Case inventory accuracy should be the target

 

 

 

 

 

 

 

 

Case 1: Inventory and
Internal Controls

Robert Pwaworo

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Liberty University

ACCT 531

Professor Teresa Bounds

January 25, 2018

Inventory is an important asset to the survival and success of a
company. No company can operate effectively or meet customers’ requirements
without the proper amount of inventory. To this end, inventory accuracy should
be the target for an organization if it wants to succeed and have a good
reputation (Walters, E., et al, 2006). To ensure inventory accuracy, “cycle
counts need to be supplemented with continuous inventory audits that keep track
of variations in stock levels to prevent premature or unnecessary inventory
replenishments” (Barratt, M. A., et al). Shenker stated, “Cycle counting is a
process where a portion of the inventory are counted during the year on a
systematic basis”.

In the case of CBU, they have instituted a new computer
mechanized to track and calculate its inventory costs periodically. At the end
of the year inventory, CBU’s inventory record has shown $4.5 million in their
financial statements instead of $3.5. To correct the inventory discrepancy that
was detected through inventory audit, the accountants made inventory adjustment
to reduce inventory by $1.0 million. Accountant A was right on point to
say  CBU had good internal controls put
in place to detect inventory. CBU inventory tracking system can be described as
a cycle count with other audit measures put in place. The audit that follows to
correct any inventory errors immediately after the end of the year inventory
records reflects the effectiveness of the CBU’s inventory system and effective
internal controls. Also, the error that is existed could be a result of what
was initially entered into the computer system. For “if garbage was entered
then the same garbage will come out as the output. On the other hand,
Accountant B was not right when all effective internal controls were placed to
detect inventory inaccuracy but she ignored that and think that CBU lacks
effective internal control. To this end, I disagree with her.

CBU has a good and effective internal inventory control system
in place. What the company requires is to rather implement effective operating
procedures or policies to improve the existing system. The organization should
implement specific internal control procedures or policies to continuously
monitor and track inventory over time for their installed system. This should
include mechanisms to enable adjustments in the records to reflect current
stock levels (Barratt, M. A., et al). Also, a procedure to educate and train
personnel on the new system should be implemented with segregation of duties.
More so, CBU should implement compensating control where the accountants or
board of directors could increase periodic oversight. Finally, CBU should
implement an accountability policy to hold personnel liable for inventory
errors.

It is important for CBU management to note that the full
implementation of the policies or procedures will improve inventory record
accuracy and requires the support of all top management to make it a
success.  As in Luke 1:37, “for nothing
will be impossible with God.” (ESV). The management of CBU should rely on their
new inventory with the implementation of procedures and policies to govern it. Proverbs 3:5,
trust in the LORD with all thine heart; and lean not unto thine own
understanding.”

 

 

 

 

 

 

 

 

 

References:

Barratt, M. A., et al. (n.d.). Inventory Accuracy: Essential,
but Often Overlooked. Supply Chain Management Review. Retrieved from
http://www.scmr.com/article/inventory_accuracy_essential_but_often_overlooked

Shenker, M. (n.d.). Cycle counting. Retrieved from
http://www.smfcpa.com

Walters, E., et al. (2006). Combination Counting Method
Provides Increased Accuracy. Review of the Electronic & Industrial
Distribution Industries. 5, 2, 117-141. Retrieved from http://web.b.ebscohost.com.ezproxy.liberty.edu/ehost/detail/detail?vid=8=6420d620-c759-486f-9e37-fe66c858ddef%40sessionmgr103=JnNpdGU9ZWhvc3QtbGl2ZSZzY29wZT1zaXRl#AN=25815487=iih

 

 

 

 

 

 

 

 

 

 

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