AUDIT OF WAREHOUSE OPERATIONS Page 1 INTRODUCTION

Consistent with the 1998/99 Annual Audit Plan, an audit of the City's Warehouse Operations was initiated in that fiscal period and completed in the current fiscal year. This audit was performed to evaluate changes implemented at the Warehouse since our prior audit, completed in March 1996. A number of findings and recommendations resulted from the earlier audit as included in our Report No.96-002. A major change since the prior audit was the implementation of the inventory module of the new Oracle Finance System. The specific objectives of this audit were to determine whether: Findings from the prior audit were corrected. All goods received or issued at the Warehouse were recorded in the perpetual inventory records. The perpetual inventory records reconciled to the General Ledger control account. Inventory goods were correctly valued on the books of the City. All goods entering the Warehouse were in acceptable condition and properly procured or returned to stock. No goods were removed from stock without proper authorization. All items issued from inventory were charged to the receiving department in a timely manner. Goods in stock were maintained at a cost effective level necessary to support City operations. Excess inventory levels were timely noted and adjusted in accordance with City policy. Goods stored at the warehouse were secured and protected from damage or misappropriation. The environmental conditions and work practices at the Warehouse complied with applicable safety standards. CONCLUSIONS AND SUMMARY OF FINDINGS While changes have taken place at the City's Warehouse since our prior audit, overall conditions have not improved and in some ways have deteriorated. Inventory records are so poorly kept that little reliance can be placed on the accuracy of what items are in inventory, the value of the items, or the value of the inventory as a whole. Users of the Warehouse facility cannot be confident charges against or credits to their cost centers for items received from or returned to the Warehouse are proper. Effective controls over the receiving and issuing of Warehouse stock are seriously lacking. The high level of shrinkage of Warehouse stock is a very serious deficiency that has gone unattended. Some safety concerns also need attention. The audit findings, as summarized in the following paragraphs, are discussed in detail later in the report along with management's responses. A copy of management's letter of response is also included at the back of the report. At the 1998-99 fiscal year-end, the Finance Department wrote down the General Fund Materials and Supplies inventory account by $57,261.89 without determining the root causes for the difference between the year-end physical inventory value and the value shown on the General Fund account. Similarly, the Finance Department wrote down the Utilities Fund Materials and Supplies account by $29,685.95 without determining the cause of the difference between the value determined by the year-end physical inventory and that shown on the Utilities Fund account. Had monthly reconciliation of the General and Utilities Funds inventory accounts to the perpetual inventory records been performed a timely determination of the causes of the differences could have resulted. Finding No. 1: Monthly Reconciliation of Inventory Accounts Can Strengthen Controls focuses on the need for regular reconciliation. The Warehouse's perpetual inventory records were found to be unreliable. Finding No.2: Effective Controls Over Purchasing, Receiving, Stocking, Issuing, and Recording of Warehouse Stock Can Improve Efficiency provides a detailed discussion of causes and effects of unreliable record keeping. Using the data contained in these records compromises the integrity of records and reports of the City's operations. The absence of sound review and approval procedures results in improper charges to users of the Warehouse. Detailed reports of charges to City departments and divisions for stock drawn from the Warehouse are not provided. Consequently, proper authorization and approval for these charges do not take place. The seriousness of this control weakness is discussed in Finding No.3: Proper Review and Approval of Inventory Account Adjustments and Issues Will Protect Inventory.

AUDIT OF WAREHOUSE OPERATIONS Page 2

Numerous items kept at the Warehouse are not under inventory control. Some City departments and divisions use the Warehouse as a "temporary" storage facility for items needed for planned projects or activities. Often these items are left at the Warehouse for extended periods of time or in some cases indefinitely. Suitable records of these items are not maintained as discussed in Finding No.4: Complete Inventory Records of All Items Stored at the Warehouse Will Enhance Control. Security over Warehouse stock is inadequate. A hand recognition entry system has been inoperative for over a year and there is no effective monitoring of persons entering and leaving the Warehouse property. Finding No.5: Security Over the Warehouse, Yard, and Stock Will Prevent Losses explains this situation. Finding No.6: Utilization and Optimization of New Software System Is Essential to Improving Productivity points out where alternate or proposed new software is deviating from the City's plan to standardize on the recently implemented financial software system. Finding No.7: Attention to Safety Can Protect Employees discusses safety concerns relating to hazardous materials handling, fork lift operation, and storage rack loading requirements. Also mentioned are two uncorrected OSHA safety issues. Inefficiencies in stock management practices and timely disposal of unneeded items were identified during the audit and are discussed in Finding No.8: Stock Level Management, Stock Rotation, and Timely Disposal of Obsolete Goods Will Add Value. The City does not have written policies and procedures covering authorization for computer systems access and user rights. Finding No.9: Proper Access Authorization to System Modules Will Help Establish Security and Insure Data Integrity addresses this important control concern. Management has responded positively and moved aggressively in response to all the recommendations. Plans have been developed with schedules for completion, policies and procedures have been updated, and many changes have already been implemented. We thank Nora Laudermilk, Purchasing and Contracts Administrator; Donna Levengood, Assistant Purchasing and Contracts Administrator; John Daris, Warehouse Superintendent; Peggy Mohan, Warehouse Supervisor, Wastewater Treatment Facility; and the Warehouse staff for the patience and assistance they afforded us throughout the audit. This audit was conducted by Ken Nielson, CPA, CIA, CISA, Assistant Internal Auditor.