Nature of Inventory Management

Jashley: The nature of the operational audit conducted in the case falls within the scope of inventory
management, which starts from the purchase of orders until the delivery of the goods.

Additionally, the purpose of the operational audit of CV. X is to increase the effectiveness, efficiency, and
economy of the company’s management of its inventories which cover six types including 1) raw material,
2) semi-finished goods, 3) supporting goods, 4) spare parts, 5) finished goods, 6) and consignment goods.

Processes of Operational Audit

Winnie: The processes and methodologies conducted in the operational audit consists of five stages
namely: 1) planning, 2) audit program, 3) fieldwork, 4) audit findings, and 5) audit report.

I’ll be discussing the first two processes to be followed by Klien’s discussion on the last three processes of
operational audit.

In planning, the auditor usually obtains more detailed knowledge about the client’s business and industry
in order to understand the transaction and events therein.

Planning is where everything starts. This stage an early stage of the operational audit starting from the
preliminary survey. After which, the researchers collected data to explore the company’s business
operational processes and internal controls related to inventory management. This was done through: 1)
conduct of semi-structured interview with managers/officers/employees with significant roles in CV. X’s
inventory management, 2) observation to compare inventory management procedure with facts on the
ground to know whether the procedures have been implemented properly or not, and lastly 3) document
analysis.

Through these 3 methods, the researchers can identify critical problem areas which are related to three
important things: effectiveness, efficiency, and economy. These three are inseparable and must be
achieved in improving the company’s performance and competitive ability.

Klien: After planning, audit program comes next. It contains instruction and information useful to the
audit. This stage bridges planning and fieldwork. It lays out what should be done by the auditor to fulfill
the objectives in the audit scope.

From planning, critical problem areas that are obtained can be used for a basic program audit.

For example, one of the audit programs applied during the conduct of CV. X’s operational audit is when
there is a risk of material loss for the company during a natural disaster, auditors can 1) conduct an
interview with the company’s president director regarding the company’s readiness to face and natural
disaster, and 2) evaluate the company’s business vulnerability.

After the audit program, an auditor then sets out to conduct a fieldwork, using the results from the audit
program stage.
When doing fieldwork, its purpose is it gather evidence that may support the audit process. Through
fieldwork, auditors get to witness or observe the operations of the business first-hand. This will allow the
auditor to produce more accurate and reliable audit findings.

Crystel: After objective evidences have already been gathered, audit findings will be developed next.

Audit findings explains something right now or in the past that include something wrong or something
that could be wrong. It contains the following elements: 1) condition, 2) criteria, 3) cause, 4) effect, and
5) recommendation.

One of the recommendations from the researchers in the study include what CV. X should do in times of
natural disasters.

“Use asset protection in the form of insurance because risk and cost are lower than self-insurance. The
company can insure their inventories for the reason that inventories are the main activity of the
company.”

This recommendation can be written in the researchers’ or auditors’ audit report, which is the last stage
or processes of the operational audit.

Audit report’s purpose is to communicate the audit findings to the management and to the company as a
whole. This is also one of the most important processes in the operational audit, because audit findings
are meaningless if not communicated to the company who will implement them or will put them into
action to achieve its goal which are: effectiveness, efficiency, and economy.

Challenges Encountered
Jaylord: One challenge identified by the researchers in their conduct of the operational audit is the
limitation in the audit scope which only covers inventory management. It limits data retrieval because of
the company’s assessment.

On the other hand, the study did not discuss the other activities of the company, as it mainly focused on
their inventory management. Consequently, the recommendations given are limited to the manufacturing
company.

It is difficult to apply to businesses whose nature are other than manufacturing to increase their
performance and their decision-making.s