Seaside Community Hospital

Storeroom Inventory Audit performed by Ed Lauer

Purpose of audit● Investigate internal controls of Hospital Storeroom

● Concerns over the inventory expenses and recurring inventory variances

● General ledger balance has decreased by $50,000 over the past year

○ Total supplies expense has increased by $2 million

● Hospital supply expense is exceeding budget

○ Patient volumes remain stable

Current Controls● Storeroom

○ Supply level triggers a purchase order to alert the requisitioner

○ When an order is input into the system, it generates the selection of the requested number of

that item by the picker

■ The picker is responsible for providing the correct item quantity to the requisitioner

● Accounting System

○ General ledger balance for storeroom inventory is adjusted monthly

■ Based on a perpetual inventory system

○ Year end physical count is performed by storeroom staff and witnessed by external auditors

○ Cycle counts of 10 randomly selected items are performed on a monthly basis

Current Controls● Pricing

○ Negotiated at a percentage discount

■ Based off of list prices with the vendors for 500 stock items

○ Non-stock items are non-negotiable - purchased at list price

○ Purchases over $100,000 require secondary approval from storeroom manager

● System Access

○ Changes to employee access must be submitted within 30 days of status change

○ System analysts annually request that department managers evaluate and confirm required

level of employee access

Control Deficiencies

Requisitioning● Requisitioner can place orders for both stock and non-stock items without

secondary approval

● The requisitioner is also responsible for delivery

○ There is no separation of duties in regards to delivery

■ Unsure if hospital department managers count received goods

○ Potential for fraud to escape detection

Ordering● Too many employees possess authority to order items

● The ordering of goods should not be decided by storeroom personnel

○ System-established replenishment level

● When UCC’s order items, they are delivered straight to UCC

○ Storeroom receivers cannot ensure that all items were received

■ Could contribute to high variance and supplies expense

● Special order items are not logged

Receiving● The “Receive All” function can cause counting errors

○ Items not properly counted; could be paying for items not received

■ Could be cause for variance in inventory amounts, and shrinkage

Physical Security● Hospital staff and vendors having access to the storeroom

○ Take items as needed without the responsibility to record the withdrawal

● Loading bay door

○ Personnel without storeroom access can enter

● Storeroom manager lending keys to another employee

○ Increases risk of theft

Purchasing/Pricing● Notifications of changes in list pricing

○ Not immediate - could cause variances in budget

● Purchasing of non-stock items

○ Cannot negotiate price (account for 20% of purchases)

● “Other” option when entering destination of order

○ Neglects to account for where the item went

System Access● Too much overlap in who is able to perform each task

○ Requisitioner, storeroom staff, and managers all have purchasing power

● Managers only confirm system access annually

● Changes to employees access are submitted within 30 days

Key Metrics● Purchasing Department

○ Special Orders < 20% Total Supplies Expense

● Storeroom

○ Less than 10 Stockout situations per year

■ In a hospital setting, even 1 stockout could lead to a patient’s death

○ If variance isn’t above 6% ($600,000), isn’t seen as a problem

○ Cycle counts of 10 randomly selected items are done monthly (2%)

■ Extremely small sample

Audit Recommended Controls

Requisitioning● Requisitioner can no longer make orders without secondary approval

○ Storeroom manager and hospital department managers should approve orders

● Requisitioner no longer responsible for delivery

○ Picker will now be responsible

Ordering● When supplies are ordered to a UCC, they will be sent to the storeroom for

counting prior to delivery

○ Up to storeroom manager, UCC manager, and vendors to uphold

Receiving● Remove “Receive All” function

● Storeroom manager must now follow up with vendors on discrepancies of

items ordered and items received

Physical Security● Log of loading dock door being opened

● Hospital personnel and vendors no longer have access to the storeroom

● Storeroom manager no longer authorized to lend keys to other employees

● Security cameras will be installed inside the storeroom

Purchasing/Pricing● Changes in list prices updated immediately

● No longer able to use “Other” option when picking destination for an order

● Order of non-stock items

● Decrease amount required for secondary approval on purchases

○ Purchases over $20,000 will now require secondary approval

System Access● Change in access level must be made immediately

○ Also, ensure that the employee receiving the change has proper access

● Storeroom manager no longer able to perform Administrator role

Key Metrics● Purchasing/Pricing

○ Special Orders < 10% Total Supplies Expense

● Storeroom

○ Variance above 1% will be investigated

○ Cycle counts will now be of 50 randomly selected items

■ Standardize how items are counted by number of items in each box

○ No stockout situations in a year

Fraud

YES or NO?● Strong opportunity for it

○ Difficult to confirm entirely

○ Unjustly acquisitions can have drastic, negative effects

● Possible because of poor internal audit controls

○ Failure to count inventory when it is received and signed off on

○ Granting access to individuals who should not be authorized access

○ Failure to separate duties between ordering and delivering

● Storeroom Manager

○ Most likely culprit

○ Total access to inventory room

Follow-Up and Reporting

Follow Up and Reporting● Format write up of our audit

○ Delivered to Department managers

○ Physical copy for reference in later times

● First order - Report our suggested changes to department directors

○ Must address those in charge in order for change to be implemented

○ Understand that all changes take time

Follow Up and Reporting● Second order - Schedule monthly meetings with department directors to

ensure changes are addressed

○ Check up on changes (monthly)

○ Avoid complacency

● Monitor security cameras

○ Will provide evidence if employees are committing Fraud