Question

CASE: On January 1, CBU installed a new computer system for tracking and calculating inventory costs. On December 31, at year-end closing, CBU’s system reported inventory at $4.5 million for financial statement purposes. At midnight, the auditors performed a physical inventory count and found the inventory total to be $3.5 million. To correct the discrepancy, CBU’s accounting staff processed an adjusting entry to reduce inventory by $1.0 million. The next day, 2 accountants were discussing the events of the previous night.

Accountant A was proud of the audit and said it illustrated a benefit of having a good system of internal control. CBU had followed good internal control procedures by having a regular physical inventory count to safeguard a valuable enterprise resource. Accountant A was relieved that the problem was resolved: the financial numbers were corrected before they were reported. In short, he felt successful and thought CBU should feel fortunate to have his accounting staff as control advisors.

Accountant B felt differently. She was concerned about the bad decisions that were made throughout the year based on the incorrect inventory numbers. She felt that she and the other accountants should have helped develop more timely and effective system controls.

Please discuss the following in details. Be sure to explain your reasonings and used scholarly sources to support your reasoning:

With which accountant’s philosophy do you agree?

How can you explain the diverse opinions?

What policies or procedures, if any, should CBU develop to avoid such problems in the future?

Your response should also include a Biblical perspective.

Answer 1

Accountant A is focusing on his role in attesting to the accuracy of published financial statement figures and verifying that they fairly represent the organization at a certain point in time. Some traditionalists will argue that Auditor A’s philosophy is correct, given his role. However, he did not play the role of a proactive, real-time control advisor.

Accountant B was more concerned about how the inventory error could be avoided, and about the problems of not detecting the error sooner, or preventing it altogether. She might want to inform the client of her firm’s ability to provide a risk/control review as a consulting service.

From Above discussion
Accountant B is correct.  
a)Cycle counting is effective
b)Avoids wasted time, money & disappointed customers
c)Time is wasted because an employee may look for an item that is stated in the inventory but does not actually exist
d)Money wasted because extra labor costs to look for items
e)Increased time to get items to customers create disappointment
f)Increase cost of goods sold because inventory is increased to offset incorrect information on actual inventory

Opinions:
Accountant A is driven by the bottom line and correcting mistakes when they happen
Accountant B is interested in correcting and avoiding the mistakes over the time period

Suggestions:
The firm could more closely examine the client’s business processes, identify the risks associated with the processes, and suggest or devise controls to reduce the risks. In doing so, her objective is to add value to the client by helping them solve business problems. Increasingly, the “independent auditor” mentality is being replaced with such a “professional business services provider” mentality.
Cycle counting is effective and can assists with maintaining between a 90% to 100% accuracy level in inventory.Perpetual inventory is suggested as it helps avoid hampered operations and increased costs for rush hours .Obsolete inventory should be recognized as a loss

Biblical Reference:
Ecclesiasticus 14:7 states that: "Whatever stores you issue do it by number and weight, spending and taking put everything in writing." This clearly indicates that a perpetual inventory system should be used.