UNIVERSITY OF JOHANNESBURG

DEPARTMENT OF ACCOUNTANCY

AUDITING 3A
2013

Production and Inventory Question Bank

QUESTION 1 (22 MARKS)
You are the managing director on of Firezone (Pty) Ltd. The company is a
wholesaler of numerous products related to domestic and industrial heading, fire
extinguishers and other fire fighting chemicals and equipment. The company’s
year-end is 31 May. The production and inventory senior got ill shortly before the
financial year-end and you had no choice but to appoint the secretary, Tasha
Mitton, to head up the stock count.

Pertinent information about the company’s inventory is as follows:

1. Inventory is kept in a single warehouse in Durban.
2. The warehouse is divided into six section according to the type of goods
stored
e.g. domestic heaters, chemicals etc, and is neatly stacked.
3. The majority of items are packaged in sealed boxes or cartons.
4. Some of the chemicals have a limited shelf life. Where this is the case, the
expiry date is stamped on the container.
5. Firezone (Pty) Ltd holds inventory on consignment from Bushblaze Inc, an
Australian firefighting company.

You asked Tasha Mitton to submit a report to you on her attendance at the year-
end inventory count. The report contained the following information.

1. The inventory count took place over two afternoons, from 1pm to 5pm on
30 and 31 July. This was to enable the company to receive and dispatch
goods during the morning.
2. The count was carried out by the six warehouse employees who usually
pick the goods to fill the orders. This worked well because they are familiar
with the inventory categories and where everything is stored.
3. The pickers decided amongst themselves which section of the warehouse
to count. Maggie Motolo, the warehouse administration clerk, printed a list
of the computerised perpetual inventory system (inventory sheet) of each
item (description and quantity) in the section chosen by the picker. The
numerically sequenced inventory sheets were handed to the pickers who
then counted each item in their section of the warehouse, ticking off the
quantities on the inventory sheets once they had counted the item.
4. If the count quantity differed from the quantity on the inventory sheet, the
counter (picker) highlighted the item and quantity and wrote in the number
he counted.
5. At the conclusion of the count on the second day, the counters returned
the inventory sheets to Maggie Moloto who identified the highlighted items
and amended the quantities on the perpetual inventory records to reflect
the actual quantities on hand.
6. Prior to the count, I confirmed with the financial accountant that we would
be attending the inventory count. He confirmed the dates and times with
me.
7 I was assisted at the count on both days by Zane Mulla (the truck driver)
and we carried out the following procedures:

a. Accompanied each picker for a short period of time on each day to

observe the counting.
 b. Allocated the six sections between us, compiled a count workpaper
by selecting inventory items (on a random basis) from the counters
inventory sheets, and performed a physical count of the items
selected.
c. We entered the quantity of each item counted on our workpapers.
d. Observed Maggie Moloto adjust the quantities on the perpetual
inventory records.
e. I initialed each of the inventory sheets and left them in the custody
of Maggie Moloto.

YOU ARE REQUIRED TO:

Discuss the weaknesses in the year-end inventory count headed up by Tasha

Mitton, based on the information given above. (20)

PRESENTATION (2)
QUESTION 1 (SUGGESTED SOLUTION)

Weaknesses in the inventory count

1. Preparation and planning of the count was inadequate (1)

 Holding the count over two afternoons so as to allow normal delivery and
dispatch was not sensible (1)
 Non-trading day or overtime count would have resulted in a more
efficient count (1)
 Total count time only 8 hours – insufficient time (1)
 The method of counting was inadequate; no tag system or double count.
(1)
 No count controller appointed to direct count. (1)
 Composition of the counters totally inadequate: (1)
o Counting should be done in teams (2 persons) (1)
o One of whom should be independent of the warehouse function. (1)
 If pickers have been involved in misappropriating inventory, they are now
in a perfect position to hide any shortages by having the perpetual
inventory records amended (1)
 Amendments were done without authority or investigation (1)
 There is no evidence that the warehouse was prepared for the count;
although it is “tidy”, a number of procedures should have taken place. (1)
o Marking damaged, slow moving obsolete goods. (1)
o Identifying expired (nearly expired chemicals). (1)
o Preparing a secure area for deliveries to be received during the
count/making sure goods received up to the 30 th, have been
unpacked. (1)
o Identifying the location of Bushblaze Inc inventory (consignment
stock). (1)

