Internal Control Inventory

8/11/2019 Internal Control Inventory

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Internal Control

Inventory


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Internal Control

Three objectives of a good system of

internal control are to ensure

The reliability of accounting records andfinancial statements

That the companys assets are protected

Adhere to laws and company policies


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The Need for Internal Controls for

Inventory

Physical inventory

Inventory includes all salable (finished) goods

owned by the business. Also all raw materialsand components that are to be converted into

finished goods

A physical inventory must be taken in both the

periodic and the perpetual inventory systems.Technology has an impact on the taking of a

physical inventory.


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The Need for Internal Controls (cont.)

Inventory losses result from theft and

spoilage are included in cost of goods sold;

these losses are easier to track under theperpetual system than under the periodic

system.


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Why is Internal Control needed over

Inventory

Internal control activities help prevent theft

and fraud and promote accuracy in cash

records.


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Why is Internal Control needed over

Inventory

Internal controls also help management by

Keeping enough inventory on hand to sell to

customers without overstocking merchandiseKeeping sufficient cash on hand to pay for

purchases in time to receive discounts

Keeping credit losses as low as possible by

making credit sales only to customers who arelikely to pay on time


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How may inventory be controlled?

All companies should maintain adequate physicalcontrol over valuable assets that may be

misappropriated.

For example, inventory should be properly stored in

a secure location.

Serial numbers should be placed on all valuable

assets to assist in a physical count of these assets.


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Monitor the control system

A physical inventory (stock count) should betaken at least annually. An independent

reconciliation between the general ledger

balance and inventory should be compared to

the inventory count.

Auditors should evaluate the effectiveness of

the control system.


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Internal control for inventory (contd)

Internal controls for inventory include control overpurchasing , receiving and sales and stock taking.

In large organisations, the purchasing department will

order inventory based on requisitions.

The receiving department should be kept separate from

the purchasing department. It should check the delivery

against an order form to see if the correct goods are

received and in the correct amount.


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Internal control for inventory (contd)

The sale of inventory should also becontrolled. Customer orders received

should be submitted to the warehouse or

storeroom.Once the order is received it should be

confirmed and despatched by the

logistics or despatch department.

An invoice is prepared by the accounts

department and given to the customer.


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Internal inventory control (contd)

Security guards

Perimetre fence

Administration

Identity badges

Locked warehouse (see p. 19)


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Internal Control: Limitations

At least three factors can contribute to the

weakening of a system of internal control:

Human errorCollusion

Changing conditions


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Limitations

Internal controls can be circumvented by

collusion among employees.

Two or more employees working together can

hide theft by covering for each other. Nosystem can prevent fraud.

Documents

Internal Control Inventory