Unit:

Subject: Sarbanes-Oxley Act Review - Inventory Management

Title: Risk & Control Identification
Year end:

REFERENCE
CATEGORY
OBJECTIVE
SUGGESTED CONTROLS TO MITIGATE THE POTENTIAL RISK MANAGEMENT CONTROL or COMMENTS (if Risk is CONTROL OWNER

RISK
OBJECTIVE POTENTIAL RISK
(Internal Audit) excluded from the Scope) (Name)

MILL RAW MATERIALS

Receiving of Raw Materials
Raw materials are received and accepted only if
they have valid Purchase Orders. (validity)
INV101 Raw materials are received and accepted on invalid The requirement exists that a goods receipt must reference a
Purchase Orders or without Purchase Orders. The Purchase or Production Order so there is certainty the goods received
following may be received and ultimately paid for, rather were ordered. All goods received are based on a valid Purchase
than returned or refused: unordered raw materials, Order (PO) number. Purchase Order is stated on delivery documents
excessive quantities, incorrect items, cancelled or and is verified for validity.
duplicated deliveries. Raw materials that arrive too early
or too late may be accepted. Company policy is not
followed regarding the handling of receipts for which no
Purchase Order can be located on SAP.

Raw materials are checked for quantity and quality
before being accepted.
INV102 Raw materials received are not subject to an inspection
for quality / quantity. Criteria are not clearly established
for inspecting received goods and services. No policy
is established for inspecting receipts in proportion to
their importance and value. Only the vendor's delivery
note (and not the physical goods) is matched to the
Purchase Order. Inspection results are not recorded to
be available for the vendor evaluation process.
Vendors do not deliver the expected quantity or
materials. Goods receipt discrepancies are not
addressed. Company policy regarding the handling of
under/over deliveries is not followed. Tolerances for
under/over deliveries are set to inappropriate values.
Raw materials are accepted without authorised
documentation (e.g. COAs - Certificate Of Analysis).
Goods counted and inspected before acceptance: overshipments and
unacceptable items are returned to the vendor. Materials are checked
for quantity and quality: Quantities of material received are verified by
actual count, weight, or measurement by the receiving department.
Quality inspection evidenced by inspection reports, notations,
receiving reports, or other acceptable records. Variances in quantity
ordered versus quantity shipped are reported. Quantities less than
those indicated on the Purchase Order may be accepted; however,
quantities more than those indicated on the Purchase Order should be
approved by the requisitioning department and the buyer.

Returns of raw materials to suppliers are properly INV103 Damaged or low quality goods received are not properly
handled. identified and handled. Defective raw materials are not
returned to the supplier and are accepted into stock.
Accounts payable is not notified of goods returned to
vendor, and the invoice is paid. Return deliveries are
not entered promptly into the system in order to reverse
the goods receipt updates. No process is established to
ensure the vendor issues credit memos when
appropriate.
Defective raw materials received from suppliers are logged. The log is
monitored to ensure that the defective goods are returned promptly
and that the credit (AP) is received timely. Rejected raw materials are
adequately segregated from other raw materials and are not used.
Rejected raw materials are regularly monitored to ensure timely return
to suppliers. A security check to either an authorised return form or a
delivery note is performed on all goods leaving the premises.

