Chapter 12
Inventory cycle
Characteristics of the inventory cycle
• Organisation shaped around type of inventory
Heart of the business • Plant and equipment specific to production
• Warehouse designed for specific inventory
Calculation:
Effect on financial → Cost of sales, gross profit, net profit (SPL)
statements → Inventory (SFP)
Control activities needed to ensure no material misstatement of inventory.
➢ No influence on entities outside company
Internal cycle ➢ Supporting cycles dealing with outside entities: acquisitions and
revenue cycle.
o Physical controls are required because of
- Stolen inventory
- Damaged inventory
Physical asset o Examples of physical controls
- Guards
- Alarms/surveillance
- Restricted access
To manipulate profits and assets at year-end – manipulate inventory.
Inventory fraud
Diverse in
Nature ❖ Easy to identify
Diversity of inventory ❖ Hard to identify
❖ Growing/moving
Location ❖ Multiple warehouses
❖ Obscure locations
Diversity has influence on ❖ Possession of others (customs)
auditor as inventory is ❖ In transit
highly dependent on its Permanence ❖ Fresh produce
characteristics. ❖ Products with expiry dates
❖ Technological obsolescence
Stage of Raw materials
development Work in progress
Finished goods
,Identify the types of documents in the inventory processes
• Transfer from receiving bay to warehouse
Goods received note
• Warehouse clerk signs when goods delivered
Materials requisition/issue
note • Request to release materials or components
Manufacturing/production • Notify production what to produce
schedules • Production plan will determine
• Track stages of production for specific job
Job Cards
• Costs are recorde on card
Production report • Report results of output
• Identify all costs anticipated in manufacturing
Costing schedule
• "budget" for production costs
Transfer to finished goods • Transfer of goods from manufacturing to
note finished goods department
Picking slip and delivery
notes • Control movement of goods after sold
• Used during inventory count
Inventory sheet
• Description, location, quantity, cost
• Small cardboard attached to inventory
Inventory tag
• 2 parts - double count
Inventory adjustment form
• Adjustments to correct records if actual
inventory differs from theoritical inventory
,Study page 12/6 and 12/7
, Year-end inventory count
PLANNING AND PREPARATION BEFORE THE COUNT
1. Clearly plan the date & time of the count
2. Method of counting: tag system, 2-person count
3. Staff requirements: One independent (from warehouse) staff member + warehouse staff member
4. Controller/Supervisor: Make sure the instructions are followed
5. Preparing the warehouse: STOP all operations (including movements); tidy racks, mark damaged
goods, stack goods together
6. Warehouse floorplan: identify count areas for count teams
7. Identify Locations: categories of inventory
8. Consignment Stock: legally owned by one party, but held by another, the second party is
responsible for distribution or retail operations. Count consignment stock to re-order if needed.
Inventory cycle
Characteristics of the inventory cycle
• Organisation shaped around type of inventory
Heart of the business • Plant and equipment specific to production
• Warehouse designed for specific inventory
Calculation:
Effect on financial → Cost of sales, gross profit, net profit (SPL)
statements → Inventory (SFP)
Control activities needed to ensure no material misstatement of inventory.
➢ No influence on entities outside company
Internal cycle ➢ Supporting cycles dealing with outside entities: acquisitions and
revenue cycle.
o Physical controls are required because of
- Stolen inventory
- Damaged inventory
Physical asset o Examples of physical controls
- Guards
- Alarms/surveillance
- Restricted access
To manipulate profits and assets at year-end – manipulate inventory.
Inventory fraud
Diverse in
Nature ❖ Easy to identify
Diversity of inventory ❖ Hard to identify
❖ Growing/moving
Location ❖ Multiple warehouses
❖ Obscure locations
Diversity has influence on ❖ Possession of others (customs)
auditor as inventory is ❖ In transit
highly dependent on its Permanence ❖ Fresh produce
characteristics. ❖ Products with expiry dates
❖ Technological obsolescence
Stage of Raw materials
development Work in progress
Finished goods
,Identify the types of documents in the inventory processes
• Transfer from receiving bay to warehouse
Goods received note
• Warehouse clerk signs when goods delivered
Materials requisition/issue
note • Request to release materials or components
Manufacturing/production • Notify production what to produce
schedules • Production plan will determine
• Track stages of production for specific job
Job Cards
• Costs are recorde on card
Production report • Report results of output
• Identify all costs anticipated in manufacturing
Costing schedule
• "budget" for production costs
Transfer to finished goods • Transfer of goods from manufacturing to
note finished goods department
Picking slip and delivery
notes • Control movement of goods after sold
• Used during inventory count
Inventory sheet
• Description, location, quantity, cost
• Small cardboard attached to inventory
Inventory tag
• 2 parts - double count
Inventory adjustment form
• Adjustments to correct records if actual
inventory differs from theoritical inventory
,Study page 12/6 and 12/7
, Year-end inventory count
PLANNING AND PREPARATION BEFORE THE COUNT
1. Clearly plan the date & time of the count
2. Method of counting: tag system, 2-person count
3. Staff requirements: One independent (from warehouse) staff member + warehouse staff member
4. Controller/Supervisor: Make sure the instructions are followed
5. Preparing the warehouse: STOP all operations (including movements); tidy racks, mark damaged
goods, stack goods together
6. Warehouse floorplan: identify count areas for count teams
7. Identify Locations: categories of inventory
8. Consignment Stock: legally owned by one party, but held by another, the second party is
responsible for distribution or retail operations. Count consignment stock to re-order if needed.
