INTERNAL AUDIT – PROCESS UNDERSTANDING NOTE
Inventory Management & Gate Controls Process – Denim Division
Client / Unit Sangam India Limited – Denim Plant
Scope of Discussion Inventory Management and Gate Controls – process walkthrough
Meeting Date 27 July 2026
Sachin Sodani (Process Owner – Client); Narendra Shetty, Rahul G (Internal Audit
Participants
Team)
1. Objective & Scope
The objective of this session was to obtain the internal audit team's process understanding of Inventory Management and
Gate Controls at the Denim division, covering the flow from material requisition through to consumption, physical
verification, and related MIS/monitoring controls, in preparation for detailed audit testing.
2. Process Narrative
2.1 Material Requisition, Reservation & Consumption
• Material requirement is raised by the user department, and a reservation is created in the system against that
requirement before material movement.
• Inventory transfer/issue is handled in two scenarios: (a) transfer against a raised requirement, and (b) direct
consumption by the using department (e.g., raw material moved from the RM store to the Loom Shed for
consumption).
• The same logic (requirement → transfer → consumption) applies to repair and spares issues.
• Physical stock verification is carried out on a defined cycle: raw material – quarterly; finished goods (FG) – half-
yearly.
2.2 Gate Controls (Inward, Outward & Visitor)
• All inward material is recorded at the gate, including weight capture at the weighbridge and security verification,
with a gate/weighment slip generated with reference to the purchase order.
• CCTV coverage is maintained across gate and material-handling locations, with footage retained for approximately
one month.
• A separate visitor gate-entry process is followed, with a distinct visitor pass issued (separate from material gate
passes).
• Outward movement of material from stores is governed by Returnable Gate Pass (RGP) / Non-Returnable Gate Pass
(NRGP) documentation, matched to the underlying PO/document.
2.3 Material Master & Material Coding
• New material codes are created and approved with reference to a defined product data (PD)/specification sheet.
• Raw material codes are created on the request of the RM/purchase department, following the department's defined
internal process.
2.4 Inventory Classification
• The list of critical materials is manually maintained and finalized in discussion with concerned user departments
however not defined in SAP.
• Slow-moving and non-moving inventory criteria are separately defined in a written policy document (distinct from
the criticality classification).
2.5 Material Requirement Planning (MRP) & Reorder Controls
• MRP is system-defined for automated planning of certain material categories.
• For regular/routine items – stationery, regular chemicals, and packing material – minimum/reorder levels are
currently defined and maintained manually, with further automation identified as a future improvement area.
• However the process is not being followed in last one year.
2.6 Procurement Sourcing
• Raw material procurement is largely domestic; imports are generally not applicable at the raw material stage except
for specific qualities not locally available.
• Imports are more relevant for spares – sourced through OEMs / authorized dealers where local/store spares are not
available.
• Rates in the system are maintained/updated manually on a periodic basis.
2.7 Goods Receipt, Quality Inspection & Rejection Handling
• On gate entry, a Goods Receipt Note (GRN) is created; the receiving department confirms receipt while the user
department simultaneously records its acceptance.
• An accounting entry is created and the vendor bill is passed following receipt confirmation.
• Materials received are first held in Restricted (quality-hold) stock. 100% quality inspection is currently performed
on raw material – no sampling-based inspection at present.
• On QA clearance, material moves from Restricted to Unrestricted stock; issue to user departments is made only from
Unrestricted stock.
• Rejected material is documented by QA through a rejection note; a debit note is raised and the material is returned to
the vendor, as applicable.
• Short-receipt discrepancies are similarly documented and handled through the debit note / vendor communication
process.
2.8 Inventory Adjustments
• Authority for inventory adjustments is defined by management (approval/authority matrix).
• Adjustment-related movement types are configured and controlled at the IT/plant level.
• Rationalization of the number/use of adjustment movement types was noted as an open observation carried forward
from the last audit.
