INV-09

Control Description

On a quarterly basis, the slow moving and obsolete reserve calculations and assumptions are reviewed and approved by management for accuracy and validity prior to the manual journal entry posting in SAP

Risk

Inventory reserves for slow-moving and obsolete items could be materially misstated or inaccurate if calculations and assumptions are not independently reviewed and approved by management prior to posting journal entries to SAP. Without this review, errors, unsupported assumptions, or fraudulent adjustments could be posted without detection, resulting in the understatement or overstatement of inventory valuation and a misstatement of the balance sheet.

Implementation Details

• Periodic Schedule: Establish a formal timeline in the quarterly financial close calendar requiring the accounting/inventory control team to execute the inventory aging and slow-moving report.

• Report Selection & Data Extraction: Execute the inventory valuation and aging report using standard SAP capabilities (such as MB5B, MC.9, or S/4HANA Fiori dead stock apps) or an approved custom-developed / management-defined reporting tool designed to extract material stock levels, last movement dates, and consumption history.

• Reserve Calculation Methodology: Apply the corporate inventory provision matrix (e.g., 0% for <180 days, 50% for 181–365 days, 100% for >365 days of no consumption) to the report output to calculate the required obsolescence reserve.

• Management Review & Approval: Finance management reviews the calculation, assumptions (such as adjustments for expected future orders or technological obsolescence), and verifies mathematical accuracy.

• Journal Entry Posting: Upon approval (documented via sign-off on the review workpaper or email approval), an authorized accounting user posts the manual inventory reserve journal entry (e.g., debit Provision Expense, credit Allowance for Obsolete Inventory

Test Procedures

Test Procedures
A) Test of Design (ToD)
Policy Inspection: Inspect the corporate accounting policy or standard operating procedure governing inventory reserves to verify that calculation methodologies, aging thresholds, review frequencies, sign-off hierarchies, and approved reporting tools (whether standard SAP or management-defined custom reports) are clearly defined.

B) Test of Operating Effectiveness (ToE)
• Review Package Inspection: Select a sample of quarters within the audit window. Inspect the completed reserve review package for each period, verifying:

◘ The inventory aging / slow-moving report was generated as of the quarter-end date using the approved standard SAP or management-defined report format.

◘ Evidence of management's review, evaluation of assumptions, and formal sign-off prior to journal entry posting.

◘ Journal Entry Trace: Trace the approved reserve amount from the final calculation workpaper through to the posted G/L journal entry (via FB03), confirming that the entry was posted accurately and by an authorized user