Internal Control Inventory

Internal Control
Three objectives of a good system of
internal control are to ensure
The reliability of accounting records and
financial statements
That the companys assets are protected
Adhere to laws and company policies
The Need for Internal Controls for
Inventory
Physical inventory
Inventory includes all salable (finished) goods
owned by the business. Also all raw materials
and 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.
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 the
perpetual system than under the periodic
system.
Why is Internal Control needed over
Inventory
Internal control activities help prevent theft
and fraud and promote accuracy in cash
records.
Why is Internal Control needed over
Inventory
Internal controls also help management by
Keeping enough inventory on hand to sell to
customers without overstocking merchandise
Keeping 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 are
likely to pay on time
How may inventory be controlled?
All companies should maintain adequate physical
control 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.
Monitor the control system
A physical inventory (stock count) should be
taken 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.
Internal control for inventory (contd)
Internal controls for inventory include control over
purchasing , 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.



Internal control for inventory (contd)
The sale of inventory should also be
controlled. 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.
Internal inventory control (contd)
Security guards

Perimetre fence

Administration

Identity badges

Locked warehouse (see p. 19)
Internal Control: Limitations
At least three factors can contribute to the
weakening of a system of internal control:
Human error
Collusion
Changing conditions
4-13
Limitations
Internal controls can be circumvented by
collusion among employees.
Two or more employees working together can
hide theft by covering for each other. No
system can prevent fraud.