Webinar: How Internal Audits Can Add Value for Manufacturers

2022-10-19T07:46:57-05:00

Highlights of the October 19, 2022, HBK Manufacturing Solutions webinar hosted by Tyler Gargano, HBK Director of Risk Compliance and Controls

An internal audit can provide value no matter the shape or size of your organization:

Historically internal audits were done typically in the public space, but we have come to realize there is just as much value for private companies: for leadership and management to understand what’s going on in their organizations.

Our definition of and internal audit is answering the questions of how we can help, the areas in your business where you might not be sure what’s going on or why certain numbers in your financials statement exist, or whether you need to do additional testing. An internal audit is not just a compliance function, but an operational function.

Roles of internal audit team

  • Review accounting and internal controls systems
  • Assist with the identification of significant risks
  • Review the economy, efficiency, and effectiveness of the operation
  • Examine financial and operating information
  • Special investigations, including suspected fraud
  • Review compliance with laws and other external regulations
  • Areas of focus for internal audit group include:

  • Vendor quality and third party management: Are vendors meeting expectations? Are you getting out of the relationship what you’re putting into it?
  • Purchasing process: What are you buying and how are you buying it, storing it?
  • Design and control, collaboration, processing controls: The internal audit process as a whole. Are you doing your testing and due diligence?
  • Impact of testing: Should test every year, including testing of new and changed controls.
  • Conceptual process of audit framework includes:

  • Is the plant/facility set up to be successful: inboarding and outboarding going smoothly?
  • Workforce: are you training properly? Are you hiring people with the right experience?
  • Utilities and energies: Where is your team focusing?
  • Planning communication: Do you have an appropriate maintenance plan in place? Do you have appropriate guidelines to ensure safety?
  • Stages of audit procedure for manufacturing companies—a five-step plan:

  • Identify subject matter experts, internal or external.
  • Document internal control procedures and, importantly, the reasons for them.
  • Continuously monitor for control effectiveness.
  • Continuously document your monitoring and testing.
  • Create an internal audit workflow.
  • Internal controls help you identify where the wrinkles are in your operations and why they are occurring.

    Operational control functions should address the core of your activities, form ordering parts to their-party service providers.

    Start operational internal controls with inventory, costing, and purchasing to help minimize risks in your internal operating environment. Inventory controls

  • Wall-to-wall counting: every single piece in inventory; typically done yearly
  • Cycle counting: the considered best practice; breaks inventory into manageable counting; very detailed level of taking inventory; count most costly, essential pieces more frequently
  • Costing methodology

  • Typical approach: standard costs versus average cost
  • Monitoring purchase price is crucial
  • Looking at costing to ensure reporting accuracy particularly critical with pricing fluctuating so greatly
  • Purchasing controls

  • Do you have appropriate segregation?
  • Do you have employees responsible for purchasing?
  • Are they also receiving the goods?
  • Is there appropriate sign off?
  • What is going into the bidding process? The internal team will do bidding reviews and bidding audits; might pay more for a better relationship with a vendor (getting product faster and more reliably).
  • Most important is to be able to identify what is going on and why.

    Five stages of internal audit:

  • Reacting to what the business is doing
  • Discovering what is going on and what is taking too much time or costing too much
  • Performing: ensuring processes are advanced and automated through connectivity for better insights
  • Advising on risk evaluation in practice and shifts from identification to recommendation
  • Transforming: looking at different areas and shaping the organization in terms of testing and compliance functions
  • Industry trends: ESG

  • Environmental, such as pollution output
  • Social, including human capital, labor relations
  • Governance, including fraud prevention, ethics
  • ESG provides a lens for investors. ESG reporting demonstrates the corporate purpose, what the corporation is doing to create long-term value. Seventy-four percent of financial leaders surveyed would like reporting of ESG performance metrics.
  • Industry trends: Industrial Automation (RPA: robotic process automation): uses of Bots and technology will continue to grow and shape testing.

    About the Author(s)
    Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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