An Analysis of the Issues that Should be Focused on Internal Auditing of Inventory in Non-ferrous Metal Bulk Trading


  Inventory is the material stockpiled for sale or consumption in the process of production and operation, which usually accounts for the largest proportion of current assets and reflects the operating characteristics of the enterprise better than other assets, and its material misstatement will have a direct impact on financial position, operating results and cash flow. Therefore, inventory audits are often the focus and difficulty of statement audits.

  The financial attributes of non-ferrous commodities determine that financial leverage can be used for investment speculation, value preservation or financing, and the profit performance of enterprises is closely related to the ups and downs of their prices, therefore, the value of non-ferrous commodities and risk management become the top priority of many non-ferrous enterprises. At the same time, the internal audit of non-ferrous bulk commodity inventory has both universal and individualized needs because of its high value, high risk, and constantly new trade patterns. This paper discusses the issues that should be focused on from the internal audit perspective, based on the internal audit practice of trading companies, combined with the characteristics of non-ferrous metal bulk commodity inventory business and the risk points under the new business model.

  Non-ferrous metal trade model and its risk points

  As an important industrial raw material, nonferrous metals have wide application fields, large scale of production and consumption, and growing trade volume year by year. At the same time, many varieties of non-ferrous metal bulk commodities have futures and high price transparency, and simple low-buy-high-sell profits are meager. Furthermore, the financial attributes and good natural properties of non-ferrous metal commodities have become the first choice for inventory financing. Therefore, the non-ferrous metal commodity trade model is constantly pushing forward. At present, the trade model can be divided into two kinds of traditional trade and financing trade.

  The traditional trade profit model is to hold the goods waiting for the rise or change hands to earn the price difference. Due to the high volatility of non-ferrous metal prices, the risk of stable profitability is high, and the trade practice mostly uses futures for hedging.

  Financing trade is to non-ferrous metal bulk commodity inventory as a pledge, the demand for funds to banks or other providers of funds to obtain loans, in practice, there are inventory pledge financing and warehouse receipts pledge financing and other forms.

  (1) Risk points in non-ferrous metal trade

  Since the environment of commodity trade financing is not fully mature, there are many risks hidden in the business development. For enterprises, price risk, open position risk, capital risk and pledge risk are the major risk points in trade financing directly related to the inventory.

  First of all, in non-ferrous metal commodity trading, the price is relatively transparent, and the final price is determined based on futures prices between buyers and sellers. In the fluctuating futures market, it is important to effectively manage price risk in order to obtain stable profits or reduce losses.

  Second, non-ferrous metal prices fluctuate frequently, and inventories are exposed to price risk if they have exposure. Locking in purchasing costs and sales profits, controlling the size of open positions and stopping losses in a timely manner are crucial to sound business operation.

  Thirdly, whether the financed funds are obtained with pledges of equivalent value, and whether the funds can be obtained in time to replenish the pledges or have the right to dispose of the pledges to make up for the loss of funds when the value of the pledges changes below the amount of financed funds, is also a major risk point for the financed funds.

  Fourth, non-ferrous metals bulk commodity trade financing is based on pledges, whether the pledges are clear and whether the pledges chosen are easy to realize has a deep impact on the enterprises that finance the funds.

  The above major risk points have a pivotal role in the evaluation of the business performance of non-ferrous metal trading enterprises and their operation in future years.

  The focus of internal audit of non-ferrous metal commodity trading inventory

  Internal audit should not only focus on the risk prevention and control mechanism and internal control mechanism of the enterprise, but also focus on the price formation of the inventory, verify the quantity and ownership of the inventory, and determine whether the inventory value is true and whether there is a potential loss.

  (1) Review of risk prevention and control and internal control of bulk commodity inventories

  Enterprises should establish a sound comprehensive risk management system and strengthen the identification and prevention of risks in the bulk commodity trading business. Select reliable and suitable business models, and choose to avoid business models with high risks; focus on inventory, contracts, receivables and prepayments, customer credit, storage inventory and ownership, pledge guarantee of goods or warehouse receipts, third-party supervision, etc. involved in the business; sort out and improve the internal control and management system of bulk commodity trade, establish customer qualification and credit investigation and follow-up management system, and prevent both up and down By the same person to control the occurrence of funds were siphoned; strictly prohibit the development of no real goods transactions, no physical commodities, no flow of goods or in situ inventory of the financing trade and “idle” trade business.

