Question

Please consider the scenario below and be aware of poor internal controls over inventory.

The City of Milford Parks and Recreation Department operates three community swimming pools. Each pool has a concession stand that sells candy. Each concession stand is staffed with two workers. To be eligible for volume discounts, the Parks and Recreation Department orders the candy for all three pools. Sandy Wells is responsible for ordering the concession stand goodies. Sandy uses a locked closet down the hall from her office at the Parks and Recreation headquarters to store the candy. She checks the closet periodically, and, when supplies seem low, she orders more. Whenever a concession stand needs to restock inventory, a worker goes to the Parks and Recreation headquarters to get the needed candy. Because Sandy knows all of the concession workers, she usually just hands the worker the key to the candy closet so the worker can get whatever is needed. Sandy has attached a chart to the closet door to keep track of candy withdrawals. On that chart, each worker records the number of boxes of candy that he or she is taking and the pool to which it is going. By the end of the summer, Sandy becomes worried that someone else has a key to the candy closet. The candy seems to be disappearing more quickly than it did at the beginning of the summer. For the last month or so, she hasn't found time to compare the withdrawals on her chart with candy purchases, but something just doesn’t seem right.

Required: Please identify the control problems, and suggest how to correct the inappropriate inventory procedures.

Answer 1

The biggest control problem here is that there is lack of segregation of duties. For instance the workers who are staffed at concession have the key of the closet where the inventory has been kept and moreover worker who is taking inventory from the closet is the only one who has to record the number of boxes withdrawn by them. This is easy way to manipulate as the worker may withdraw more number of boxes from the closet and record compartively less on the chart.

Solution to the above problem can be, another independent person should be staffed at the closet who issues the inventory to the workers as per the demand or requirement and maintain the record accordingly which should contain details of inventory issued alongwith signature of the both the worker who is taking the inventory for their concession and of the worker who is issuing the inventory. This record can further be compared with purchases and conducting physical count of inventory periodically.

When a company segregates the duties of employees, it minimizes the probability of an worker being able to steal the inventory and cover up the theft.