Welcome!

Auditing Notes (12th)

O Background and documentation (12/3-
12/6)
O Warehousing (Limited to goods for resale
(receiving and selling of goods, not transfer
to WIP & FG) (12/7-12/8)
O Inventory counts (12/9-12/12)

O Therefore, production is excluded

 GEAR371
STUDY GUIDE UNIT 6.2
INVENTORY/PRODUCTION CYCLE
(MANAGEMENT CONTROLS)
 MODULE OUTCOMES
O 6.2 Inventory and Manufacturing Cycle
• apply the principles of the revenue and receipt cycle and the
acquisition and payment cycle for the sales / purchases of
inventory;
• describe the control activities relating to each function within the
inventory and production cycle (which includes the segregation
of duties, the flow of information as well as the source documents
applicable to the recording of these transactions);
• describe the risks relating to each function within cycle as well as
the controls to address those risks for application to a case study;
• name and apply the following accounting principles in terms of
IAS2 relating to inventories: cost; cost formula net realisable value
 MODULE OUTCOMES (ctd)
• discuss the control activities for the annual inventory count in its
entirety with specific reference to the planning and preparation, the
client’s written instructions, stationery design and the conduction of
the inventory count (controls the client need to implement);
• identify the weaknesses relating to each function within the
inventory and production cycle (including the inventory count),
provide risks and make recommendations for the weaknesses
identified in a case study;
• apply all of the above-mentioned in a case study; and
• integrate any of the above-mentioned learning outcomes with other
learning outcomes and/or other modules.
 Inventory cycle
O Deals with:
O Warehouse: Goods for resale, components for
manufacture and finished goods
O Control the movement of goods
O Control damage, theft or loss of inventory by means
of:
O Physical controls
O Comparisons and reconciliation
O Inventory count
 CHARACTERISTICES OF THE
CYCLE (background)
1. Heart of business
O Most important part of the business.
Business shaped around type of inventory
dealt with
 CHARACTERISTICES OF
THE CYCLE (background)
2. Material effect on F/S (COS, GP, NP)

Sales 500 000 500 000

Cost of sales (400 000) (350 000)

Opening inventory 100 000 100 000

Purchases 450 000 450 000
550 000 550 000
Closing inventory (150 000) (200 000)
Gross profit 100 000 150 000
8
 CHARACTERISTICES OF THE
CYCLE (background)
3. Internal cycle
• inputs–purchase
• outputs-sales
• Good control over Inventory!
Inventory record – Product X

GRN 1386 (purchase) 100

Invoice 411 (sale) 9
(20)

Balance 80
 CHARACTERISTICES OF THE
CYCLE (background)
4. Physical asset
O Damage
O stolen
5. Inventory fraud
O Directors who want to manipulate
profits\assets – Inventory balance)
 CHARACTERISTICES OF THE
CYCLE (background)
6. Diversity of Inventory
NATURE - easy/difficult to identify

LOCATION - warehouse/in transit/imports

PERMANENCE - perishable/expiry dates

STAGE OF
PRODUCTION - finished goods/WIP
11
 We will be looking at:
1. Warehouse:
O Control the movement of goods
O Control damage, theft or loss of
inventory by means of:
O Physical controls
O Comparisons and reconciliation
2. Inventory count
 Documents
GRN Material Inv
Material
Requisition
or material
PS DN count
received issue note doc

Sales cycle (receive order Purchase cycle (need stock

from customer) to produce\sell inventory)

Picking slip Requisition

Delivery note GRN

 Warehouse
Goods for resale
AN page12/7-12/8
Function: Risk:
Control transfer in Warehouse
Goods received from supplier are not
and out of the transferred in warehouse timeously or
warehouse (movement) at all (stolen)
Inventory is stolen or lost
Inventory shortages (theft) - concealed
No record created for goods moved

Good issued are incorrect – resulting

in lost of sales
Physically protect Inventory deteriorates in value due to
inventory in all inadequate physical controls eg. Gets
warehouses wet or nature – foodstuff – eg. expire
by)
Controls for warehousing
1. Control the movement of goods
2. Control damage, theft or loss of inventory by
means of:
2.1 Physical controls
2.2 Comparisons and reconciliation
1. Control the movement of inventory
O Documents (sequenced & filed numerically)
and sequenced check - missing doc
investigated)
O Transfer of inventory between sections =
sign doc by receiver & deliver should sign,
after checking Q + quality
O No movement without authorizing doc (PS
(out), requisition (in))
O No movement without recording movement
(DN)
O Recording of inventory on the perpetual
inventory system > checked by accountant
(accuracy & completeness)
 2. Control damage, theft or loss of
inventory by means of:
2.1 Physical controls (nature & R)
Restricted entry eg.
Production
Minimum staff=warehouse,
entry/exit not buying staff
points
Secure building – min Surveillance
windows/solid - cameras
structure

environmental

Controlled
entrance/exit
(eg. Keypad)

Temperature
controlled/dry/clean/neatly packed
2. Control damage, theft or loss of
inventory by means of:
2.2 Comparisons and reconciliation
O Compare physical inventory to
theoretical inventory per perpetual
inventory

How is this done?

