Question

Hana Ranch Company, which has never been audited, is asked on October 1 by its bank to arrange for a year-end audit. The company retains you to make this audit and asks what measures, if any, it should take to ensure a satisfactory year-end physical inventory. Perpetual inventories are not maintained. How would you answer this inquiry?

Answer 1

The following measure will help the company to improve its physical inventory management system:

a) The counting of physical inventory should be done at reasonable intervals.

b) Stock taking should be done by experienced persons from the department.

c) Internal check system should be implemented under this system.

d) The physical count of the inventory should be matched with the invoice statement.

e) The physical count of the inventory should be reconciled with the requisition statement.

f) Records should be maintained by persons independent of storekeepers.

Perpetual inventory system requires excessive work for record keeping. This results in extra indirect labour cost to the company. Thus this system is recommended for large scale companies having large volume of inventories which cannot be physically counted. For small companies with very less volume of inventory, physical method is recommended as it fulfils the purpose and is cheaper.