For many organizations, inventory is one of the largest assets carried on a company’s books, and as a result, it is important to maintain appropriate controls over these assets. Inventory controls help your organization to maintain accurate records and to fulfill promises to customers. Risks specific to a lack of inventory controls includes the potential for lost, stolen, misappropriated, or miscounted items during routine physical counts. Below are some quick tips on maintaining appropriate oversight and prevention of unexpected inventory shrinkage:

• Physical controls: Keep your inventories in a secure location. The area should be gated, locked, and covered. Access to the location where inventory is housed should be limited to only authorized personnel. Management should perform risk assessment on whether inventory is subject to environmental damages such as fire, rain, or flood and take corrective actions to mitigate risks. Larger items should be tagged and placed in an assigned location (aisle). This will facilitate easier tracking and retrieval. Access to important accounting documents, including applicable shipping, receiving and master inventory listing, should be restricted to authorized personnel.
• Segregation of duties: To the extent possible, separate purchase authorization, inventory custody, and accounting activities. The purchasing department should review and approve inventory acquisitions. The receiving and shipping department should not have editing privilege of accounting records. The accounting department should not have access to the warehouse. Establish a threshold for cash disbursement transactions such that purchases over a certain limit require dual check signatures.
• Reviews and recordkeeping: When receiving orders, re-count and match items to packing slips. Verify that all items are the correct types and in sellable condition. Any items that fail inspection should be returned and not paid for. Purchase orders and received order sheets should be pre-numbered and timely forwardly to accounting department for processing. Freight cost can be expensed or charged directly to inventory, but you must be consistent in your treatment.

If your organization maintains a perpetual inventory system, perform a periodic count and adjust the perpetual record to match the count. Management should regularly review value of slow-moving goods and also evaluate whether items have become obsolete. If their original cost is greater than replacement cost, use the value according to the lower-of-cost-or-market principle. All journal entries made to inventories should have appropriate supporting documents and approval from management.

This list above is not comprehensive, but it does provide some basic controls to secure and maintain effective oversight of inventories. Depending on the size and complexity or your organization, these controls can be appropriately modified and combined. For more guidance on inventory, please visit the authoritative guidance at FASB ASC 330.

Source:

https://asc.fasb.org/

As a general disclaimer, the information provided above is very general and broad in nature, is not represented as complete, and may not apply to taxpayers’ individual situations. We advise all taxpayers to consult a professional advisor regarding their own specific needs. 

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