2. Count stationery was inadequately designed and controlled (1)

 Count sheets not pre-numbered (1)

 Staff not signed for count sheets received (1)
 Count sheets not accounted for in count sheet register (1)
 No mentioning that counts must be documented in ink (1)
 There are no inventory adjustment forms on which count
differences/adjustments/results of investigation can be entered for
authorization before the inventory records are adjusted. (1)

3. No written instructions were prepared for the count which again will
result in a substandard count. (1)

 No identification of who should count what – pickers decided

themselves. (1)
 No method of counting conveyed to counters and count controller and
auditors. (1)

4. The count itself was inadequately conducted (1)

 Inventory only counted once (1)
 No recount by another counter when a discrepancy identified. (1)
 No random counts by supervisor (1)
 No identification and recording of slow moving, expired or damaged
stock. (1)
 No identification of consignment stock. (1)
 No count controller, so no walk through of the warehouse once the count
is complete, and no method of determining whether all stock has been
counted. (1)
 No procedure conducted to ensure that goods received or dispatched
during the count were properly accounted for (1)
Maximum (20)
Presentation (2)
QUESTION 2 (25 MARKS)

You are the internal auditor employed by Amazambane manufacturers (hereafter

AM), a producer of potato chips and other related items. AM is situated in
Gauteng and its premises consist of an administration building with an
accounting division, a raw materials store with a separate receiving and dispatch
area, a factory, and a finished goods store. The organization has recently
converted to a new production system which resulted in minor changes to their
production processes and inventory management systems.

You are busy planning the audit of the new inventory, warehousing and
production system and have documented the process as follows:

Raw Materials:

Potatoes, spices, oil and other raw materials are issued to production upon
receipt of a written authorized requisition from the production manager. The
materials requisitions are pre-printed and prepared sequentially. Raw materials
are transferred from the raw materials store to the factory using an authorized
transfer or issue note. Upon receipt of the materials at the factory, one of the
factory foreman inspects the goods and compares the details to a copy of the
requisition to ensure that the correct quantity and quality of raw materials are
received. He signs a copy of the materials requisition as proof of receipt and
returns it to the raw materials store man.

Production:

Raw materials are stored in a separate area in the factory warehouse until
needed for production. The production process consists of four stages: The
peeling, cutting and frying of the potatoes and the packaging of the finished
products. The production supervisor ensures that sufficient raw materials are
used in the production process. Potato chips are packaged using two weights :
30g and 150 g packets. Production reports clearly indicate the raw materials,
labor and overheads used as well as the quantity of the finished goods produced.
These reports are sent to the management accounting division where a cost
accountant updates the inventory records. A perpetual inventory system is in
place.

Finished goods:

The potato chips are transferred to the finished goods store as soon as the
production process has been completed. A transfer note is once again used to
remove the goods from the factory to the store. Upon receipt at the finished
goods store the goods are packed in boxes containing fifty 30g packets or
10 150g packets. These boxes are then sealed and stamped and are ready for
distributing to the various wholesalers.
You are required to:

Prepare a working paper for the internal audit on the inventory, warehousing and
production system of AM. Your working paper should include:
1. A relevant heading (2)
2. Four control objectives that are related to the production and inventory
cycle. (4)
3. Four risks relating to the production and inventory cycle (4)
4. The test of controls that should be performed on the production and
inventory cycle to ensure that proper controls are in place. (15)
QUESTION 2 SUGGESTED SOLUTION

Working paper format

Client: Amazambane Manufacturers Prepared by:

Period under review: Reviewed by:

(2)
Engagement objectives:
 To ensure that raw materials issued to production are authorised
 To ensure that valid products are produced
 To ensure that goods are properly safeguarded, and
 To ensure that recorded inventory actually exists.

