CPA P1 Auditing

TOPIC 30: INTERNAL CONTROLS OVER INVENTORY

To understand the need for controls over the inventory cycle, it is helpful to break
down the Inventory process into its component stages.

Stage in Cycle Risks/Objectives Procedures

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Inventory arrives 1. Inventory stolen on 1. All goods inward
arrival received at set
because it has
locations and signed for
been purchased, by stores manager

or a sale has
2. New purchases mixed
been returned 2. All returns sent to a
up with sales returns
returns department for
checking

3. Poor quality Inventory 3. All goods inward

accepted inspected for quality
before acceptance

4. Sequential GRNs
4. Inventory accepted matched to purchase
that was never orders, to ensure goods
ordered received, were in fact
ordered

5. No record is made of 5. Stores manager to be

its arrival present for all

deliveries and to have
sole control over GRNs
CPA P1 Auditing

Inventory is stored 1. Poor storage 1. Storage areas fitted

conditions lead to with sprinklers, fire
until it is needed
damaged Inventory alarms, temperature
monitors (all of which
are physical controls)

2. Inventory items not

2. Inventory “rotated”
used before their useful
to ensure FIFO usage
life ends
where relevant
(arithmetical control)

3. Inventory stolen from 3. Valuable Inventorys

storage areas locked away and
Inventory areas limited
to a single exit…use of
security guard.. (all of
which are physical
controls)

Raw materials 1. Materials over-ordered 1. All requisitions from

to enable theft stores to have signed
leave stores, to
authorisation from
be used in production manager

production

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Finished goods 1. Wrong goods sent 1. Goods checked to sales
order
leave because
2. Despatches checked by
they have been 2. Goods being stolen (no
security against
real sale)
sold authorised GDN

3. Poor quality inventory

3. Quality checked before
sent
despatch occurs

Goods leave Returned goods being Security to verify Return

stolen Note, authorised by stores
because they
manager,
actually being stolen
are being
before goods leave
returned to

suppliers …i.e. purchase

returns
CPA P1 Auditing

A Inventory-count is 1. Counting lacks accuracy 1. All counted areas to be

marked as
performed (may
completed….Managers to
be at year end, continuous verify by doing random
or roll back/roll forward) second counts

2. Staff do not count

2. Staff lie about amounts areas that they are
counted to cover up usually responsible for…
their theft Counting done in pairs

3. Inventory count sheets 3. Inventory count sheets

lost during count sequenced and counters
sign out (and in) the
count sheets

4. Inventory counted
twice because it is 4. All Inventory

moved during count movements during count

from raw materials to authorised by

WIP or from WIP to management ….inventory

finished goods movements to be

suspended during count,
to avoid double counting

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Internal Control Checklists For The Inventory Cycle.

Internal Control Checklists for the Inventory Cycle

For Inventory, an Internal Control Questionnaire (ICQ) would be a checklist of

questions to establish which controls were in operation. For example:

ICQ – INVENTORY MOVEMENTS

Q1 Are Goods Received Notes prepared for all goods inward?

Q2 Are all requisitions from stores authorised by the production manager?

If the auditor is using an Internal Control Evaluation Questionnaire (ICEQ), the layout
would be slightly different:

ICEQ – INVENTORY MOVEMENTS

Q1 Could Inventory arrive but not be recorded? (important to auditors as it may

indicate Inventory is understated)

Answer – no, because of the following controls:

• Inventory arrives at a single “goods in” point

• Stores manager keeps sequenced GRNs

• Inventory records are sequence-checked monthly to ensure complete entry of GRNs

CPA P1 Auditing

CONTROL TESTS OF INVENTORY

If you can come up with control procedures, then tests of control are easy –

simply ask yourself how you would find out if a particular control procedure

had taken place?

Examples

Observe goods arriving to confirm they are all handled at a single point and that stores
manager is present

Observe GRN preparation and confirm sequence

Inspect evidence (e.g. signature) that Inventory records are checked every month, and
that discrepancies are dealt with

The Inventory count is an extremely useful piece of audit evidence, so wherever

Inventory is a material figure, auditors are likely to attend at least 1 Inventory Count
per year.

By attending, auditors can assess the quality of the count. As an Inventory Count is a
form of internal control, Inventory Count attendance by the auditor is therefore
primarily a TEST OF CONTROL.

The auditor will assess such issues as:

 How Inventory sheets are controlled, to ensure that none are lost

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 o Stock sheets serially numbered

o Control and return of all stock sheets,

o Sheets completed in ink and signed

o details to be shown on stock sheets, recording quantity, condition,

o Record details of last forms used

o Recording of quantity, condition and stage of production of WIP

o Recording of number of last GRN and GDN and internal transfer slips (cut-
off)

o Reconciliation of count to inventory record and investigation and correction of

differences

 The structure of counting teams i.e. teams of two counters

 Whether initial counts are being checked by a separate counting team

 How the count is planned, to ensure that all areas are counted once and only
once - avoid double counting

 Whether counting staff are provided with instructions and are following those
instructions

 Whether staff are counting areas that they have normal responsibility for

 How they are dealing with Inventory that is moving during the count