Internal Control Deficiencies in Inventory Management

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Accounting Information Systems
Assignment 3
13-May-19
Syed Hammad Hussain
Submitted to:

Executive Summary
The aim of the assignment is to understand the importance the inventory purchase and
management in an organization. There should be a comprehensive inventory purchase structure
model known to the management which will allow them to take corrective actions if there are
any deviations identified. Part A requires the drawing up the data flow chart of the purchase
order process such that an internal control deficiency is identified in the current process allowing
the management to implement the changes to combat the same. Part B provides a comprehensive
list of all the internal control weaknesses experienced in the inventory purchase and management
by the organization, their impact and the steps that could be taken to mitigate the same.

Table of Contents
Executive Summary.....................................................................................................................................2
Part A..........................................................................................................................................................4
Part B...........................................................................................................................................................5
Conclusion...................................................................................................................................................8
References...................................................................................................................................................9

Part A

Part B
Business Report on Inventory Purchasing and Management
Inventory purchasing and management is the system where purchase orders are managed and
accounted for the system of the company so as to ensure accountability and effective
management of the inventory. It is essential for the company to employ a proper inventory
purchasing process as it's easy to lose the track of the inventory and thus increases the possibility
of the frauds and thefts and ultimately company loses resources and incurs loses. The purpose of
this report is to identify internal weaknesses in the inventory purchase and management system,
their impact and the steps that can be undertaken to mitigate the internal control weaknesses and
thus make the system more efficient and effective (Sayed, et. al., 2018).
Internal Control Weakness Impact of the Weakness Control to mitigate the
weakness
Permission of the Finance
Department
While raising the purchase
order requisition, prior
permission of the finance
department or controller needs
to be taken. It needs to make
sure that the finance
department is involved in the
process as it is responsible for
managing the finances of the
company and thus it needs to
keep a check on the outflows
of the company. Company is
required to follow the budget
prepared at the start of the
year and necessary corrective
actions are required to be
taken along the business
operations. If the purchase
order doesn’t fall into the
purview of the budget, the
same is needed to be
considered and analyzed by
the finance department as it
would affect the overall
Before issuing the purchase
order, a purchase requisition is
needed to be raised and
submitted to the finance
department or controller for
them to consider and allow
only if it fits in the budget of
the company.
Only after the approval of the
Finance department, purchase
requisition takes the form of
the purchase order and further
processes are then to be
carried on. The copy of the
same purchase requisition is to
be documented for future
references (Waters and
Humphrey, 2017).

budget of the company.
Verbal intimation by
Receiving Department
After the receiving department
receives the order, the same is
intimated to the purchasing
department through verbal
communication. There is no
formal documentation of the
intimation and hence no
documents are available as a
proof or future reference. It
increases the possibility of
fraud and theft and hence
company loses resources
incurs loss (Joseph, et. al.,
2015)
.
The communication between
the purchasing department and
the receiving department
should take place in formal
communication which can be
verified by both the
departments and can be
documented for future
references. 2 Copies of
purchase order receipts are to
be prepared and stamped by
the receiving department and
each is to be sent to the
purchasing department and the
finance department. Along
with the receipts,
reconciliation statements are
also to be sent along for the
purchasing department to be
able to verify the difference in
the receipts.
The difference in the receipts
of goods
In cases where goods
requested and goods received
differ; items not received are
marked in red without any
follow up. Such cases can
hamper the quality of work of
the production department as
the inventory is ordered in
accordance with the needs of
the production department and
in the case where less than
required goods are received
leads to insufficiency in the
production process. One
reason for such practice could
be the selection criteria of the
vendors which lead to
ordering goods from the
previous vendors without
considering the possibility of
engaging a new supplier.
A proper follow up is required
with the vendors such that
they are to be intimated for the
incomplete order. A punitive
damages clause needs to be
entered in the agreement so as
to charge penalties on the
vendors if the orders received
are incomplete and not up to
the quality. The company also
needs to bring changes to the
vendor selection criteria
adopted by it as the same
vendors are chosen again and
again which leads to the
receipt of incomplete orders
more frequently. Vendors
should be selected on the basis
of the cost-benefit analysis
from the very 1st stage and not
after narrowing down to old
purchases (Calderon, et. al.,
2016).
Authority over the Signature As per the company’s current Just like in the case of

machine
accounting policies, payments
under $5000 are carried out by
the machine and above those
are maintained by the cashier
and treasurer. Cashier also
maintains the signature
machine's key, signature plate
and along with it monitor its
use. This practice gives the
cashier the complete authority
over the signature machine
and thus the possibility of the
frauds by cahier increases
greatly. No check over the
cashier is being kept and
hence frauds may be
committed by him/her without
coming to anybody's notice
(Kinyua, et. al., 2015).
transactions of $5000 and
above, where invoices are
signed by both the cashier and
the treasurer so as to ensure
cross-checking over each
other. Signature machine
related responsibilities should
be segregated between 2
persons so that one person can
keep a check on others and
thus promote a culture of
cross-checking. This process
should be subject to
concurrent audit allowing the
identification of the frauds on
a concurrent basis i.e. during
the process itself. It will allow
the company to implement
discipline among the
employees in the organization.
Implementation of Internal control allows for the company to identify the material misstatements
both at assertion level and at financial statements level. It allows the rectification or errors and
frauds and thus enables the company to generate a true and fair view of the operations of the
company. Internal controls in the inventory purchase and management enable the company to
make the process more efficient and get rid of any malpractices.

Conclusion
The assignment helps to understand the importance the internal control in the organization and
their impact on the overall working of the organization. Internal control ensures the operational
efficiency and that the processes are carried out without errors which would enable the
organization to present financial statements in a true and fair view. It helps to identify the
internal control tools and understand their implementation and use, so as to promote a culture of
error-free processes and inculcate efficiency and effectiveness in the business processes. Both
the parts of the assignment are mutually inclusive and together helps to understand the
importance of such tools.

References
 Sayed, S., Kamath, A., & Sharma, A. (2018). U.S. Patent Application No. 15/359,854.
 Waters, C. J., & Humphrey, B. R. (2017). U.S. Patent No. 9,659,274. Washington, DC:
U.S. Patent and Trademark Office.
 Joseph, O. N., Albert, O., & Byaruhanga, J. (2015). Effect of Internal Control on Fraud
Detection and Prevention in District Treasuries of Kakamega County. Int. J. Bus. Manag.
Invent, 4(1), 47-57.
 Calderon, T. G., Song, H., & Wang, L. (2016). Audit deficiencies related to internal
control. CPA Journal, 32-40.
 Kinyua, J. K., Gakure, R., Gekara, M., & Orwa, G. (2015). Effect of internal control
environment on the financial performance of companies quoted in the Nairobi Securities
Exchange. International Journal of Innovative Finance and Economics Research, 3(4),
29-48.