1
BMAL 500 - ORGANIZATIONAL BEHAVIOR
Mitigation: Verify existence of insurance coverage for owned in-transit goods.
2
Abstract
If a company legally has title to in-transit goods, there is a risk that damage to those goods while
in transit will result in losses to the company. Thus, the internal audit program should include an
annual review of the existence and adequacy of insurance coverage for owned in-transit goods. A
more passive control is to also include this requirement in a procedure listing all insurance
requirements to be covered as part of the annual insurance renewal process.
3
Mitigation: Verify existence of insurance coverage for owned in-transit goods.
Inclusion in valuation: Enforce rapid completion of financials.
A common problem is pressure on the accounting staff to delay the month-end cutoff date,
thereby allowing the shipping department to pack a few more deliveries into the reporting period
to increase revenues. This is an ongoing battle that never really goes away. An excellent control
over the issue is to get management so used to receiving financial statements within one day of
month-end that they tacitly approve of a stringent cutoff in order to obtain the financials as fast
as possible.
Inclusion in valuation: Compare shipping log dates to shipper documentation.
A good way to detect an extended period-end cutoff is to compare the shipment date recorded in
the corporate shipping log to any shipper documentation on which the shipper records the actual
date on which it accepted the goods for delivery. If the shipping staff knows this audit will be
conducted, they will be less inclined to stuff more shipments into the reporting period with an
extended cutoff.
3-4 Inventory Stocking
4
Many of the problems associated with inventory originate with the initial decisions to set safety
stock levels, add product options, and design new components into products. Although these
decisions fall outside of the traditional control systems for inventory, they play a key role in the
amount of a company’s inventory investment, and so are included here. All controls noted relate
to the addition of stock to inventory.
Additions: Reject all purchases that are not preapproved.
A major flaw in the purchasing systems of many companies is that all supplier deliveries are
accepted at the receiving dock, irrespective of the presence of authorizing paperwork. Many of
these deliveries are verbally authorized orders from employees throughout the company, many of
whom are not authorized to make such purchases. This problem can be eliminated by enforcing a
rule that all items received must have a corresponding purchase order on file that has been
authorized by the purchasing department. By doing so, the purchasing staff can verify that there
is a need for each item requisitioned and that it is bought at a reasonable price from a certified
supplier.
Additions: Revise safety stock levels for seasonal items.
5
The most common approach to setting safety stock levels is to run a historical usage analysis
over the past few years and use that information to decide on an average safety stock level.
However, this approach ignores sudden drops in demand caused by seasonality, leaving too
much inventory on hand. If demand permanently drops thereafter, safety stock levels will be too
high and may represent a risk of obsolescence. A potential control is to mandate quarterly
adjustments to safety stock levels of seasonal items, thereby more closely matching supply to
demand.
Additions: Reduce the number of products and product options.
Each incremental product that a company chooses to sell requires the storage of more parts. This
is a particular problem if there are many variations on the basic product, mandating storage of
each product version. To control the number of these inventory additions, schedule a periodic
product profitability review and cancel unprofitable products; the determination of
unprofitability should certainly include an analysis of the amount of working capital tied up in
inventory that is uniquely associated with a particular product.
Additions: Standardize parts.
6
When engineers design new products, they may not consider using existing components. The
result is a plethora of similar but separately tracked components, each of which requires some
investment in on-hand inventory. An excellent control over these unwanted inventory additions
is to require a parts standardization review as an integral step in the development of any new
product. To reinforce the concept, consider including the minimization of the total number of on-
hand component parts in the bonus plan of the engineering manager.
Additions: Coordinate engineering change orders with on-hand balances.
When the engineering staff implements a change order, new parts are added to a product while
the replaced items are no longer needed and remain in stock for prolonged periods. In an
environment where engineering change orders are common, a nearly mandatory control is to
verify the remaining on-hand balance of any components being rendered obsolete so that the
change orders can be implemented in conjunction with the maximum depletion of existing
stocks.
Additions: Turn off reordering flags for cancelled components.
7
Many computer systems contain a flag in the item master file, indicating that the system should
automatically create a purchase order to replenish on-hand stocks when a minimum stock level is
reached. However, this contravenes a company’s intent in attempting to dispose of any obsolete
items, because the system will reorder what is no longer needed. Therefore, a good control is to
incorporate in the obsolete inventory disposition procedure a line item stating that the reordering
flag be turned off as soon as an item is declared obsolete.
Additions: Compare open purchase orders to current requirements.
The purchasing staff may have placed purchase orders that are no longer needed because the
production schedule was changed subsequent to placement of the purchase orders. This problem
is automatically spotted by a material requirements planning system, which generates a report
listing those purchase orders that should be closed. However, in the absence of an MRP system,
a process should be in place to frequently compare open purchase orders to current requirements,
resulting in the elimination of unneeded inventory receipts.
