Page 344 - Accounting Best Practices

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16–9 Compare Recorded Inventory Activity to On-Hand Inventories
pleted in the computer, either a comprehensive or focused training session with
that person, along with follow-up reviews, will eliminate the error.
Auditing can be assigned to the internal audit department. However, continual
review work may be necessary, which the audit department may not have suffi-
cient manpower to provide; the accounting department is well advised to take on
this chore itself, if no other approach will work. Once the entity doing the work
has been determined, the next step is to find the best way to spot transaction prob-
lems among the hundreds or thousands of inventory-related transactions that occur
every month. A simple random selection of transactions will eventually discover a
reasonable quantity of mistakes to review, but there are ways to improve one’s
chances of finding them. For example, a transaction that results in a negative
inventory on-hand quantity is certainly worthy of a review, as is any transaction
that takes more out of stock than is actually there. The same exception rules can be
applied to transactions with inordinately large quantities. Further, transactions can
be compared to the production schedule to see if any of the items received in the
warehouse are scheduled to be used in production in the near future. Any of these
issues are indicative of a problem and should be reviewed first. Though many of
them may be valid, the odds of finding an error are greatly enhanced.
The next step in the auditing process is discovering the nature of the problem
that caused the transaction error. Since the only two possibilities are systems or
people problems, it is wise to assign a team with exceptional systems knowledge
and people skills to this task. Since most employees will not admit to an error if
they have made one, the single most important auditing skill is carefully dealing in
a nonthreatening manner with the people involved in these transactions. Finally,
there must be a follow-up routine established that reviews previously uncovered
problems to verify that they have been fixed. Only if all of these steps are followed
will errors in the recording of inventory-related transactions be fixed.
As several departments are involved in the recording of transactions related
to inventory, the controller must be able to deal carefully with the managers of
these other departments to ensure that the auditing process does not degrade into
a situation where discovered problems are used to attack each other. Thus, inter-
personal skills are critical to the success of this best practice.

Cost: Installation time:

16–9 COMPARE RECORDED INVENTORY
ACTIVITY TO ON-HAND INVENTORIES

Some industries deal with extremely expensive materials. In these situations, it is
critical to ensure that recorded inventory levels are completely accurate, since
even a small quantity variance can lead to a large impact on profitability. This is a
particular concern when dealing with precious metals or gemstones, not to men-
tion a variety of electronic components.