(4)

Risks:
 Incorrect quantities and inferior qualities of raw materials are issued to the
production proses
 Unnecessary goods and inefficient quantities are produced
 Theft, damage of goods and
 Recording of inventory items that do not exist (overstatement of inventory)
(
4)

Test of Controls:

 Inspect controls of the warehouse to determine the effectiveness of:

o Access and custody controls;
o Authorised documentation in respect of inventory movement.
 Observe the placement of controls, e.g. entrances to the warehouse
should be
 limited and monitored;
 Enquire from warehouse personnel as to which procedures and controls
are properly enforced and in place.
 Inspect and / or enquire whether a proper inventory management system
exists;
 Inspect whether the building is equipped with surveillance cameras,
burglar bars, security fencing/gates, etc.
 Enquire from warehouse personnel and inspect duty sheets of staff to
determine whether isolation of responsibilities can be enforced.
 Inspect production schedules for signatures of authorisation;
 Sequence check production schedules and job cards;
 Inspect records for marks of checking;
 Reconcile production schedules and job cards with quotations and job
orders
 and register for work in progress;
 Review policies and system documentation for adequacy, recentness and
 applicability to current production processes;
  Re-perform or Inspect performance reviews of production staff;
 Enquire from production personnel whether follow-ups are performed on
inefficiencies.

Marks will be allocated for any other valid audit procedure given. Maximum
15
QUESTION 3: (12 MARKS)

You are currently the senior internal audit trainee of Bubbles (Pty) Ltd, a
company which manufactures and sells soaps and other cleaning materials. You
asked a junior trainee to explain the control objectives relating to bubbles (pty)
Ltd’s inventory of R1 832 916 reflected in the financial statements at 31 March
2012. He responded as follows:

Completeness: Only inventory which is complete is included in the figure of

R1 832 916. Work in progress is excluded
Validity: Only saleable inventory is included. Any inventory which has
expired because of deterioration, is excluded from the
amount of R1 832 916, i.e. it is invalid.
Rights: Bubbles (Pty) Ltd has a license (the rights) to manufacture
the soaps and cleaning materials which it sells.
Existence: The inventory which is included in the amount of R1 832 916
actually existed at balance sheet date, i.e. it had already
been manufactured.

You are required to:

Discuss your junior trainee’s understanding of the control objectives pertaining to

Bubbles (Pty) Ltd’s inventory, based on his response. (12)
QUESTION 3 SUGGESTED SOLUTION

1. My junior trainee has very little understanding of the control objectives.

2. Whilst he has correctly identified completeness, rights and existence as
being applicable to inventory
 he does not know what they mean and
 he has omitted valuation and presentation and disclosure.
3. He appears unaware that validity is an internal control objective, not a
control objective.
4. The completion objective represents that all inventory including WIP, raw
materials is included in the figure of R1 832 916. It has nothing to do with
the “stage of completion” of the inventory.
5. He appears to have muddled validity and valuation, whilst he does seem
to know that inventory which has “deteriorated” should not be included he
clearly does not understand that the valuation objective represents that the
amount of R1 832 916 is the fair carrying value of the inventory.
6. The rights assertion has nothing to do with the company’s (legal) rights to
manufacture their products. The control objective represents that Bubbles
(Pty) Ltd has ownership of the inventory, it belongs to them, it is not the
property of anyone else.
7. He is partially correct on the existence objective, but again he has
excluded other relevant categories of inventory believing that only
manufactured inventory is included in the amount of R1 832 916. The
objective relates to the existence of all categories of inventory (no fictitious
inventory is included).
8. Finally he is unaware of the presentation and disclosure control objectives
which requires that inventory be disclosed, classified and described in
terms of IAS and the Companies Act.
QUESTION 4 (32 MARKS)

You are the newly appointed financial manager of The Shoebox (Pty) Ltd, which
operated a chain of 29 large retail shoe stores in and around Port Elizabeth,
selling on a cash only basis. The stores are controlled from a central head office
and all inventory is issued to the stores from a central warehouse. All inventory
deliveries to stores are made by the shoebox (Pty) Ltd’s own delivery vans.

