Exceptions around cycle counts 2311
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Controls state that raw materials will be cycle counted weekly and finished goods will be counted semi-annually. Both counts were not performed, and controls failed. At year end however, all raw materials were counted, and finished goods older than 2 months were counted (with a full count planned for last week of March 2008).
Results of both these counts were favorable. We’re a non-accelerated filer, and plan to file our 10k on March 25th. I’m in the process of evaluating these exceptions and am inclined to consider them as significant deficiencies, if not material weaknesses. We’re a manufacturing company, and inventory is therefore a critical component of our financials.
Any feedback/input is appreciated.
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Were reasons given for failure to count the controls as frequently as your controls matrix indicated that they were to be counted?
What other controls are in place to ensure that COGS and inventories are stated correctly?
It appears that your FS were stated correctly at YE (based on successful counts at YE). I would not be inclined to go the Material Weakness route at this point unless you feel that there is still some risk in your FS due to the infrequent counts.
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Although FS were accurately stated at YE, wouldn’t it be prudent to consider the ‘reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s ICFR’? As I understand it, just because a misstatement has not occurred does not necessarily mean a material weakness does not exist.
I raised the issue to my CFO and got pretty much the same response that you provided. I then sought feedback from a collegue (Compliance Mgr) and he was leaning towards the issues being material weaknesses. I’m awaiting feedback from our EA before making a final decision on this.
Thanks for your reply; always good to get feedback from various sources.
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Along with the lack of effectiveness of this control, you need to look at your other controls that would either mitigate or compensate for this breakdown. After factoring in those other controls, you will be in a good position to make a call on the level of significance of this deficiency.
Unfortunately (or fortunately, however you want to look at it), there is no one-size-fits-all answer for a specific control breakdown. Due to confidentiality issues, you probably cannot provide us with all of the other details of your FS (total assets, total inventory subject to this control, total sales, total COGS, etc.) where we could each make our own call. It really is a judgment call. I would think long and hard before making a material weakness call. Usually, this will entail more than just one control failing. Certainly, a SD will get the attention of management and the audit committee of the BOD such that the control receives the proper attention in 2008.
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Ingor13 wrote:
At year end however, all raw materials were counted, and finished goods older than 2 months were counted (with a full count planned for last week of March 2008). Results of both these counts were favorable.
Without a cycle count program you need to take full physical inventory counts. An effective cycle count program prevents you from having to take a full physical inventory if it is designed and ran effectively. It seems your company did both cycle counts and a full physical in this case. I see your point in that the cycle count program was not operationally effective, however, I do not believe you can identify this as a material weakness given the fact that a full physical inventory count was performed at year end.