Regalia personneldoes not
send signed gate pass to

ensure fabric rolls being received at A.Regalia, whether of packed or


loose fabric.This may result
in Fabric being embezzled on the way,once it leaves the C&C premises,
as there is no written proof as to the quantity of fabric send. Hence
people carrying and receiving the fabricwill not take the responsibility
ofany loss.
However, the packing list is usually send after 4 to 5 days, and/or at
times after the whole fabric is being consumed in production.This isalso
send after constant demand from the A.Regalia personnel and hence the
purpose is not fulfilled.
b. Recommendation

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COTTON & COTTON

Internal Audit Report


Fabric Stock Count, Aug-Sep, 2012

Proper packing list containing the details of the fabric should be attached
and send, so that people carrying and receiving should be aware that
how much is being carried and same is being received. Proper receiving
should be taken by the respective persons dealing the movement of
fabric. This would mitigate the chances of any loss.
c. Department Comments
Manager Merchandising statedthat they just send the fabric as per the
email, stating the demand, received from A.Regalia and that is the only
evidence of the quantity send. Gate pass is issued to the person carrying
fabric to A.Regalia but receiving is not taken from the store incharge at
Regalia.He further added that gate pass should be given and received at
A.Regalia.
d. Evaluation of Department Comments
Management comments were responsiveto the audit finding and
recommendation.
11. Dubious Purchase Invoices
a. Finding
While viewing the purchase receipts of local fabric, it is observed that
many of the purchases have been made on the basis of simple cash
memos with just quantity and amount mentioned andname of vender and
the type of fabric was not mentioned. Moreover, visiting cards has also
been used in place of purchase invoices on which just the quantity
purchased and the amount is mentioned and transaction has been made
on thesetypes of so-called bills. This is may even encourageother
employeesto make fake invoices and bills in future, if not today.
Moreover, the accounts department is also making payments on such
dubious bills without any inquiry as to the vender name or other details.

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COTTON & COTTON

Internal Audit Report


Fabric Stock Count, Aug-Sep, 2012

b. Recommendation.
Being a leading brand in the market, merchandising department should
demand proper bill from the vender for the purchase of fabric. If any
vender that cannot generate proper purchase invoice or bill, then some
other vender should be opted for purchase of fabric.
Furthermore, the accounts department should also not accept any
doubtful bills or invoices.
c. Department Comments
Manager merchandising commented that due to lack of time we cannot
demand proper invoice so we just take quantity and amount on
temporary cash memo or visiting card. He added that even the shops do
not have invoices or proper bill books to provide us.
d. Evaluation of Department Comments
Management comments showed a lenient attitude towards the
observation highlighted.
12. Fabric Being Frittered Away At C&C Warehouse
a. Finding
While conducting audit at C&C Warehouse it has been found that many
satisfactory fabric pieces are being dumped in the cartons and left to be
damaged. Around 108 fabrics of range of 1.5 m 2 m and 283
fabrics of 1 m & plus were there. Moreover, 7 fabrics were also there
of length varying from 2.5m-9m.
Still these fabrics can be recovered and profitably be used in producing
MTO Shirts and boxers. This issue is highly questionable on the part of
Merchandising Department as the company is already in critical position
b. Recommendation.
The fabric being deserted at C&C Warehouse should be removed from
scrap and used in producing shirts. Merchandising department should
take immediate action and mitigate this loss of the company.
c. Department Comments

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COTTON & COTTON

Internal Audit Report


Fabric Stock Count, Aug-Sep, 2012

Merchandising department commented that they were not aware of the


fabric being scrapped and left to be damaged.

d. Evaluation of Department Comments


The comments of the respective department were showing negligence
towards an important asset of the company. However this should not
have been the case as the C&C Warehouse personnel should have
complete knowledge of the fabric in their vicinity.
13. Improper Management Of Fabric Data
a. Finding
The fabric data maintained at A. Regalia is not updated on timely basis
and hence accurate track of the fabric can be kept. This may further
result in the discrepancies regarding fabric.
b. Recommendation.
Fabric data should be updated on timely basis. No fabric should enter or
be issued without entry into the database of the fabric. Hence it should
give clear position of the fabric in the warehouses.
c. Department Comments
Department Head was of the view that staff does not follow SOPs
regarding issuance of fabric so the fabric data base is not updated on
timely basis.
d. Evaluation of Department Comments
Management comments showed a lenient attitude towards the
observation highlighted.
GENERAL RECOMMENDATIONS

A separate space should be allocated to the fabric both at C&C and


A.Regalia to preserve its security and maintenance.

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COTTON & COTTON

Internal Audit Report


Fabric Stock Count, Aug-Sep, 2012

If measuring of meter cannot be done at C&C then, instead of sending


the limited quantity of fabric, the whole of the fabric roll should be
issued to A.Regalia from which the order is demanded. This way
packed fabric rolls can also be measured and shortage, if any, will also

be identified.
Fabric Swatches should be maintained both at A.Regalia and C&C so
that every person dealing with fabric should be well informed of its

code and type.


Concerned department should maintain fabric data in a way that it
should clearly indicate EXACTLY where the fabric exists; whether at
C&C Warehouse or A.Regalia Warehouse.

There should not be any confusion regarding the availability of fabric

at either Warehouse as this has been observed during the audit.


There should be single line of authority regarding the fabric dealing.
As fabric is both at C&C and Regalia warehouse so only one person
should be held incharge and then he should keep a close eye and
coordinate with the whole chain dealing with the fabric. This way
people can easily be accountable for their doing and held responsible
for any shortage of fabric, if any.

OUR OPINION
We confirm that we have conducted our internal audit work in
accordance with the Internal Audit Standards. We planned and
performed our internal audit work to obtain reasonable, rather than
absolute, assurance that the systems were operating as described by the
SOPs and other rules of Organizationwith the exception of the above
discrepancies found during audit. However, we have completed all of
our internal audit work in accordance with Internal Audit Plan discussed
and approved by the Brand Manager.
If you have any queries in relation to this correspondence, please do not
hesitate to contact Internal Audit Department.

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Internal Audit Report


Fabric Stock Count, Aug-Sep, 2012

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