2.9 Near-Expiry / Shelf-Life Material Management
• The system tracks shelf life and flags near-expiry material based on defined criteria.
• Issue of material is prioritized based on near-expiry status, guided by system-generated reports.
2.10 Job Work Process
• Raw material (e.g., yarn/greige fabric) is sent to job workers under a job-work arrangement/contract.
• Processed material (e.g., dyed beam, finished fabric) is received back from the job worker against the material
originally sent out.
2.11 Scrap Generation & Monitoring
• Scrap generated during production is reconciled against defined standard output/consumption norms.
• Scrap is packed depending on type (e.g., carton or bag) and recorded/identified as generated waste.
2.12 In-Transit / Goods-in-Transit Monitoring
• Internal movements between processes/plants (e.g., Spinning → Weaving, and other inter-plant transfers) are
tracked as goods-in-transit until receipt is confirmed, at which point the in-transit balance is reduced to nil.
• For domestic dispatches, transport is typically arranged and coordinated by the company (basis agreed terms with
the customer); for exports, logistics/transport is coordinated with the customer/freight forwarder.
• Tracking of in-transit consignments is maintained through the logistics/transport coordination process.
2.13 Warehouse Management System (WMS) & Stacking Norms
• Defined stacking norms are followed for storage.
• Ageing of material stored at outside/godown locations is periodically reviewed to identify material lying beyond the
normal ageing threshold, so that it can be prioritized for consumption.
2.14 Physical Verification
• Physical stock verification is performed on a defined cycle – raw material quarterly, finished goods half-yearly.
• Physical verification results are reconciled against system records; any resulting adjustments are posted through
approved movement types.
2.15 MIS Reporting
• A monthly MIS report is generated covering slow-moving and non-moving inventory for management review.
• Follow-up cadence on MIS action points varies by department; follow-up is largely conducted through mail/phone
rather than a standardized escalation matrix.
2.17 Interface with Production & Maintenance
• The inventory and gate control process interfaces with Production (planned production process) and Maintenance
(planned maintenance) functions.
• A separate, more detailed walkthrough with Production and Maintenance stakeholders was identified as necessary
and was not fully covered in this session.
3. Consolidated Process Flow (Step-wise)
The table below consolidates the discussion into a logical, step-wise process flow for ease of reference and for use in
designing audit test steps.
System /
Step # Process Step Description / Control Point Responsibility
Reference
User department raises
requirement; a reservation is
Material Requirement &
1 created in the system against User Department SAP (Reservation)
Reservation
department requirement before
any issue/transfer of material.
Two scenarios handled: (a)
transfer of material from RM
location to consuming location
Inventory Transfer / (e.g., RM store → Loom Shed) Stores / User SAP (Movement
2
Consumption basis requirement, and (b) direct Dept. Types)
consumption/use by department.
Same logic applies to repair &
spares issue.
3 Inward Gate Entry All incoming material recorded Security / Gate Gate Register +
at the gate – vehicle/material Office CCTV
weight captured, security
verification performed, and a
gate/weighment slip issued
referencing the PO. Certain job-
System /
Step # Process Step Description / Control Point Responsibility
Reference
work / returnable movements are
handled separately.
Separate visitor gate entry
process – a visitor pass is issued Security / Gate Visitor Pass
4 Visitor Gate Entry
distinct from the material gate Office Register
pass.
Material moving out of the
store/plant is covered by a
Outward Gate Pass Returnable Gate Pass (RGP) or
5 Stores / Security RGP / NRGP
(RGP/NRGP) Non-Returnable Gate Pass
(NRGP), matched against the
corresponding PO/document.
New material codes are
created/approved with reference
to a defined product data (PD)
Purchase / RM SAP (Material
6 Material Master & Coding sheet; RM codes are created on
Dept. Master)
request of the RM/purchase
department as per defined
process.
Materials classified as Critical A
manually maintained list of Cross-functional
Inventory Classification
7 critical items is finalized in (with User Manual List / SAP
(ABC / Criticality)
consultation with concerned Depts.)
departments.