Inventory counts
 Inventory counts
AN 12/10-12/12

1. Cycle counts > ongoing comparison of physical Q to

theoretical Q as per perpetual inventory records

2. Year-end inventory count

20
 Inventory counts
2. Year-end inventory count
2.1 Planning and preparation
2.2 Design of stationery
2.3 Written instructions
2.4 Conducting the count

21
2.1 Planning and preparation
o Date and time of the count
o Method of counting – tag, count twice
o Staff requirements – how count teams
are made up
(1-WH, 1 independent from inventory function)
o Supervision – who will be count controller
o Preparation of warehouse –tidy/mark damage
o Draft floor plan – identify count areas
o Identify -Inventory locations/categories

22
2.2 Design inventory count sheet :
❖ Printed, numerically sequenced inventory sheet
Inv item Category Location 1st 2nd Discrepancies Prices
nr (item count count
descripti
on)

❖ Contains descriptions only (no quantity)

❖ Inventory tags & adjustment forms
2.3 Written instructions
o Identification of count teams and
their responsibilities
o Method of counting to be used e.g. tags
o Details of counting instructions (date, time,
place)
o Controls over issues to and returns of
inventory sheets to count controller
o Identification of slow moving/damaged
inventory as well as consignment stock
o Procedures to be adopted if problems
24
arise during count
 2.4 Conducting the count
a) Counting staff divided in teams of two (1 member of the
count team is independent of all aspect of inventory)
b) All teams should be given a floor plan (WH) identifying
location they are accountable for
c) All inventory should be counted twice
(eg. write& count&swop)
d) As items are counted they should be neatly marked
(tag system or different colours)
 2.4 Conducting the count
e) If count teams identify damaged goods/excessive dusty,
it must be marked as such count sheet (potential write-
down)
f) Select few random boxes & agree description on label to
contents (to confirm content has not changed)
f) Counters responsible for count sheets should sign count
sheet including for changes made & draw line through
blank space
g) Count teams dismissed when count is complete/queries
were attended to
 2.4 Conducting the count (ctd)
i) COUNT CONROLLER should:
* walk through WH when count is completed to
ensure ALL items have been marked twice
* examine count sheets (1st count=2nd count) &
agree Q to perpetual inventory
* if discrepancies – instruct count team to recount
i) Count controller obtain last number of GRN/INV/DN
up to date of inventory count
j) Controller ensures all sheets accounted for (sequence
test of inventory sheets)
k) No despatch of inventory take place on count day
l) Any inventory received after count began-store
separate. Counted & added to inventory sheet after
count is complete
 TEAMS (2) – 1 team
member being
independent of
inventory function FLOORPLAN
indicate
COUNT TWICE RESPONSIBLE
1 count 1 record SECTION
& hand to count
controller 2nd team
count INDICATE
MARK ITEMS COUNTED (tag system/different DAMAGED/EXCESSIVE DUSTY
colour) GOODS ON COUNT SHEET
(if boxes tampered count but
indicate on inv sheet detail note)
COUNTER
RESPONSIBLE FOR COUNTERS DISMISSED = COUNT
COUNT SHEET = SIGN COMPLETE & QUERIES ADRESSED
(incl changes) & LINES
THROUGH BLANK
SPACES

ENSURE NO DESPATCH DURING COUNT,

SELECT RANDOM BOXES, GOODS RECEIVED DURING COUNT
CONTENTS=LABEL STORED SEPERATELY+COUNTED+ADDED
DESCRIPTION (no changes
to content)
COUNT CONROLLER should:
* walk through WH when count is completed to
ensure ALL items have been marked twice
* examine count sheets (1count=2nd count) &
* if discrepancies – instruct count team to
recount
Controller ensure all sheets accounted for
(sequence test inventory sheets)
Count controller obtain last nr of GRN/inv/DN
up to date of inventory count
 Class question
O Question 4 – Beautha Shoes
Any questions?
 Homework
O Quiz – to be communicated