Inventory Cut-Off Remediation and Cost Savings
The client was a leading multi-state operator (MSO) in the cannabis industry, managing cultivation, processing, and retail operations across several U.S. states. Given the complexity of its supply chain and high transaction volume, accurate inventory reporting is essential for maintaining compliance, investor confidence, and operational efficiency.
During the FY2022 and FY2023 financial statement audits, external auditors identified errors in inventory cut-off testing. Specifically, invoices for raw materials were not accrued in the proper accounting period. While the audit firm determined the errors were immaterial, the issue exposed a material weakness related to inventory cut-off controls - namely, the absence of a robust three-way match process and goods receipt verification. This gap created risk of purchases being recorded in the incorrect accounting period, misstatement of inventory balances and COGS, and broader GL inaccuracies.
R&B Advisory partnered with the client’s Internal Audit leadership to strengthen reliance readiness and optimize coordination with the external audit firm. Our structured approach included:
1. Root Cause Analysis – Conducted walkthroughs and data mapping to identify breakdowns in purchase-to-pay processes and cut-off recognition.
2. Control Redesign – Developed and implemented both manual and automated three-way match controls (PO, invoice, and goods receipt).
3. Quarter-End Cut-Off Testing – Established recurring cut-off validation procedures to ensure timely and accurate recognition of inventory purchases.
4. Post-Close Review Enhancements – Implemented targeted reconciliations and variance analytics to identify exceptions early.
5. Control Effectiveness Testing – Performed formal design and operational effectiveness testing aligned with SOX and PCAOB standards.
Through these actions, R&B Advisory successfully guided the client to full remediation of the material weakness within two quarters. Key outcomes included:
Eliminated audit exceptions and removed the material weakness disclosure from the Form 10-K filing.
Strengthened financial close accuracy, ensuring alignment between goods receipt and invoicing.
Improved audit readiness, reducing external audit adjustments and cut-off testing time.
Reduced accrual reconciliation workload by 20–25% per quarter.
Realized annualized savings of approximately $100K in efficiency and audit support costs.
Following R&B’s engagement, the Client’s Internal Controls Department verified that no further exceptions were identified during control testing. Cut-off accuracy improved across all operating entities, and quarterly monitoring procedures were embedded into the standard close cycle.