CATEGORY
OBJECTIVE
OBJECTIVE
Only raw materials received are recorded. (validity)
Raw materials received are recorded accurately.
(accuracy)
Raw materials received are allocated correctly.
(classification)
All raw materials received are recorded.
(completeness)
Receipts of raw materials are recorded timeously
and in the correct period. (proper period)
Received raw materials are safeguarded.
Raw materials are delivered to the correct location.
Expected and overdue orders for raw materials are
monitored.
See weighbridge for relevant controls and risks over
incoming product.
Transfers (issues) of Raw Materials to Production
Issues from raw materials inventory are made only
on the basis of authorised documents.
(authorisation)
REFERENCE
RISK
POTENTIAL RISK
INV104 Fictitious receipts of raw materials may be recorded.
Invalid materials may be recorded. Payments may be
made for fictitious goods.
INV105 Raw materials receipts are not recorded accurately.
Incorrect goods receipt information is entered.
INV106 Goods receipts do not have the correct account
assignments.
INV107 All raw materials are not recorded when received.
Inventory received is not recorded at all. Goods
movements are not captured on SAP (i.e. receipt of raw
materials).
INV108 All raw materials received are not recorded in the period
in which they have been received. Goods receipts are
not entered immediately into the system, particularly on
period-end dates.
INV109 Raw materials are received by unauthorised personnel.
Received goods are not physically secured to protect
them from theft. Personnel are not required to
acknowledge receipt of goods.
INV110 Raw materials are delivered to the incorrect location.
INV111 No monitoring of expected or overdue goods receipts.
Vendors do not deliver on time. No action is taken for
late deliveries.
INV201 Goods movements in SAP (inventory transfers, transfer
postings) are not authorised. Unauthorised issues may
be recorded. Incorrect quantities of raw materials may
be transferred to production. Raw materials not
requested transferred to production.
SUGGESTED CONTROLS TO MITIGATE THE POTENTIAL RISK MANAGEMENT CONTROL or COMMENTS (if Risk is CONTROL OWNER
(Internal Audit) excluded from the Scope) (Name)
SAP edits and validates input GRN data on-line. The values that are
allowed, for example, for a material master, are known to the system.
Upon entry in the field SAP automatically checks the value entered
against the values available in the configuration tables. Most goods
receipts are created with reference to a Purchase Order.
Capturing of receipts directly into SAP: Mandatory fields, Tolerance
levels, Visual checks by operator, e.g. key in material number and
description appears on the screen, Limit/reasonableness checks on
quantities (e.g. no negative amounts). SAP edits and validates input
Goods received note (GRN) data on-line. Most goods receipts are
created with reference to a Purchase Order. SAP then copies
information from Purchase Order into GRNs per configuration. The
SAP material movement automatically creates both a material (for
quantity) and accounting (for value) document. The transactions
update these items: Purchase Order history, stock overview, Material
Requirements Planning (MRP) (planning file), general ledger
accounts.
Account assignment is determined at the time of purchase
authorisation (PR / PO).
All deliveries must be directed through Stores Receiving. Appropriate
stores procedures should be implemented to ensure all raw materials
receipts are recorded. Vendor statement reconciliation including
follow-up of invoices without GRNs.
Documentation in respect of goods received at, before, or after the
end of an accounting period is scrutinised and/or reconciled to ensure
complete and consistent recording in the appropriate period.
Goods are delivered only to designated, physically secure locations
within a warehouse or storage building and are accepted only by
authorised personnel (stores personnel).
Purchase Order forms are pre-printed with the receiving location and
that instruct vendors only to deliver to that location. Security
accompanies vendors which deliver toxic, chemicals and other
environmentally sensitive material to the correct location.
Expedition of Purchase Orders is covered under the Expenditure
cycle.
Appropriate documentation is completed when goods are issued:
Written stores requisition is required for all raw materials issues.
Materials are only transferred on the basis of a properly approved
source document. Transfer documentation should accompany all
transfers, stores or other activities and personnel should verify
material and quantity received. Requesting department should sign
approval on stores requisitions as acknowledgement of receipt.

