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The type and range of other systems that the auditor may encounter will depend upon the nature of the
business but, as a general rule, most other systems you may encounter will be concerned with the safe custody
of an asset of the business.
Thus there will be a system for inventory in a manufacturing company and a system for non current assets in
many businesses. Some businesses may have significant investments and thus will have a system to maintain
control of this type of asset.
In this section, we will consider control systems: for inventory and non current assets.


You will be aware that there is a close link between inventory on the one hand and sales and purchases on the
other hand. In the light of this, you will not be surprised that many of the points in this section have already
been dealt with in covering sales and purchases above - they are repeated here briefly to give you the overall


Although inventory records may vary considerably from client to client, the controls are the same in all cases,
(i) Authorization and purchase procedures
(ii) Control over goods inwards
(iii) inventory records supported by physical inventory counts
(iv) Control over dispatches and goods outwards
(v) Adequate steps should be taken to identify all inventory for which provisions may be
required on the grounds that their net realizable value is below cost
(vi) Inventory levels should be controlled so that materials are available when required but
that inventory is not unnecessarily large

Control Procedures over Inventory


Approval and Control of Documents

a) Issues from inventories should be made only on properly authorized requisitions.
b) Reviews of damaged, obsolete and slow moving inventor/ should be carried out. Any write-offs
should be authorized.

Arithmetical Accuracy

a) All receipts and issues should be recorded on inventory cards, cross-referenced to the appropriate
GRN or requisition document.
b) The costing department should allocate direct and overhead costs to the value of work-inprogress
according to the stage of completion reached.
c) To do this standard costs are normally used. Such standards must be regularly reviewed to ensure
that they relate to actual costs being incurred.
d) If the value of work-in-progress is directly comparable with the number of units produced,
checks should periodically be made of actual units against work-in-progress records.

Control Accounts

a) Total inventory records may be maintained and integrated with the main accounting system; if so
they should be reconciled to detailed inventory records and discrepancies investigated.

Comparison of Assets to Records

a) Inventory levels should be periodically checked against the records by a person independent of
the stores personnel, and material differences investigated.
b) Where perpetual inventory records are not kept adequately a full inventory count should be held
at least once a year.
c) Maximum and minimum inventory levels should be pre-determined and regularly reviewed for
d) Re-order quantities should be pre-determined and regularly reviewed for adequacy.

page 102

Access to Assets and Records

a) Separate centers should be identified at which goods are held.
b) Deliveries of goods from suppliers should pass through a goods inwards section to the stores. All
goods should pass through stores and hence be recorded and checked as received.
c) Inventories should be held in their locations so that they are safe from damage or theft.
d) All inventory lines should be identified and held together e.g. in bins which are marked with all
relevant information as to size, grade, origin, title for identification.
e) Access to the stores should be restricted.

Tests of Controls

a) Observe physical security of inventories and environment in which they are held.
b) Test procedures for recording of inventory movements in and out of inventory.
c) Test authorization for adjustments to inventory records.
d) Test authorization for write-off or scrapping of inventories.
e) Test controls over recording of inventory movements belonging to third parties.
f) Test procedures for authorization for inventory movements i.e. the use made of authorized goods
received and dispatch notes.
g) Inspect reconciliations of inventory counts to inventory records (this gives overall comfort on the
adequacy of controls over the recording of inventory).
h) Check sequences of dispatch and goods received notes for completeness.
i) Assess adequacy of inventory counting procedures and attend count to ensure they are carried out.

page 103

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