An analysis of the most recent branch accounts revealed that the average gross
profit margin for the 20 stores was 51% but that five stores reported margins
below 20%.

You approached the managers of the stores in question and the company
internal auditor and they all ascribed the poor margins to weak internal control
systems which enables theft in particular, to go undetected. Their explanations
for this, with which you agreed, is that the internal control system has not kept up
with the rapid growth of the company. You therefore decided to design internal
controls to improve the control over branch inventories.

For a number of reasons, it is not feasible to computerize branch activities,

although all processing at the head office is computerized.
The stores are staffed by a branch manager, a cashier and between 2 and 5
sales assistants, (depending on the size of the store). The company does not
wish to change this. All the branches’ inventory is kept either on display or in
storerooms at the back of the shop. All inventory items are coded. A cash sales
invoice, which indicates the item code and description, is made out for each pair
of shoes sold. No inventory records are kept at the branches.

Due to the nature of the stores clientele, the company introduced a “down
payment scheme”. This enables a customer to purchase shoes over six months
by making payments when they are able to. The selected shoes are put aside
and only once the six payments have been made are the shoes handed over to
the customer. Internal controls over this scheme are particularly poor.

You are required to:

Design an internal control system for the control of inventory under the following
headings:
1. Despatch from central warehouse to stores (12)
2. Receiving of goods by stores (5)
3. Physical control over inventory at stores (10)
4. The “down payment” scheme (5)
Detailed computer application controls should not be considered.
QUESTION 4: SUGGESTED SOLUTION

1. Despatch from warehouse to stores

1.1 Branch managers should anticipate inventory needs timeously
(Cardex see 3.1) and should place an order with the central
warehouse on pre-printed order forms which
 are sequentially numbered
 indicate the branch
 are signed by the branch manager.
 describe the required shoes accurately e.g. quantity required, code,
size, etc.
1.2 No despatches from the warehouse should take place without such
an order.
1.3 On the strength of the order a three part despatch note should be
prepared by the warehouse admin clerk and checked and signed by
the stores controller.
 Two copies to accompany the delivery (to the branch).
 One (signed) copy to remain at the branch for its records.
 The second copy to be signed and returned to head office as proof
of delivery.
 The third copy to remain “in the book” as a permanent record.
1.4 On despatch a gate controller at the warehouse should check the
goods to the despatch note and should not allow any goods to
leave without a correct despatch note (2 copies).
1.5 On a daily basis the stores controller at the central warehouse must
confirm that all despatch notes (permanent copy) are cross
referenced to and supported by an order by inspection thereof.
1.6 Branch managers should monitor that all orders are filled timeously,
by retaining a duplicate copy of the order and cross referencing to
despatch notes daily.
1.7 A sequence control over orders and despatch notes should be
carried out to ensure that they are all accounted for on a regular
and frequent basis.
1.8 All despatches should take place at selling price (to facilitate ease
of inventory, cash reconciliation).

2. Receiving of goods by stores

2.1 The branch manager should be responsible for receiving deliveries
from the central warehouse.
2.2 On receipt a careful check must be made on quality and quantity
against the order and the despatch note. Any discrepancies must
be noted on both copies of the despatch document and signed by
the manager and delivery person (driver).
2.3 The manager must sign the despatch note and retain and file the
top copy with the corresponding order number.

