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Running head: INVENTORY OBSERVATION 1
INVENTORY OBSERVATION
Students Name:
Institution:
Introduction
Inventory control is very important in a manufacturing company. Inventory refers to the
finished good or products ready for sale (Ambati, 2016). In manufacturing company, inventory is
finished goods, stores, raw materials, and work-in-process. Inventories can be classified
differently according to the type of organization. Therefore inventory refers to goods stocked for
use in future. A good inventory management is quite important for business success. In a
classical inventory management system, quantity supplied to the company must be equal to the
quantity ordered, physical stock should not shrink or get damaged, and quantity of goods sold
and quantity delivered should be registered(Khader et al.,2014).This research paper will discuss
the necessary procedures an auditor should perform before attending on-site inventory
observation , review inventory of the client, and discuss possible changes as well as addressing
issues noted during inventory observation.
Procedures to Be Performed Before Going On-Site
Inventory observation like any other field activity, one must be prepared before. Auditors
should be prepared before on-site inventory observation. Preparation differs according to the
type of company the auditor is attending for observation. For instance, preparation before onsite
visit to a manufacturing company differs from that of service industry. Therefore preparation
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INVENTORY OBSERVATION 2
depends on the type of company to be visited for inventory observation. In this section,
procedures to be performed before going to on-site inventory observation will be discussed in
details.
One of the procedures and auditor should perform is inquiring the nature of the inventory
and as well as knowledge of the inventory to be observed. Ilis et al (2011) argued that nature of
inventory to be observed varies from one company to another. He proposed that if the auditor
does not have the knowledge of the product on observation, then expert should be present during
on-site observation. Technical products require assistance and expert advice from professional in
that specific field to avoid confusion and wrong inventory observation.
Different companies have different accounting and internal inventory systems. Therefore
it is advisable for an auditor to check and acquaint himself to the internal accounting and
inventory system of the company before the on-site inventory observation activity. According to
Ambati (2016), auditors should check internal inventory system of a company and affirm that
they are conversant with the system. Materiality of the inventory and the audit risks attached to
the inventory ought to be checked prior to the actual observation. Lastly, location of the counting
as well as the timing should also be considered prior to the activity. In cases where there are
multiple locations, scheduling is important (Ilis et al., 2011).
Changes to Be Made
I would implement a few changes. To address risk fraud, I would launch a quality
control. Would launch most appropriate quality contro policies taking into the consideration the
risk fraud associated. I would also appoint a person to be in charge of the quality control. The
head of quality control will be able to addres the risks of fraud.
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INVENTORY OBSERVATION 3
I would start a training on fraud to the management of the company and employees. My
audit firm would setup seminars to train both employees and management on how to realize
instances of fraud. I would change the way the company deals with fraud related information by
establishing policies that will be used to consider both information from inside and outside the
company. The policies should include excellent communication channels. Excellent
communication of any fraud related information in good time to the relevant team will ensure
chances of risks of fraud are minimized.
Procedure to Address the Issues Noted
One of the procedures and auditor should perform cutoff analysis. The auditor should
examine the procedure of stopping receiving products into the company store or the delivery of
products to the potential customers. According to (Ilis et al., 2011) inspection of the last few
transactions (receiving and shipping) should be done immediately before the physical count
started to determine if proper accounting took place. If proper accounting took place then the
next procedure follows.
The next procedure that follows cutoff analysis is the observation of physical inventory
count. During this procedure, procedures used during inventory count are discussed in details.
The auditor himself may opt to also take part in inventory count and test some of the inventory.
Verification of all amounts and the inventory tags accounted for should take place during
observation of physical inventory count (Ambati, 2016). Ambati (2016) argued that if the
company has multiple warehouses, observation of physical inventory count should be carried in
large warehouses and possible test carried too.
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INVENTORY OBSERVATION 4
References
Ambati, y. (2016). Inventory management in paper industry: a comparative study in spml and
international paper appml. Clear international journal of research in commerce &
management, 7(11), 74-78
Khader, S., Rekik, Y., Botta-Genoulaz, V., & Campagne, J. (2014). Inventory management
subject to multiplicative inaccuracies. International Journal of Production Research,
52(17), 5055-5069. doi:10.1080/00207543.2014.895444
Ilieş, R., & Mureşan, A. (2011). Best practices on improving the supply chain management
system. Managerial challenges of the contemporary society, (2), 137-140.
