Accounting concepts and applications

Accounting

Internal Controls That Must Be Applied

When Taking a Physical Count of Inventory

There are many potential internal controls companies can use when completing a physical count of inventory. Of the controls mentioned in this analysis the majority are focused on ensuring a segregation of duties, authorizations, and support for independent checks of performance to protect physical inventory (Giannoccaro, Pontrandolfo, 2002). The internal controls include segregation of duties, proper authorization, adequate documents and records (Howard, 1984), physical controls, and independent checks of performance (Randall, 1984).

Analysis of Control Principles

All five of these approaches to managing physical inventory are predicated on being able to be used standardized processes and procedure's that have over years had variability removed from them, in addition to being auditable from a performance standpoint (Corman, 1988). From a staffing standpoint, having the segregation of responsibilities for those who are completing inventory counts during physical inventory sessions is critically important. This alleviates the potential for fraud and over-reporting to cover up theft or shrinkage of inventory that staff members may not be conversant in how to handle (Giannoccaro, Pontrandolfo, 2002). The need for segregation of duties is also critical for ensuring the next control principle as well, which is ensuring proper authorization of each manager and their teams involved in the inventory counts. This ensures the best-trained members of a company are managing the actual inventory counting process.

The second control principle is that of ensuring proper authorization of managers and teams completing the internal counts and audits of physical inventory levels (Giannoccaro, Pontrandolfo, 2002). This is critical down to the level of having team members be trained in how to manage the verifying of boxes, containers and how they are configured after an inventory audit is completed (Howard, 1984). The proper authorization to complete an inventory also needs to include training on how to manage the exceptions that often occur when physical counting is taking place (Corman, 1988).

The third principle to have adequate documents and records in place that can be quickly be used by the teams completing the audits. This also needs to be preceded with a training session focused on how to also manage exceptions to the paperwork as well, as each company's physical inventory processes are unique to their specific business models (Randall, 1984).