Inventory Control & Internal Controls

Module 4:
Inventory & Costing

Duration:
45-60 minutes

Level:
Beginner to Diploma-Level

➛ Define inventory control

➛ Explain the purpose of internal controls

➛ Identify common inventory risks

➛ Describe internal control procedures for inventory

➛ Understand the role of physical counts

➛ Explain segregation of duties in inventory management

➛ Understand how internal controls prevent errors and fraud

➛ Inventory Control
➛ Internal Controls
➛ Segregation of Duties
➛ Physical Inventory Count
➛ Authorization
➛ Documentation
➛ Shrinkage
➛ Fraud

Internal controls are rules and procedures designed to

➧ Safeguard assets ➧ Ensure accurate accounting records
➧ Promote efficiency
➧ Prevent and detect errors and fraud

Inventory is a high-risk asset, so strong controls are essential.

➛ Theft by employees or outsiders
➛ Recording errors
➛ Damaged or obsolete goods
➛ Unauthorized access to inventory
➛ Inaccurate inventory records

1. Segregation of Duties

No single employee should
➛ Order inventory
➛ Receive inventory
➛ Record inventory
➛ Have custody of inventory

This reduces the risk of fraud.

2. Authorization Procedures

➛ Purchases approved by management
➛ Sales authorized through invoices
➛ Returns approved by supervisors

3. Proper Documentation

➛ Purchase orders
➛ Receiving reports
➛ Sales invoices
➛ Inventory records

Documents provide evidence and accountability.

4. Physical Inventory Counts

➛ Conducted regularly
➛ Compared with accounting records
➛ Differences investigated

Helps detect shrinkage and errors.

5. Secure Storage

➛ Restricted access to inventory
➛ Locked storage areas
➛ Security cameras | where applicable

6. Perpetual Inventory Records

➛ Inventory updated continuously
➛ Allows quick detection of discrepancies

➛ Inventory control helps prevent theft.
➛ One employee should handle all inventory duties.
➛ Physical inventory counts help detect errors.
➛ Internal controls are only needed in large businesses.

A store manager orders goods, receives them, records them, and stores them alone.

Questions

➛ Which internal control principle is violated?
➛ What risks arise from this situation?
➛ Suggest two control improvements.

1. Internal controls help protect business __________.

2. Inventory losses are known as __________.

3. A __________ count compares actual stock with records.

4. Dividing responsibilities is called __________ of duties.

A supermarket experiences high inventory shrinkage despite using a perpetual inventory system.

Questions

➛ Why can shrinkage still occur?

➛ What additional controls should management introduce?

➛ How do physical counts help even with perpetual systems?

➛ How does inventory control improve financial reporting?

➛ What is inventory control?

➛ Name two inventory risks.

➛ Why is segregation of duties important?

➛ What is the purpose of physical inventory counts?

➛ How do internal controls improve reliability of financial statements?

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Answers ➧ Here

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Merchandise Transactions ➧ Here