Impact of material weaknesses in internal controls on operational performance

3. Examples of inventory-related internal control

Now after we have seen that inventory-related internal controls may provide operational benefits to companies, letís take a look at examples of such internal controls.† Keep in mind that there are a lot of such controls and some of them are only applicable to some companies, but not others.

The list below only includes some examples and is not intended to represent a full list of such controls (a full list would not be possible to compile because these controls can be custom-designed to work with peculiarities of company operations).

Control

Control Description

Policy for inventory accounting

A policy for inventory accounting exists and communicated to all involved employees and appropriate training related to accounting for inventory is performed.

Updates to standard costs

New standard costs or changes to existing standard costs are reviewed by an independent person and approved in writing.† Any unusual costs or changes in them are investigated.

Inventory standard costing variances

Variances related to inventory standard costing are reviewed on a periodic basis and any significant variances are investigated.† An appropriate amount of variances is capitalized as part of the inventory cost on the balance sheet (when standard costing is utilized).

Labor and overhead cost allocation

The method of allocating labor and overhead costs is formally documented and consistently applied through manual or system processes.

Physical inventory counts

Inventory quantities are periodically verified through physical counts, results are reviewed, significant differences are investigated, and appropriate adjustments are recorded in financial records.† You can refer to these articles for more information about inventory physicals: When is physical inventory usually taken? and Physical inventory procedures.

Inventory ledger to subledger reconciliation

Inventory subledgers are regularly reconciled to the general ledger, differences are investigated, reconciliations are reviewed by an independent person and any necessary adjustments are recorded in financial records.† For more information about reconciliations, refer to this article: How to prepare general ledger to sub-ledger reconciliation.

Inventory physical safeguards

Inventory is stored in a secure location with access by authorized personnel only.

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