Question

ABC Stores is a general dealer with branches throughout South Africa. Their head office is in Johannesburg. Once a month the branches receive inventory from head office. The branches are only permitted to buy inventory for cash. One of the aspects of control activities is proper control over the storage of inventory. To verify that proper control over the storage of inventory is being carried out, the auditor must make certain that adequate physical security measures and access controls are in place for all the assets of the enterprise.

Required: Describe the internal controls that would ensure that proper control over the storage of inventory and assets is exercised at all the branches of ABC Stores.

Answer 1

Key internal controls for your inventory are:

1. Lock the warehouse: The most important inventory control is simply locking down the warehouse. Only autorized person should be allowed to access the warehouse.

2. Organize the inventory: It may not seem like a control to simply organize the inventory in the warehouse, but if you cannot find it, you cannot control it. Thus, a fundamental basis for inventory internal control is to number all locations, identify each inventory item, and track these items by location.

3. Count all incoming inventory: Count the inventory before recording it as received. This keeps errors from being introduced into the inventory records.

4. Inspect incoming inventory: Create a paper trail of internal documentation and cross-check to ensure items received and those on invoice are identical.

5. Tag all inventory: Every scrap of inventory in the warehouse should be identified with a tag, which states the part number, description, unit of measure, and quantity. Otherwise, inventory items are bound to be mis-identified.

6. Physical tracking: Confirm that a system of signing items out of inventory and into sales exists, that it requires signature authorization and compliance is enforced as policy. Confirm that all shipments of products are identical to invoiced sales documents. Adopt measures to ensure that inventory is not reduced in company records until documentation is checked and items are shipped.

7. Segregate Duties: Segregate the duties involved in purchasing, ordering, receiving and storageof inventory. Different managers should be appointed for different duties.

8. Proper inventory management system: Ensure that a strong inventory tracking and management system is in place and that key personnel able to use it. Access to inventory master files and the ability to modify, delete or change data should be restricted.