Additions: Reward managers based on a reduced working capital investment.
8
One of the classic frauds is to greatly increase the size of value-added on-hand inventory so that
more overhead costs are assigned to the inventory instead of flowing through the cost of goods
sold and reducing reported profits. To avoid this problem, an excellent passive control is to
include the reduction of a company’s working capital investment in the management bonus plan.
By doing so, anyone increasing inventory levels to manipulate profits would end up reducing his
profit because of the increased investment in working capital.
3-5 Inventory Storage
Inventory storage tends to be the area in which the most controls are implemented. Traditionally,
the key control targets have been over the loss of inventory through pilferage, as well as the
record accuracy for inventory contained within the warehouse. The following list also includes a
third category addressing the ownership of inventory contained within the warehouse. Additional
controls related to accuracy levels are described in the “Inventory Transactions” section of this
chapter. Possible controls are as follows:
Loss: Review for case overhang on pallets.
Inventory can be damaged if cases are incorrectly stacked on pallets. If they overhang the edge
of a pallet, the weight of the stack bears down on the overhanging cardboard walls of the cases,
potentially causing damage to their contents. A simple control is to include in the cycle counting
review a brief visual inspection of the stacking pattern on pallets to see if any overhang is
occurring. This review can also be done by audit teams as part of other investigations.
9
Loss: Restrict warehouse access to designated personnel.
Without access restrictions, the company warehouse is like a large store with no prices—just
take all you want. This does not necessarily mean that employees are taking items from stock for
personal use, but they may be removing excessive inventory quantities for production purposes,
which leads to a cluttered
Additions: Compare open purchase orders to current requirements.
The purchasing staff may have placed purchase orders that are no longer needed because the
production schedule was changed subsequent to placement of the purchase orders. This problem
is automatically spotted by a material requirements planning system, which generates a report
listing those purchase orders that should be closed. However, in the absence of an MRP system,
a process should be in place to frequently compare open purchase orders to current requirements,
resulting in the elimination of unneeded inventory receipts.
Additions: Reward managers based on a reduced working capital investment.
10
One of the classic frauds is to greatly increase the size of value-added on-hand inventory so that
more overhead costs are assigned to the inventory instead of flowing through the cost of goods
sold and reducing reported profits. To avoid this problem, an excellent passive control is to
include the reduction of a company’s working capital investment in the management bonus plan.
By doing so, anyone increasing inventory levels to manipulate profits would end up reducing his
profit because of the increased investment in working capital.
3-5 Inventory Storage
Inventory storage tends to be the area in which the most controls are implemented. Traditionally,
the key control targets have been over the loss of inventory through pilferage, as well as the
record accuracy for inventory contained within the warehouse. The following list also includes a
third category addressing the ownership of inventory contained within the warehouse. Additional
controls related to accuracy levels are described in the “Inventory Transactions” section of this
chapter. Possible controls are as follows:
Loss: Review for case overhang on pallets.
Inventory can be damaged if cases are incorrectly stacked on pallets. If they overhang the edge
of a pallet, the weight of the stack bears down on the overhanging cardboard walls of the cases,
potentially causing damage to their contents. A simple control is to include in the cycle counting
review a brief visual inspection of the stacking pattern on pallets to see if any overhang is
occurring. This review can also be done by audit teams as part of other investigations.
11
Loss: Restrict warehouse access to designated personnel.
Without access restrictions, the company warehouse is like a large store with no prices—just
take all you want. This does not necessarily mean that employees are taking items from stock for
personal use, but they may be removing excessive inventory quantities for production purposes,
which leads to a cluttered
12
13
Additions: Compare open purchase orders to current requirements.
The purchasing staff may have placed purchase orders that are no longer needed because the
production schedule was changed subsequent to placement of the purchase orders. This problem
is automatically spotted by a material requirements planning system, which generates a report
listing those purchase orders that should be closed. However, in the absence of an MRP system,
a process should be in place to frequently compare open purchase orders to current requirements,
resulting in the elimination of unneeded inventory receipts.
Additions: Reward managers based on a reduced working capital investment.
One of the classic frauds is to greatly increase the size of value-added on-hand inventory so that
more overhead costs are assigned to the inventory instead of flowing through the cost of goods
sold and reducing reported profits. To avoid this problem, an excellent passive control is to
include the reduction of a company’s working capital investment in the management bonus plan.
By doing so, anyone increasing inventory levels to manipulate profits would end up reducing his
profit because of the increased investment in working capital.
3-5 Inventory Storage
14
Inventory storage tends to be the area in which the most controls are implemented. Traditionally,
the key control targets have been over the loss of inventory through pilferage, as well as the
record accuracy for inventory contained within the warehouse. The following list also includes a
third category addressing the ownership of inventory contained within the warehouse. Additional
controls related to accuracy levels are described in the “Inventory Transactions” section of this
chapter. Possible controls are as follows:
Loss: Review for case overhang on pallets.