CATEGORY
OBJECTIVE
OBJECTIVE
All issues of raw materials to production are
accounted for. (completeness)
All material is issued in a timely manner.
Issues from raw materials inventory are correctly
recorded as to quantity and amount. (accuracy).
Issues from raw materials inventory are processed
in the correct accounting period to the correct
account. (classification and proper period)
All materials requisitioned represent valid items
and quantities used in the production of pulp or
paper at the mill. (validity)
Transfers between units/mills are recorded
accurately and timeously.
See weighbridge for risks relevant to other mass
measurement devices for issues to production.
Storage of Raw Materials
Company personnel store materials in accordance
with established Company Policy.
Raw materials inventory is adequately
safeguarded. There are special safeguards for
expensive material and material susceptible to
personal use or sale.
All warehouse and inventory locations comply with
appropriate government, regulatory, and company
policies.
REFERENCE
RISK
POTENTIAL RISK
INV202 Issues from raw materials inventory may not be
recorded. Transfer documents may be lost. Goods
movements are not captured in SAP.
INV203 Late raw materials issues may resulting in loss of
production time.
INV204 Transfers (issues) of raw materials to production may
not be accurately recorded. Raw materials issues may raw materials to production are only done on the basis of a source
be processed in the incorrect period or to the incorrect document. A procedure should be established whereby the source
account. Raw materials may be allocated to the
incorrect cost centre. Transfer procedures do not
require preparation of supporting documentation.
INV205 Raw materials could be used for unauthorised
purposes. Incorrect raw materials are used.
INV206 Transfers between units/mills are not recorded.
INV301 Raw materials inventory is unusable. Chemicals are
not stored in a dry, safe place and separate from other
raw materials. Other raw materials are not usable due
to bad storage.
INV302 Unauthorised access to raw materials inventory -
misappropriation of raw materials inventory.
INV303 Non-compliance with statute and / or company policy
e.g. with regard to safety, notices. Fines / Loss of
ratings (e.g. NOSA).
SUGGESTED CONTROLS TO MITIGATE THE POTENTIAL RISK MANAGEMENT CONTROL or COMMENTS (if Risk is CONTROL OWNER
(Internal Audit) excluded from the Scope) (Name)
Prenumber transfer documents (e.g. stores requisitions) should exist.
The sequence of these documents is independently checked. Missing
documents should be investigated.
A procedure should be established that the material is issued to an
order (transfer, work, etc.) within an established time period after the
inventory has been picked. By issuing the material to the order
immediately after the pick has been completed, the inventory levels
are kept current and the possibility of the wrong material being issued
to an order is minimized.
Transfers of raw materials are documented. Transfers (issues) from
documents are captured in SAP within an established time period after
the inventory has been issued. By recording the issue in SAP
immediately after the issue has been completed, the inventory levels
in SAP are kept current and the possibility errors are reduced.
Physical inventory is counted periodically. Inventory counts are
reconciled to inventory records and a theoretical usage is derived.
Monthly consumption figures are reviewed by Management.
Variances against standard are identified and investigated.
Validations prevent the entry of incorrect information (e.g. nonexistent
storage locations or materials). SAP has standard reports for goods
issued and goods received, these report are reviewed regularly.
Require appropriate documentation of materials transferred from Raw
Materials Stores to other business activities.
Develop strategy/policy for storing materials to include (1) the number
and type of storage locations to be used, (2) Warehouse placement of
materials (3) OSHAct requirements for the proper labelling/storage of
hazardous materials (4) Storage capacity levels (5) Physical inventory
requirements. A shelf life strategy is developed and authorised to
include any materials that would have specified timeframe for usage.
Physical storage methods regularly reviewed for sources of inventory
deterioration.
Storage areas secured against unauthorised admission. Periodic
stock counts should be regularly performed. Storage areas secured
against unauthorised admission.
Management reviews all physical inventory storage locations for
compliance with government, regulatory, and company policies.

