Physical Inventory

Purpose:

The Auditor is responsible for ensuring that the contractor has scheduled and performed physical inventories of Government property in accordance with the contractor's

approved PMS. The basic objective is to determine the effectiveness of the physical inventory process about physically locating and counting Government property, comparing the results to the records, posting the findings and adjustments, and reporting the adjustments to the PA.

Process Segments:

• Performance

• Recording

• Material Records Adjustments

• Reporting of Inventory Findings

Population: The Auditor has the option of performing the PMSA of the contractor's physical inventories either during the performance of the inventory or subsequent to its completion. In either case, the tests shall evidence physical counts of selected items, verification of the entries on count slips, comparisons with records, preparation of documents necessary for any adjustments required, approval of adjustments, and the referral of lists of all recorded adjustments to the PA. Populations and their respective samples may be drawn from physical inventory documentation such as count slips, inventory tickets, computer printouts, or similar items. Subjective evaluations may include a review of the techniques employed by the contractor to accomplish the physical inventory; e.g., ensuring the inventory was accomplished and completed as scheduled, ensuring the inventory was not performed by the individual(s) responsible for keeping the records, and inventories are performed at contract completion, when

required.

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Process Segment: Performance

Population: Populations may be arrived at using a variety of techniques. One method, for contractors with limited amounts of Government property who use a wall-to-wall inventory would be to use the entire physical inventory listing compiled through the accomplishment of the physical inventory. This may be in the form of a computer printout, in the case of an automated system, or the actual count sheets in a manual system. Another method may be used when a cyclic physical inventory is performed.

This involves the selection of a sample from the items completed during that cycle, e.g., those items counted in a one month period, etc., rather than waiting for the entire

physical inventory to be completed.

QUESTIONS:

• What process is the contractor using for performing the required physical Inventories? Cyclical, stratified, Inventory by Exception, etc.

• Where VCSes or ILPS are applied for this process are the criteria set forth in the VCS/ILP applied through the contractor’s PMS?

• Are the physical Inventories performed in accordance with the schedules and procedures (PMS) approved by the PA?

• Review submission letters for statement of dates performed, when applicable.

• Who performed the inventory? How do you know who performed the inventory?

• What procedures does the contractor have for performing physical inventories upon contract completion or termination?

• Have these procedures been used during the past PMSA cycle? Has the Government PA, waived these requirements for transferred items?

• Has the property, during the course of the physical inventory (including inventory by exception) been sighted and counted, either manually or electronically?

• Is there documentation or data to support this?

• Was the count accurate?

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Process Segment: Recording

Population: The same population(s) may be used for performing this Process Segment as for the Process Segment of PERFORMANCE.

QUESTIONS:

• Where VCSes or ILPS are applied for this process are the criteria set forth in the VCS/ILP applied through the contractor’s PMS?

• Was the inventory posted to accountable record within a reasonable period of time in accordance with the contractor's PMS?

• What is the time frame specified within the contractor's PMS? NOTE: In the case of automated systems this may be immediate or done as a down load to a mainframe or desktop PC.

• In a manual system, were the quantities on the record the same as the quantities on the count slips?

• Were the entries specified as the periodic physical inventory?

Process Segment: Material Records Adjustments

Population: The documentation may consist of the contractor's required listing of all discrepancies reported to the PA. From this listing all reports of MATERIAL

adjustments should be used as the population from which to select a sample. In a cyclic or inventory by exception basis, only those items reported discrepant during the specified period of counting, issuing, maintaining, etc will be used as the population.

These discrepancies need to be evaluated from the standpoint of prompt and timely posting to the accountable records as well as reasonableness.

QUESTIONS:

• Were the material adjustments posted to the stewardship records? [NOTE:

Many PAs make the mistake of believing that they must approve the adjustments prior to the contractor posting the results. This is incorrect in that the PA is only involved from a liability standpoint and therefore his/her decision has no impact or role in regard to the actual physical count that the contractor made.]

• Were the material adjustments PROMPTLY posted to the accountable records?

• What is the timeframe for posting specified in the contractor's PMS?

• Were these entries clearly identified as inventory adjustments on the accountable record?

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Process Segment: Reporting Inventory Results

Population: The documentation may consist of the contractor's

required reporting of all discrepancies reported to the PA and, where requested, to the Contracting Officer.

QUESTIONS:

• Where VCSes or ILPS are applied for this process are the criteria set forth in the VCS/ILP applied through the contractor’s PMS?

• Were the results of the physical inventory submitted to the PA in the time stated in the contractor's PMS?

• If the contractor did not report as stated in its PMS was a delay authorized by the PA?

Property to Record Reviews (REDUX)

In addition to the normal record to property analysis it is STRONGLY SUGGESTED that the Auditor perform a property to record review. This entails the random selection of property from the floor with the property then being traced back to the record to assure that a record has been generated or is being maintained. It is important that the Auditor be aware that the selection of the property from the floor be random. A simple

technique to ensure randomness is to use the same sample sizes determined under the Process Segment of "All Records of Government Property" and prior to reviewing these items, determine that you will select either the item above, below, to the left or to the right of the sampled item as your property to record sample. This way you remove the possible accusation of selecting a biased sample.

The main concern in this Process is to assure that all property was physically

inventoried. The Auditor shall select a random sample of the same size as the sample selected for either performance or recording. A random selecting of the property on the floor must be chosen as described above and then verified to see if this property was physically inventoried and posted to the records! The purpose of this property to records review is to assure that all property was in fact inventoried. Reason: Only the property actually counted will show up on the reports -- there may have been some property "missed."

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