Inventory Control & Internal Controls

Inventory control helps prevent theft.
➛ True

One employee should handle all inventory duties.
➛ False
This violates segregation of duties and increases fraud risk.

Physical inventory counts help detect errors.
➛ True

Internal controls are only needed in large businesses.
➛ False
All businesses need internal controls, regardless of size.

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

Questions

Which internal control principle is violated?
➛ Segregation of duties

What risks arise from this situation?
➛ Theft or misappropriation
➛ Recording errors
➛ Fraud going undetected
➛ Inaccurate inventory records

Suggest two control improvements.
➛ Separate ordering, receiving, and recording duties
➛ Introduce independent inventory checks or supervision

1. Internal controls help protect business assets.

2. Inventory losses are known as shrinkage.

3. A physical count compares actual stock with records.

4. Dividing responsibilities is called segregation of duties.

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

Questions

Why can shrinkage still occur?
➛ Theft
➛ Damage
➛ Recording errors
➛ System misuse

What additional controls should management introduce?
➛ Regular physical inventory counts
➛ Security cameras or restricted access
➛ Better staff supervision
➛ Improved authorization procedures

How do physical counts help even with perpetual systems?
➛ Verify accuracy of records
➛ Identify losses or errors
➛ Ensure inventory exists physically

How does inventory control improve financial reporting?
➛ Accurate inventory valuation
➛ Correct COGS calculation
➛ Reliable profit measurement
➛ Compliance with accounting standards

What is inventory control?
➛ Procedures used to manage, track, and safeguard inventory.

Name two inventory risks.
➛ Theft, damage, errors, or fraud.

Why is segregation of duties important?
➛ It reduces the risk of errors and fraud.

What is the purpose of physical inventory counts?
➛ To compare actual inventory with records and detect discrepancies.

How do internal controls improve reliability of financial statements?
➛ By ensuring accurate records, preventing fraud, and protecting assets.

---

Merchandise Transactions ➧ Here