CATEGORY
OBJECTIVE
OBJECTIVE
Hazardous materials are stored and handled in an
appropriate manner in accordance with applicable
government regulations.
Receiving and despatch of raw materials are
separate.
Raw materials inventory adjustments (including
scrapping) are valid. (validity)
All raw materials inventory adjustments (including
scrapping) are recorded when identified and are
subsequently accounted for as having been
processed. (completeness)
Raw materials adjustments (including scrapping)
are processed to the correct account within the
correct accounting period. (classification and
proper period)
Raw materials adjustments (including scrapping)
are accurately processed. (accuracy)
Raw materials adjustments (including scrapping)
are reviewed and approved by a responsible
official. (authorisation)
Inventory valuation policy is adhered to when
valuing raw materials stock. Inventory reserves
are reviewed and adjusted to ensure that balances
do not exceed net realisable values.
Raw materials are issued on a first in first out
basis.
Inventory levels are maintained in accordance with
established Company Policy. Limits are placed on
quantities to be maintained in inventory. The
adequacy and appropriateness of inventory levels
is monitored.
Individual inventory balances per SAP are
periodically compared to the physical inventory of
raw materials. (completeness, accuracy and
validity)
REFERENCE
SUGGESTED CONTROLS TO MITIGATE THE POTENTIAL RISK MANAGEMENT CONTROL or COMMENTS (if Risk is CONTROL OWNER
RISK
POTENTIAL RISK
(Internal Audit) excluded from the Scope) (Name)
INV304 Hazardous materials are not stored, handled and The item master record should contain a field to identify the material
transported in compliance with applicable laws and as hazardous. Appropriate procedures for handling and storing
regulations. Fines / Loss of ratings (e.g. NOSA). hazardous materials should be maintained. There should be proper
follow up on reported safety concerns. Relevant policies should be
maintained which are consistent with Occupational Safety and Health
Administration and other pertinent laws and regulations approved at
technical and legal personnel. Compliance should be monitored.
INV305 Receiving and despatch of raw materials take place out Physical storage areas for goods issued and goods received should
of the same entrance. Lack of segregation of duties. be segregated. Different personal are responsible for receiving and/or
issuing raw materials.
INV306 Adjustments to raw materials inventory prices or Detailed records maintained for any adjustments processed. The
quantities do not relate to valid price changes and officials are authorised to make raw materials adjustments only on the
physical inventory differences. Recorded scrapped raw basis of an authorised source document.
materials are not valid.
INV307 All adjustments to raw materials inventory are not Inventory adjustments data is edited and validated; identified errors
recorded. are corrected promptly. Maintain procedures for promptly updating
inventory records.
INV308 Raw materials adjustments may be processed in the Goods received at, before, or after the end of an accounting period are
incorrect period or to the incorrect account. Raw scrutinised and/or reconciled to ensure complete and consistent
materials scrapped items are not processed timeously. recording in the appropriate period.
INV309 Adjustments to raw materials may be inaccurately Raw material adjustments are compared to authorised source
recorded or incorrectly processed. Raw materials documents to ensure that they were input accurately.
scrapped items are not processed accurately. Costs of
scrapped items are not written off.
INV310 All adjustments to raw materials inventory have not The officials are authorised to make raw materials adjustments only on
been authorised in accordance with the appropriate limit the basis of an authorised source document. Management reviews
of authority. The scrapping of raw materials is not and approves all recorded adjustments to inventory prices or
authorised. quantities.
INV311 Raw materials inventory does not reflect the existing Raw Materials are valued automatically in SAP according to moving
business circumstances and economic conditions in average price. At the end of each accounting period management
accordance with the accounting policies being used. should assess whether there is any indication that inventory may be
(lower of cost or Net Realisable value (NRV)) impaired. The recoverable amount should be estimated. Application
of stock valuation policy by controlling when valuing stock on a
monthly basis.
INV312 Raw materials inventory may expire - exceed the shelf Materials are issued to production on a FIFO basis, expiry dates are
life - or become obsolete. monitored and there is regular turnover of the main raw materials,
limiting the risk of obsolescence.
INV313 Inadequate or inappropriate inventory levels are Management monitors the adequacy and appropriateness of inventory
maintained. Unanticipated or excess inventory carrying levels. Stock level policies are established to include replenishment
costs may be incurred. cycles, safety stock levels, slow moving inventory, etc. and this plan is
communicated to appropriate personnel. Stock replenishment policies
are periodically reviewed, at least annually, to ensure policies meet
changing company needs. The value of items in stock is maintained at
the lowest practical levels in order to economise the use of working
capital and to minimise the costs of storage.
INV314 Inventory balances may be incorrectly recorded. Physical inventory is counted periodically by persons independent of
Correct raw materials stock count procedures are not day-to-day custody or recording of inventory. Inventory counts are
followed (e.g. as regards cut-off.) Stock counts of raw reconciled to inventory records and inventory records are reconciled to
materials are not properly recorded. the general ledger.