3. Physical controls
3.1 The branch manager should maintain a simple cardex of all
inventory on hand. The cardex should be written up from
  despatch notes (see 1.3)
 cash sales invoices
3.2 The manager and a salesperson/cashier should perform frequent
inventory counts (on a test basis) and the count quantities should
be reconciled to the cardex quantities.
3.3 The internal auditor should conduct surprise inventory counts
frequently and should agree the inventory on hand to the inventory
cardex. Managers are responsible for all shortages.
3.4 The storeroom should only be accessible through the shop itself,
i.e. any outside doors, windows should be barred off
 it is obviously necessary that the staff have free access to the
storeroom, but no other persons should be allowed in the
storeroom e.g. customers, delivery people. Manager and staff
to enforce this control by being vigilant as physical controls are
inappropriate.
 storeroom and shop to be protected against fire etc.
3.5 Inventory in the store itself should also be controlled by displaying
only one of the pair of shoes.
3.6 The store should be laid out in such a way as to make it very
difficult for someone to leave without passing a till
 a security guard/electronic detectors should be used to reduce
shop lifting.
3.7 Staff should be checked at the end of the day to ensure that they
are not removing inventory (feet as well).
3.8 Security guards should be on duty at night.

4. Down payments
Note: There is a danger that “down payment” monies could be used to hide an
inventory shortfall.

4.1 Full details of customers placing down payment should be kept in a

ledger by the branch manager
 name
 address
 contact number
 dates
 code, description, size, etc of shoes
 receipt numbers
 amounts
4.2 A simple downpayment contract should be drawn up (name of
customer, price, date shoe description etc) and signed by customer
and authorised by the store manager.
4.3 A sequentially numbered down payment receipt must be completed
in duplicate.
 the receipts must be signed by the customer and the manager.
 the customer to retain a copy and be advised not to lose it.
4.4 "Down payment" shoes should not be released until the full
purchase price has been received
 Manager to authorise release of shoes after reconciling
customer copy of down payment receipts with the outlet’s copy
and with the ledger.
 Customer copies of receipt to be cancelled (or retained) so that
they cannot be used again.
 Down payment contract to be “cancelled” or signed off by both
parties.
4.5 The shoes being purchased must be put aside in a separately
demarcated area in the storeroom for the customer.
4.6 Cash received on down payment should be separately identified in
the daily cash receipts reconciliation and this figure should be
reconciled to the day’s down payment receipts.
4.7 Internal audit should reconcile down payment records with “down
payment” shoes set aside, at the same time as conducting their
surprise counts (see 3.3 above) to ensure there is no manipulation
of down payments.
QUESTION 5 (20 MARKS)

Posh Shoe Ltd (hereafter Posh Shoe) is a listed company that is situated in
Sandton City, and specialises in the manufacturing of elite footwear for men,
women and children.

Posh Shoe purchases all of the raw materials needed for the production of the
shoes from Chic Shoes (Pty) Ltd (hereafter Chic Shoes) in Europe. A variety of
materials are used for the making of the shoes, such as leather fabrics, plastic,
rubber, fabrics, wood, jute fabrics, and metal. With the development of modern
machines, a pair of shoes can be easily manufactured in less time than it would
take to manufacture it manually, as each step in its manufacturing is performed
by a separate footwear making machine.

The process for issuing raw materials and producing the shoes is as follows:

 The production clerk issues an order to the processing department that

contains the details of the raw materials that is needed for the production
of the shoes. The order is based on re-ordering levels and market trends.
 Raw materials are then issued to the production processing department
through a single copy of a raw materials issue slip.
 The raw materials are then sent to the production department to start with
the production process.
 Daily production reports are generated for all orders and copies are sent to
the production planning department. Management briefly looks at a few of
the reports to ensure that all charges in terms of raw materials, labor and
overheads are accurate.
 Time spent on each stage of production is captured into a personal journal
that is kept by each of the workers involved in the production of the shoes.
 The foreman inspects that each stage of the production process is
properly completed before the shoes are sent to the next stage.
 All of the raw materials and labour and machine hours and overheads
appear on the job card. The job card is then inspected by the production
manager to ensure that it is correct.
 The goods are sent to the finished goods department once they are
complete.