F

Unformatted Attachment Preview

Running head: INVENTORY OBSERVATION INVENTORY OBSERVATION Students Name: Institution: Introduction Inventory control is very important in a manufacturing company. Inventory refers to the finished good or products ready for sale (Ambati, 2016). In manufacturing company, inventory is finished goods, stores, raw materials, and work-in-process. Inventories can be classified differently according to the type of organization. Therefore inventory refers to goods stocked for use in future. A good inventory management is quite important for business success. In a classical inventory management system, quantity supplied to the company must be equal to the quantity ordered, physical stock should not shrink or get damaged, and quantity of goods sold and quantity delivered should be registered(Khader et al.,2014).This research paper will discuss the necessary procedures an auditor should perform before attending on-site inventory observation , review inventory of the client, and discuss possible changes as well as addressing issues noted during inventory observation. Procedures to Be Performed Before Going On-Site Inventory observation like any other field activity, one must be prepared before. Auditors should be prepared before on-site inventory observation. Preparation differs according to the type of company the auditor is attending for observation. For instance, preparation before onsite visit to a manufacturing company differs from that of service industry. Therefore preparation 1 INVENTORY OBSERVATION 2 depends on the type of company to be visited for inventory observation. In this section, procedures to be performed before going to on-site inventory observation will be discussed in details. One of the procedures and auditor should perform is inquiring the nature of the inventory and as well as knowledge of the inventory to be observed. Ilis et al (2011) argued that nature of inventory to be observed varies from one company to another. He proposed that if the auditor does not have the knowledge of the product on observation, then expert should be present during on-site observation. Technical products require assistance and expert advice from professional in that specific field to avoid confusion and wrong inventory observation. Different companies have different accounting and internal inventory systems. Therefore it is advisable for an auditor to check and acquaint himself to the internal accounting and inventory system of the company before the on-site inventory observation activity. According to Ambati (2016), auditors should check internal inventory system of a company and affirm that they are conversant with the system. Materiality of the inventory and the audit risks attached to the inventory ought to be checked prior to the actual observation. Lastly, location of the counting as well as the timing should also be considered prior to the activity. In cases where there are multiple locations, scheduling is important (Ilis et al., 2011). Changes to Be Made I would implement a few changes. To address risk fraud, I would launch a quality control. Would launch most appropriate quality contro policies taking into the consideration the risk fraud associated. I would also appoint a person to be in charge of the quality control. The head of quality control will be able to addres the risks of fraud. INVENTORY OBSERVATION 3 I would start a training on fraud to the management of the company and employees. My audit firm would setup seminars to train both employees and management on how to realize instances of fraud. I would change the way the company deals with fraud related information by establishing policies that will be used to consider both information from inside and outside the company. The policies should include excellent communication channels. Excellent communication of any fraud related information in good time to the relevant team will ensure chances of risks of fraud are minimized. Procedure to Address the Issues Noted One of the procedures and auditor should perform cutoff analysis. The auditor should examine the procedure of stopping receiving products into the company store or the delivery of products to the potential customers. According to (Ilis et al., 2011) inspection of the last few transactions (receiving and shipping) should be done immediately before the physical count started to determine if proper accounting took place. If proper accounting took place then the next procedure follows. The next procedure that follows cutoff analysis is the observation of physical inventory count. During this procedure, procedures used during inventory count are discussed in details. The auditor himself may opt to also take part in inventory count and test some of the inventory. Verification of all amounts and the inventory tags accounted for should take place during observation of physical inventory count (Ambati, 2016). Ambati (2016) argued that if the company has multiple warehouses, observation of physical inventory count should be carried in large warehouses and possible test carried too. INVENTORY OBSERVATION 4 References Ambati, y. (2016). Inventory management in paper industry: a comparative study in spml and international paper appml. Clear international journal of research in commerce & management, 7(11), 74-78 Khader, S., Rekik, Y., Botta-Genoulaz, V., & Campagne, J. (2014). Inventory management subject to multiplicative inaccuracies. International Journal of Production Research, 52(17), 5055-5069. doi:10.1080/00207543.2014.895444 Ilieş, R., & Mureşan, A. (2011). Best practices on improving the supply chain management system. Managerial challenges of the contemporary society, (2), 137-140. F Name: Description: ...
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