Separate criteria defined (in a
Slow-Moving / Non-Moving written policy/document) for Materials /
8 Policy Document
Criteria classifying inventory as slow- Finance
moving or non-moving.
Material Requirement Planning
(MRP) is system-defined for
automated planning of select
MRP / Reorder Level categories. For regular/routine Materials SAP (MRP) +
9
Planning items (stationery, chemicals, Planning Manual
packing material), min-max /
reorder levels are defined
manually.
Raw material is largely
domestically sourced; imports are
10 Procurement Sourcing mainly limited to spares (through Purchase Dept. SAP (PO)
OEMs/authorized dealers) and
select specialty items.
On gate entry, a Goods Receipt
Note (GRN) is created; the
receiving/material department
Stores + User SAP (GRN, Bill
11 Goods Receipt (GRN) confirms receipt while the user
Dept. + Accounts Passing)
department simultaneously
records acceptance; accounting
entry and bill passing follow.
12 Quality Inspection & Received material sits in QA/QC + Stores SAP (Quality
Rejection Handling Restricted (quality-hold) stock; Mgmt.)
100% inspection is currently
performed for raw material. On
System /
Step # Process Step Description / Control Point Responsibility
Reference
QA clearance, stock moves to
Unrestricted and is issued to user
departments only from
Unrestricted stock. Rejections are
recorded by QA, with debit note
and return to vendor as
applicable; short receipts are
similarly documented.
Adjustments are governed by a
management-approved authority
matrix; movement types used for
adjustment are SAP (Adjustment
13 Inventory Adjustment Management / IT
configured/controlled at the Movement Types)
IT/plant level (rationalization of
movement types flagged from the
last audit as an open item).
System tracks shelf life and flags
Near-Expiry / Shelf-Life near-expiry material; issue of SAP (Shelf-Life
14 Stores / QA
Monitoring near-expiry stock is prioritized Report)
basis system-generated reports.
Raw material (e.g., yarn/greige)
is sent to job workers under a
job-work arrangement;
Production / SAP
15 Job Work Process processed/finished material (e.g.,
Stores (Subcontracting)
dyed beam, finished fabric) is
received back against material
sent out.
Scrap generated during
production is reconciled against
defined standard
Scrap Generation & Standard Norms
16 output/consumption norms; scrap Production
Monitoring Reconciliation
is packed (carton/bag, depending
on type) and recorded as
identified waste.
Internal transfers (e.g., Spinning
→ Weaving and inter-plant) are
tracked until receipt, reducing in-
transit balance to nil; external
In-Transit / Goods-in-Transit SAP (In-Transit
17 dispatch is predominantly export Logistics / Stores
Monitoring Stock)
(~99% of FG), with a smaller
share to domestic customers, and
transport/logistics coordinated
accordingly.
Warehouse operations are
managed through a Warehouse
Management System (WMS);
defined stacking norms apply.
Warehouse Management
18 Ageing of material stored Warehouse/Stores WMS
(WMS) & Stacking Norms
outside/at godowns is
periodically reviewed to identify
aged stock for priority
consumption.
19 Physical Verification Physical stock verification is Stores / Internal Physical Count
conducted on a defined cycle – Control Sheets + SAP
System /
Step # Process Step Description / Control Point Responsibility
Reference
raw material quarterly, finished
goods half-yearly – with results
reconciled against system records
and adjustments posted through
approved movement types.
Monthly MIS reporting covers
slow-moving and non-moving
Materials / MIS Monthly MIS
20 MIS Reporting inventory; follow-up cadence
Team Report
varies by department and is
largely tracked over mail.
A claims process exists for
inventory losses, tracked
department-wise until settlement.
Insurance & Inventory Loss Insurance/Admin
21 Discussion on this sub-process Claims Register
Monitoring (to be confirmed)
was limited during the
walkthrough – recommended for
a dedicated follow-up session.