You are required to:

1. Identify and describe the weaknesses in the internal control system of Posh
Shoe Ltd’s production and inventory cycle and; (9)
2. Recommend the internal controls that should be implemented to address
these weaknesses. (9)
(You are required to present you answer and tabular format)
PRESENTATION MARKS (2)
QUESTION 5
1. Weakness
The order is placed by the
production clerk. (award mark
if student says order wasn’t
authorised by production
planning department)
A Customer Job Card (CJC) is
not generated by the
production department to
ensure that they capture all of
the costs involved in the
production of the shoes.
No documentation is signed
(authorisation) as proof that
the raw materials have moved
to the next stage of work in
progress. (Award 1 mark even
if student mentions this for
each stage, i.e. mentions four
times = 1mark)
Management only briefly looks
at the daily production reports
to ensure that all charges in
terms of raw materials, labor
and overheads are accurate.
The RMI slips are not pre- 1
numbered
The raw materials requested 1
on the RMI is sent to WIP, but
is not captured on the CJC
The RMI slip is issued in only 1
a single copy.
As a result of the above a 1
copy of the RMI slip is not sent
to the Raw materials store to
compare with the Raw
materials masterfile.
Time spent on the production 1
of the shoes is captured into a
personal journal by each of the
workers.
No reconciliation is done at the 1
end of the day to ensure that
the total amount of hours is
SUGGESTED SOLUTION
Marks 2. Control Marks
1 An inventory production order 1
(IPO) should be issued by the
production planning
department to the production
processing department.
1 A Customer Job Card (CJC) 1
should be generated by the
production department to
ensure that they capture all of
the costs involved in the
production of the shoes.
1 As goods move to the next 1
stage in the production, the
person responsible for that
specific part of the production
process signs a document
stating that the shoes have
moved to the next stage.
1 All daily production reports 1
should be reviewed in detail to
ensure that all of the raw
materials are captured and
accurate.
Any unusual allocations of 1
costs should be identified and
rectified.
The RMI should be pre- 1
numbered.
All of the raw materials 1
requested on the RMI should
be allocated to the particular
work in progress (WIP) CJC.
There should be two copies so 1
that one of the copies can be
sent to the Raw materials
store to compare with the Raw
materials masterfile.
Time spent on each stage of 1
production should be captured
onto the CJC.
At the end of the day the total 1
time recorded is reconciled
with the total hours worked by
correct according to what the
staff have captured in their
journals.
No quality control inspections 1
are done before goods are
sent to finished goods.
As there is no job card that is 1
made out, none of the hours,
raw materials and overheads
appear on a job card.
The shoes are sent to the 1
finished goods department
once they are complete
without the production
manager signing off the
transfer.
the production staff.
Quality control inspections are 1
also done to detect any of the
apparent defects before the
shoes are sent to finished
goods.
All of the raw materials, labor 1
and machine hours and
overheads appear on the job
card and is inspected by the
production manager to ensure
that it is correct.
Once the production manager 1
is satisfied that the shoes are
100% correct and ready to be
sent to finished goods, he
signs for the goods to be
transferred.

The finished goods 1 The finished goods 1

department does not department acknowledges
acknowledge the receipt of the that they received the finished
finished goods. goods by signing the
completed production report.

Available marks 14 Available marks 17

Maximum marks 9 Maximum marks 9
Table format 1
Layout and Logic 1
QUESTION 6 (20 MARKS)

You have just been appointed as the head of Internal Audit of Buy and Sell Ltd, a
company that purchases domestic goods and then distributes them to retail and
the public. The head office of the company is located in Johannesburg with
several branches in Gauteng, Mpumalanga and North West. All purchases are
made by the head office, however, each branch has its own store and goods are
delivered either at the head office and then distributed to the other stores, or
delivered directly to the branches’ stores. No sales take place at the main store.

