Question

How would inventory fit into your planned separation of duties? Please answer in your own words. Do not use outside resources.

Answer 1

Solution:

Separation of duty which is also called segregation of duty is a tool that prevents the concentration of control of the task or process in the hand of one person. This method involves more than one person in task to avoid fraud and intended error.

This separation of duty become an important tool for the internal control of the business operation. Few examples where this method can be employed are as follows

1. Inventory

2. Cash and Cash equivalents

3. Payroll

4. Accounts receivable

As required by the question application of the separation of duty in the field of Inventory management explained as follows  

The Inventory management and its control is a process which can be broadly divided into 3 parts

Part A: Purchase authorization:

The purchasing department should review and approve inventory acquisitions. There should be a prohibition on the receiving department to interfere in the process of purchase.

Part B:  Inventory custody

Similarly, The receiving department maintains the custody of all the inventory and issuer per the need of the production department that too after following the standard of the procedure set by the organization.

Further, The shipping department or purchase department should not have the editing privilege of accounting records. The accounting department should not have access to the warehouse.

Part C: Accounting activities:

Recording of the purchase or issue of credit/ debit note and processing payment to the supplier should be done by the accounting department. This will ensure that no excess payment is made to any supplier.

If we consolidate the above three-step. The picture will be like

1. The purchase department can report excess purchase as the receiving department put a check after receiving and verifying the actual inventory received.

2. The receiving department can not understate the inventory received or divert the goods as the accounts department will make the payment after cross-checking with the purchasing department and if a lower payment is made to the supplier he/she will raise the concerns for short payment.

3. Accounting Department can not make any excess payment to suppliers as records of the purchasing and receiving department will cross-check the number of units ordered and received in comparison to payment made.

Hence, there will a check and balance in place to keep track of all the activities and reduces the chance of fraud. This way Separation of duty plays a key role in placing control in inventory management.