Hubbell Policies

support decisions on whether to rely upon the perpetual inventory records for certain stores areas, but to conduct physical counts in others (i.e. it does not need to be an "all or nothing" decision).

Reporting of cycle count results must not be mixed with the miscellaneous audit results. Statistics associated with these two tasks must be reported separately.

Cycle count results should be reported weekly. In order to spot trends and mitigate the impact of temporary/unusual fluctuations in the reported accuracy of the individual stores areas, cycle count results must be accumulated and reported on a rolling thirteen-week average. The preferred method of reporting cycle count accuracy can be found in Exhibit A-1 . Weekly cycle count accuracy reports should be reviewed by business unit management to assure that the accuracy of the perpetual inventory records is in line with respective goals.

Measurement of Inventory Accuracy

The accuracy of the perpetual inventory records is measured using the "Composite Accuracy Rate." The rate incorporates:

• The frequency of errors (i.e. how often the individual cycle counts result in errors);

• The magnitude of the errors (i.e. when an error occurs, how far off was the actual count from the quantity recorded in the perpetual inventory records). The magnitude of each single error must be capped at 100%.

A detailed example of the calculation of the Composite Accuracy Rate can be found in Exhibit B-1 . The recommended format for reporting cycle count results can be found in Exhibit A-1 and A-2 .

E. Minimum Requirements for Financial Reliance

Minimum Composite Accuracy Rate

A sustained composite accuracy rate of at least 95% is required in order to rely on the perpetual inventory records in lieu of an annual physical inventory count. However, this does not preclude the possibility that a physical inventory count will be required in those situations where: a review by the external auditors or Internal Audit indicates that the accuracy of the certified inventory (as determined by a sampling of the inventory) is actually below 95%; the procedures and controls associated with the operation's cycle counting program are determined to be inadequate; or circumstances are such that there is reason to believe that the actual dollar accuracy of the inventory may be materially misstated or indeterminable under existing procedures. • If the rolling 13-week average Composite Accuracy Rate in any given stores area falls below 95%, the Director, Internal Audit must be contacted immediately to discuss the exposure and corrective actions to be taken. • If it is likely that the rolling 13-week average Composite Accuracy Rate will not be restored to at least 95% in a timely manner (in particular, by September 30 th ), a physical inventory count must be planned and conducted to correct the inventory balances. If multiple areas of a location are certified, the physical In maintaining the minimum 95% accuracy rating, the following requirements apply:

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