Audit 410118

Criteria Accurate and complete records must be maintained with respect to the receipt, distribution/use, and inventory of USDA Foods, including end products processed from USDA Foods in TEFAP. Failure to maintain records required by 7 CFR section 250.19 is considered prima facie evidence of improper distribution or loss of USDA Foods, and the agency processor or entity is liable for the value of the food or replacement of the food in kind (7 CFR sections 250.16 and 250.19(a)). Condition The organization’s perpetual inventory system calculates inventory costs using the weighted average method. However, the organization’s established methodology for valuing USDA Foods is FIFO. Because the system does not support FIFO, the organization must manually recalculate inventory costs to align the inventory with the required FIFO methodology and USDA-assigned values. This manual recalculation resulted in a significant adjustment at year-end and indicates that the perpetual inventory records maintained during the year do not reconcile to USDA-assigned costs. Cause The inventory system is not configured to apply the FIFO costing method. Additionally, the organization has not implemented formal procedures to ensure that perpetual inventory records are updated and reconciled in accordance with the required methodology. Effect The discrepancy between the system’s weighted average costing and the established FIFO methodology increases the risk of inaccurate inventory valuation, incomplete records, and potential misstatements. Manual recalculations heighten the risk of errors and may result in unexplained differences between perpetual inventory, accounting records, and USDA cost assignments. Questioned Costs None Context The condition represents a systemic issue rather than an isolated instance. Although our testing did not cover all inventory transactions, the issues identified arise from a basic limitation in the organization’s perpetual inventory system, which uses weighted average costing even though the organization’s established method for valuing USDA Foods is FIFO. Because this system is used throughout the year as the primary mechanism for recording inventory activity, this limitation affects the valuation of the inventory balance on an ongoing basis. The significant year-end adjustment performed by the organization further indicates that the issue impacts inventory valuation across the broader population of transactions, not only the items reviewed. Recommendation We recommend that the organization: • Configure the inventory system to apply the FIFO costing method or adopt a system capable of reflecting USDA-assigned costs. • Establish formal written procedures requiring periodic reconciliation between the perpetual inventory, accounting records, and USDA cost assignments. • Document and investigate any differences identified to ensure accurate, complete, and compliant inventory records in accordance with 7 CFR §250.19. Views of Responsible Official: The organization management agrees with the finding. Responsible Official is Marcos A. Rivera Sánchez, Executive Director. Please refer to the corrective action plan on page 30.