Buy and Sell Ltd is renowned for having sound internal controls procedures in
place for all their warehouses. The company uses a perpetual inventory system
and inventory takings, on a surprise basis, are also executed continuously by the
internal auditor.

The company has decided to conduct an inventory taking over the upcoming
weekend. Although the company trades over the weekends, the warehouses are
at least all closed on Sundays.

As the internal auditor you will be co-coordinating the inventory taking. The
current inventory figure of R39 564 279 represents a material portion of the total
assets in the financial statements.

You are required to:

a) Discuss the audit procedures that you should perform prior to the
inventory taking in your capacity as the co-coordinator. (15)
b) List five controls that should be in place during the inventory count. (5)
QUESTION 6 SUGGESTED SOLUTION

a)Fixing the date All employees concerned with the count should be 1
informed, well in advance, of the date of the count,
or dates, where the count will occupy several days.
Fixing responsibility Responsibility for the work should be clearly 1
defined and all staff involved in the count informed
to facilitate cooperation.

This may be done by dividing the building(s), or 1

portions thereof, in which inventories are stored,
into clearly defined areas and assigning each of
these to a particular person as supervisor.

Counters are then assigned to each supervisor. 1

Control over stationery It is imperative to maintain control over the medium 1
used to record the count.

Thus, when inventory count sheets or tags are 1

used, these should be pre-numbered and a record
made of those issued.

The sheets or tags should, at the end of the count, 1

be checked against the prelisting.

Parallel to this control is the numbering of all 1

shelves and/or bins in which inventory may be
kept, the prelisting of all such numbers, and
accounting for them all on the inventory count
sheets at the close of the inventory count.
Control over inventory Around the financial year end care should be taken 1
movement to match goods received into inventory with the
recording of the relevant supplier’s invoices.

Similarly matching of goods delivered and removed 1

from inventory to the recording of the relevant
invoice to customers.
A cut-off point should Determine the exact point of time up to which 1
be established goods received are to be included in inventory, and
sales made treated as a reduction thereof.

After such point goods received from suppliers and 1

goods sold are treated as having been received
and issued in the new financial year, the relevant
invoices from suppliers and to customers being
recorded in that year

Care must be taken to ensure that a correct cut-off 1

will be obtained at the date of the count for
purchases, sales and interbranch transfers of
goods and goods in transit at the year end
Thorough recording is Thorough recording is required to provide the 1
required information for the adjustments.

Some undertakings, to avoid difficulties envisaged 1

in this respect, arrange with suppliers to suspend
delivery of goods and close their businesses to
customers for the inventory count period
Instructions to staff  The explanation and instructions should cover 1
performing the count the:
o overall inventory count plan; 1
o preparation of inventory prior to the 1
count;
o method of counting; 1
o method of recording the counts; 1
o responsibility for issuing, collecting 1
and controlling records; and
o the addressee’s specific task. 1

General controls During the period leading up to the count, the 1

inventory should be prepared for the count.

Care should be taken to identify and separate slow- 1

moving, obsolete and damaged inventory.

Good housekeeping, such as neat stacking, like 1

items brought together, aisles kept clear, and other
means of facilitating the count should be attended
to prior to the count
Available Marks 25
Maximum Marks 15

b) Controls:
The actual counting and recording of the inventory should be done under 1
proper supervision and the instructions issued strictly followed.

Provision should be made for the counting, the recording and the checking to 1
be distinct functions.

Where there are no inventory records, inventory items should be counted 1

twice, once by each of two separate count teams.
Count teams should consist of two employees with one doing the count and 1
the other recording the count details.
At the conclusion of the count, all count sheets or tags issued – used, unused 1
or spoilt – should be accounted for, first to each supervisor and then to the
executive in charge of the whole operation
All counters, recorders and checkers should sign or initial the count sheets 1
(or other record), identifying their functions.

The supervisor should scrutinise the record for such signatures or initials and 1
add his or her own as evidence of review.
Maximum marks 5