Question

Use internal control to answer:

1.In your stores, physical inventories were different than the recorded inventory amounts. Physical inventory was lower than the recorded inventory.

2.Your store seems to have an unusually high amount of sales returns for cash

What errors may occur?

What internal control may prevent this problem in the future?

Answer 1

Following errors may occur due to given problems:

1. Mishandling of inventory

2. Shortage of inventory for sale

3. Loss of possible sales revenue due to lower level of physical inventory against recorded inventory.

4. Increase in loss of stock which will ultimately reduce ney income.

5. Wrong calculation of purchases, sales, profit margin, closing inventory as recorded inventory is different from physical inventory.

6. There will be an adverse impact on production budget as data regarding physical and on record inventory does not matches.

7.As there is more cash sales return it will lower down the revenues and profit .

8. Employees may indulge themselves in fraud activities related to cash as they may be keeping cash of sales return with them.

Internal control activities to prevent the above errors and problems:

Internal control activities for inventory are basically prepared so as to ensure to bridge the gap between physical inventory and inventory on records.Some of these are listed below.:

1.Anti-theft tags should be tied or pasted on stock.

2.Periodic physical inventory monitoring should be enforced.

3. Employee assigned with the job of inventory counting should be rotated or moved in short time spans so as to break the monotany and reduce the chances of fraud.

4. Physical examination of sales return should be done and reasons should be identified for the same.

5. A routine check of cash balance should also done.

6. If possible a damage product should be replaced with the new product instead of cash return.