  Therefore, the internal audit of non-ferrous metal commodity trade should first focus on the internal and external environment of the audited unit and the significant risk factors, whether the audited unit has established a risk prevention and control mechanism, whether the trade business model, risk assessment, cost-benefit analysis, and whether the systemic risk response measures have been formulated. The auditors can reasonably identify and assess the financial situation based on risk prevention and control? Hydrazinium is the most important component of the business.

  Secondly, the review of the development and implementation of the internal control system for each aspect of the bulk commodity inventory, focusing on the following two aspects of the implementation of the audit: First, to review whether the inventory management system is sound and effective, at least should include the specification of key aspects such as receipt and delivery, receipt and payment, review and approval, graded authorization, supervision and checks and balances; second, to review whether the internal control system is effectively implemented and enforced, and whether regular self-evaluation of The key aspects of internal control are self-evaluated and self-improved.

  (2) Review the quantity of bulk commodity inventory

  Internal auditors should do a good job in monitoring the physical inventory of inventory stock to determine whether the inventory of the audited unit really exists and whether it is consistent with the book records; they should also obtain relevant supporting documents to determine whether the audited unit has the real ownership of the inventory. When monitoring the inventory in the field, we should pay special attention to whether or not the goods arrive, the goods are sent but not received, the goods are received but not sent, as well as whether or not the mortgage, pledge, entrusted processing and other circumstances are recorded to find out the reasons for the discrepancy between the accounts and the reality.

  The use of non-ferrous metals bulk commodity trade for financing, especially warehouse receipt pledge financing business, the focus should be reviewed delivery link, whether the actual control of goods and the flow of goods, if only processing, passing the contract documents “empty” trade, so that it is firmly put an end to.

  (3) Review the formation of inventory prices

  Futures prices are highly correlated with spot prices and can reflect the changes in market supply and demand in advance, and the non-ferrous metal commodity trade is mostly priced by the trading mode of “futures price + premium”. In practice, there are two base price selection methods: monthly average price and point price. The monthly average price is the average monthly settlement price of the futures market, while the point price is negotiated with the market. How the base price is applied depends largely on the agreement of the buyer and seller.   Reviewing the formation of non-ferrous metal price inventory prices, the first thing to focus on is the choice of base price. From a practical point of view, monthly average pricing is less risky and point prices are more risky.

  Second, if the point price is chosen, it depends on the right of the buyer and seller to point price, i.e., who decides to set the price within a specified period. If the audited entity has the right to point price, it is important to pay attention to whether the point price is set by the deadline. If the point price is postponed, an additional deposit is required from the other party and an extension fee is paid, which will increase the cost of the point price.

  Again, it is important to pay attention to whether the price ordered is significantly different from the market price. If there is any abnormality, it is necessary to find the reason.

  (4) Review the valuation method of bulk commodity inventory

  If the audited unit does not comply with the principle of consistency of inventory valuation method, it can change the inventory valuation method at will to achieve the purpose of adjusting the cost of sales and thus the profit. In the non-ferrous metal commodity trade, the physical form of inventory is usually supervised by a third party, so there is no room for cheating. In enterprises with profit target pressure, the practice of changing inventory valuation methods to adjust profits during the year is most common. For example, a company’s year-end copper outbound carryover method is changed from cumulative weighted average method to LIFO method, which results in a reduction in cost of sales and an inflated profit in the case of unilateral decline in market price.

  Secondly, due to the many changes in the form and flow of inventory, there are certain differences between the value carryover and the actual flow procedures, and if they are not consistent, it will affect the whole process of the accounting cycle. If the non-ferrous metal bulk commodity encounters significant fluctuations in market prices, especially in the process of unilateral decline in market prices, the value carry forward can also achieve the purpose of profit reconciliation if it is not the same period and batch as the actual flow. For example, a company in December of a year a total of 50,000 tons of copper, the first batch of 50,000 tons of the average purchase price of 30,000 yuan / ton, the second batch of 50,000 tons of the average purchase price of 28,000 yuan / ton, the enterprise daily use a moving weighted average method to carry forward costs at the end of the month, December in two warehouses, and the second batch of low-priced copper first, the second batch of high-priced copper after warehousing, this practice leads to the second moving This practice resulted in a smaller second moving weighted average base, a reduction in the cost of outbound storage and an increase in profit for the year.

