Inventory And Production Cycle

Question 1

What does the inventory and production cycle deal with?

Answer 1

Safekeeping of inventory, and overcoming its biggest risks through implementing physical controls

Question 2

What are the characteristics of the inventory and production cycle?

Answer 2

•Heart of the business- Businesses make profits as a result of inventory sold
•Has material effect on financial statements- C.O.S, Gross Profit & Net profit
•Internal cycle- Has no connection with entities outside the company
•Physical asset- It can be damaged or stolen
•Inventory fraud- Fraud can be committed through under/overstatement
•Diversified- Nature, location, permanence, stage of development

Question 3

What are the basic activities of the inventory and production cycle?

Answer 3

1. Movement of inventory from the warehouse to sale
2. Safeguarding of inventory against theft/damage

Question 4

What are the documents used in this cycle?

Answer 4

CIMP GIMPD JIT
•Costing schedule- Budget of which actual costs can be measured
•Inventory sheets- Records number of items counted
•Materials requisition/issue note- goods requested/issued to/from warehouse
•Picking slip- lists all items to be picked from warehouse
•Goods received note- Receiving clerk➡️goods are received & warehouse clerk➡️signs➡️goods transferred to warehouse
•Inventory tag- Identifies items already counted & quantities identified by all teams
•Manufacturing schedule- Notifies production department of what to be produced
•Production report- Reports results of production
•Delivery note- Proof that goods have been delivered
•Job cards- Tracks stages of production for specific job
•Inventory adjustment form- Records adjustments needed when actual inventory counted differs from the inventory quantities on the accounting system.
•Transfer to FG note- Records transfers from production department to FG

Question 5

What are the functions/purposes of the “Warehouse” function in this cycle?

Answer 5

•Control the transfer in & out of the warehouse
•Physically protect inventory in all warehouses

Question 6

What are the control activities in the “control transfer in & out of the warehouse” function in “Warehousing” function of this cycle?

Answer 6

1. Document any movement of inventory on a pre-numbered source document
2. Employee that delivers the goods & the employee receiving the goods signs as proof of delivery/receipt
3. No movement without authorizing document
4. Documents to be sequenced & filed numerically

Question 7

What are the risks in the “control transfer in & out of the warehouse” function in the “Warehousing” function of this cycle?

Answer 7

•Goods received from supplier are not transferred to warehouse
•Goods issued by supplier is incorrect, resulting in loss of sales
•No record created for goods removed

Question 8

What are the control activities in the “physically protecting inventory in all warehouses” in the “Warehousing” function of this cycle?

Answer 8

1.Physical controls
- Restricted access to warehouses
- Making warehouses safe
•Environmental controls
- Monitoring camera system
2. Comparisons & reconciliation
- Comparing physical inventory with the theoretical inventory
- Reconciliation of the inventory list with inventory control account

Question 9

What are the physical controls that can protect inventory against damages/theft?

Answer 9

•Minimum entrance points
•Controlled entrance & exit
•Secure building (with minimum windows)
•Surveillance

Question 10

What is inventory count?

Answer 10

•It is comparing physical inventory to theoretical inventory & comparing actual production to budgeted production
•And the material variances should be investigated

Question 11

What are cycle counts?

Answer 11

•They happen during the year
•The timing is planned in the beginning of the year
•Items counted should be identified
•It is a physical count

Question 12

What is a year-end inventory count?

Answer 12

•Involves:
:Planning & preparation
:Design of stationary
:Written instructions
:Conducting the count

Question 13

Procedures to be performed during cycle counts.

Answer 13

a).The timing is planned in the beginning of the year
b). Items to be counted should be identified
c). Physical inventory should be compared to the theoretical inventory records as they are counted & discrepencies should be documented on a sequenced inventory adjustment forms
d). Inventory discrepencies must be thoroughly investigated
e). Inventory adjustment forms must be properly authorised by a senior inventory clerk & recorded by a clerk independent from the warehouse function

Question 14

Procedures to be performed during planning & preparation of year-end counts.

Answer 14

•Date & time of the inventory count
•Inventory count method used by entity
•Personnel required for the different counting teams
•Supervision during the inventory count
•Preparation of the warehouse & counting areas
•Setup of the warehouse floor plan, divided into counting areas, for which each counting team is responsible
•Identification of all inventory locations as well as the categories of inventory to be counted

Question 15

Procedures to be performed during the design of the inventory count sheets

Answer 15

•Inventory count sheet must be sequenced & pre-printed
•Only the description of the inventory must be indicated & not the quantity

Question 16

What are the written instructions for year-end counts?

Answer 16

a). Identification of the counting teams
b). Method used to count inventory
c). Instructions with regards to counting inventory
d). Instructions with regards to the movement of inventory during inventory count, no acceptance of inventory must take place during the inventory count
e). Instructions with regards to damaged/obsolete stock
f). Instructions with regards to inventory adjustments concerning audit differences identified during the inventory count
g). Instructions with regards to issuing & returns of inventory sheets to the count controller
h). Procedures to be adopted if problems arise during count
I). Instructions with regards to the review & approval of the inventory count

Question 17

Name the procedures to be followed when conducting the count

Answer 17

a). Counting staff divided into teams of 2
b). All teams should be given a floor plan identifying location they are accountable for
c). All inventory should be counted twice
d). As items are counted they should be neatly marked
e). If count teams identify damaged goods , it must be marked as such on the inventory sheets
f). Counters responsible for inventory sheets, (signs for changes made, draw line through blank space)
g). Count teams dismissed when count is complete/queries attend to
h). Select few random boxes & agrees description on label to contents
i). Count controller should:
:Walk through warehouse when count is completed to ensure items are marked
: Examine count sheets
:If discrepencies-instruct count team to recount
•Count controller obtain last GRN/INV/DN up to date of inventory count
•No despatch of inventory to take place on count day
j). Any INV received after count began ➡️stored separately
k). Controller ensure all sheets are accounted for