CATEGORY
OBJECTIVE
OBJECTIVE
Adjustments resulting from the comparison of
physical to recorded inventory of raw materials are
approved by a responsible official. (authorisation)
Raw materials inventory is usable. Inventory is
periodically reviewed for excess and obsolescence
issues.
Replacement items have been ordered (if required)
for raw materials scrapped.
Scrapped raw materials are kept separate from
other inventory.
Sufficient inventory of raw materials is kept on
hand. Stock balances are adequate to support the
current rate of consumption, with regard to
economy.
Raw Materials Master Data
Only valid changes are made to the raw materials
master data file. (validity)
Duplicate raw materials master records are
avoided.
Raw material master data changes are approved
by a responsible official. (authorisation)
Changes to raw materials master data are
accurate. (accuracy)
REFERENCE
RISK
POTENTIAL RISK
INV315 Raw materials stock count adjustments are not
authorised, or are inaccurate or incomplete. Raw
materials stock count differences are not investigated
and corrected.
INV316 Obsolete and slow moving raw materials items have not The usability of raw materials is assessed regularly including a review
been identified.
INV317 Replacement items have not been ordered (if required)
for raw materials scrapped.
INV318 Scrapped raw materials are not kept separate from
other inventory.
INV319 Insufficient raw materials inventory levels resulting in
loss of production time or excess inventory or
inaccurate or untimely material requirement forecast.
INV401 Changes to raw materials master data are not valid.
INV402 Duplicate raw materials master data may be created.
The same material is defined more than once in the
masterfile but with different names. This may result in
incomplete materials management reporting due to
more than one material number and/or confusion when
selecting material when processing Purchase Orders.
INV403 Changes to raw materials master data are not
authorised.
INV404 Inaccurate raw materials data may be entered.
Changes to raw materials master data may be incorrect. data) shall authorise all requests for modification of the material
For example, a material may be characterised as an
inappropriate material type.
SUGGESTED CONTROLS TO MITIGATE THE POTENTIAL RISK MANAGEMENT CONTROL or COMMENTS (if Risk is CONTROL OWNER
(Internal Audit) excluded from the Scope) (Name)
Raw material stock count adjustment data is edited and validated;
identified errors are corrected promptly. Raw material stock count
adjustments are compared to authorised source documents to ensure
that they were input accurately.
during physical inventory counts. Inventory ageing reports are
prepared and analysed regularly.
System functionality monitors and maintains inventory levels in
accordance with organisation policies.
Obsolete, excess, and damaged inventories are adequately
segregated from other finished goods inventories and are monitored to
ensure appropriate and timely disposition.
Management monitors the adequacy and appropriateness of inventory
levels or SAP functionality monitors and maintains inventory levels in
accordance with organisation policies.
A procedure is established that changes to the raw materials material
master record are documented on a valid source document and
approved by owner of the material master information. All information
entered during raw materials master creation and/or change is
automatically validated by SAP. For example, the values that are
allowed for base unit of measure, pricing group, purchase organisation
and account group are known to SAP. Upon entry in the field, the
system automatically checks the value entered against the values
available in the configuration tables. An error message is generated if
the value entered is not available.
All raw material master entries must be reviewed against the existing
material master before entry into SAP to ensure there are no
unnecessary duplication of materials in the material master. Standard
naming conventions are used to reduce the possibility of duplicate
material names. The Material List (RMMVRZ00) report is generated
and reviewed at least quarterly or as needed for duplicate materials.
This lists materials by number, type, group, and user who created the
material. Duplicate materials will be investigated and deleted from the
material master record if they are not held in inventory, used in a
BOM, or purchase requisition or Purchase Order.
The officials are authorised to enter, modify or delete raw material
master data only on the basis of an authorised source document.
Significant changes to the raw material master file are approved by
management.
The officials (responsible for maintenance of raw material master
master data after having checked the contents and the accuracy of the
data supplied. SAP edits and validates material master records
online. Recorded changes to the material master file data are
compared to authorised source documents to ensure that they were
input accurately.