  Third, in commodity trade, logistics, capital flow and bill circulation are often inextricably linked. For the goods to the payment of bills not yet arrived, the goods sent to the receipt of bills not yet opened inventory should not only check the differences between the accounts and inventory quantities, but also pay attention to the reconciliation with accounts prepaid, accounts received in advance and other accounts to review whether there is a duplication of pending accounts, the phenomenon of inflated inventory and liabilities.

  Fourth, review whether the provision for inventory decline at the end of the period of inventory is reasonable and accurate. When the non-ferrous metal bulk commodity trade is in the process of unilateral price decline, if no value preservation is carried out, the purchase and sale loss may occur. Internal audit should pay attention to whether the audited unit has made or fully provided for impairment in accordance with the market price and whether there is potential loss.

  Fifth, using the method of horizontal or vertical comparison, excluding the factor of price increase and decrease, whether the price is reasonable compared with the recent or similar brand and quality of inventory, and the price is much higher should be regarded as a potential loss. For example, the auditors found in the audit of the sales price of aluminum commodities of a non-ferrous trading enterprise, the sales price for the month was mostly within the range of 12,000-15,000 yuan/ton, but several sales prices were 20,000-25,000 yuan/ton, and after finding the reason, it was found that the enterprise artificially raised the sales price to complete the sales revenue target at the end of the year, and intended to buy back in the next year. This business resulted in inflated profits for the year and formed a potential loss for the next year.

  (5) Review of exposure to commodity inventories

  Non-ferrous metal bulk commodities have a mature futures market, which is an integral part of the overall financial market. The use of financial leverage to speculate, preserve or finance and pursue higher returns on investment is highly favored by many companies. In order to hedge the risk of non-ferrous metal price fluctuations and financing risks and reduce losses, it becomes a daily task for non-ferrous enterprises to pay attention to the risk exposure of commodity inventories.

  Internal audit review of non-ferrous metal bulk commodity exposure should focus on the following aspects.

  First, review whether the risk prevention and control mechanism of graded authorization, limit approval, risk monitoring and timely stop loss is established and whether the risk prevention and control mechanism is followed in the actual operation process.

  Second, review the flow process of the business to see whether the inventory spot is preserved, whether the amount of preservation exceeds the risk tolerance of the enterprise, and whether there exists a speculative position, suggesting the potential profit or loss brought by the risk exposure to the enterprise.

  Thirdly, review whether the financed funds obtain pledges, whether the pledges’ ownership is complete, whether the appraised value covers the financed funds, and whether the pledges can be realized in time, whether the pledges are entitled to dispose of the depreciated value, and other matters to determine whether the financed funds can be recovered safely and completely.

  (6) Internal audit recommendations in light of the actual situation

  The internal auditors shall conduct an in-depth analysis of the inventory audit found in the ? issues for in-depth analysis, diagnose the root cause of their generation, combine with the business model of the audited unit, reveal the deficiencies and improprieties in inventory management procedures, and put forward improvement suggestions so that the audited unit can improve the economy and efficiency of inventory management activities through the implementation of internal audit recommendations to better prevent and control operational risks and ensure the safety of corporate assets.


  Inventory has a direct impact on the business results of enterprises, and it is very easy to become the object of corporate fraud. For non-ferrous metal commodity trading enterprises, inventory is the most direct and effective tool for fraud. New business models constantly bring new challenges to internal audit, internal audit should be combined with different business models of different companies, the audit object and audit content to make timely adjustments, around the focus of business operations, hot spots and difficult points, we should take the initiative, targeted cut, find risk points, find the value-added audit point, realize the internal audit function from post-facto audit supervision to the change of prior and in-fact control, and constantly To enhance the value of internal audit, and finally escort the enterprise and realize value-added.