Inventory can be damaged if cases are incorrectly stacked on pallets. If they overhang the edge
of a pallet, the weight of the stack bears down on the overhanging cardboard walls of the cases,
potentially causing damage to their contents. A simple control is to include in the cycle counting
review a brief visual inspection of the stacking pattern on pallets to see if any overhang is
occurring. This review can also be done by audit teams as part of other investigations.
Loss: Restrict warehouse access to designated personnel.
Without access restrictions, the company warehouse is like a large store with no prices—just
take all you want. This does not necessarily mean that employees are taking items from stock for
personal use, but they may be removing excessive inventory quantities for production purposes,
which leads to a cluttered
15
16
Additions: Compare open purchase orders to current requirements.
The purchasing staff may have placed purchase orders that are no longer needed because the
production schedule was changed subsequent to placement of the purchase orders. This problem
is automatically spotted by a material requirements planning system, which generates a report
listing those purchase orders that should be closed. However, in the absence of an MRP system,
a process should be in place to frequently compare open purchase orders to current requirements,
resulting in the elimination of unneeded inventory receipts.
Additions: Reward managers based on a reduced working capital investment.
One of the classic frauds is to greatly increase the size of value-added on-hand inventory so that
more overhead costs are assigned to the inventory instead of flowing through the cost of goods
sold and reducing reported profits. To avoid this problem, an excellent passive control is to
include the reduction of a company’s working capital investment in the management bonus plan.
By doing so, anyone increasing inventory levels to manipulate profits would end up reducing his
profit because of the increased investment in working capital.
3-5 Inventory Storage
17
Inventory storage tends to be the area in which the most controls are implemented. Traditionally,
the key control targets have been over the loss of inventory through pilferage, as well as the
record accuracy for inventory contained within the warehouse. The following list also includes a
third category addressing the ownership of inventory contained within the warehouse. Additional
controls related to accuracy levels are described in the “Inventory Transactions” section of this
chapter. Possible controls are as follows:
Loss: Review for case overhang on pallets.
Inventory can be damaged if cases are incorrectly stacked on pallets. If they overhang the edge
of a pallet, the weight of the stack bears down on the overhanging cardboard walls of the cases,
potentially causing damage to their contents. A simple control is to include in the cycle counting
review a brief visual inspection of the stacking pattern on pallets to see if any overhang is
occurring. This review can also be done by audit teams as part of other investigations.
Loss: Restrict warehouse access to designated personnel.
Without access restrictions, the company warehouse is like a large store with no prices—just
take all you want. This does not necessarily mean that employees are taking items from stock for
personal use, but they may be removing excessive inventory quantities for production purposes,
which leads to a cluttered
18
19
Additions: Compare open purchase orders to current requirements.
The purchasing staff may have placed purchase orders that are no longer needed because the
production schedule was changed subsequent to placement of the purchase orders. This problem
is automatically spotted by a material requirements planning system, which generates a report
listing those purchase orders that should be closed. However, in the absence of an MRP system,
a process should be in place to frequently compare open purchase orders to current requirements,
resulting in the elimination of unneeded inventory receipts.
Additions: Reward managers based on a reduced working capital investment.
One of the classic frauds is to greatly increase the size of value-added on-hand inventory so that
more overhead costs are assigned to the inventory instead of flowing through the cost of goods
sold and reducing reported profits. To avoid this problem, an excellent passive control is to
include the reduction of a company’s working capital investment in the management bonus plan.
By doing so, anyone increasing inventory levels to manipulate profits would end up reducing his
profit because of the increased investment in working capital.
3-5 Inventory Storage
20
Inventory storage tends to be the area in which the most controls are implemented. Traditionally,
the key control targets have been over the loss of inventory through pilferage, as well as the
record accuracy for inventory contained within the warehouse. The following list also includes a
third category addressing the ownership of inventory contained within the warehouse. Additional
controls related to accuracy levels are described in the “Inventory Transactions” section of this
chapter. Possible controls are as follows:
Loss: Review for case overhang on pallets.
Inventory can be damaged if cases are incorrectly stacked on pallets. If they overhang the edge
of a pallet, the weight of the stack bears down on the overhanging cardboard walls of the cases,
potentially causing damage to their contents. A simple control is to include in the cycle counting
review a brief visual inspection of the stacking pattern on pallets to see if any overhang is
occurring. This review can also be done by audit teams as part of other investigations.
Loss: Restrict warehouse access to designated personnel.
Without access restrictions, the company warehouse is like a large store with no prices—just
take all you want. This does not necessarily mean that employees are taking items from stock for
personal use, but they may be removing excessive inventory quantities for production purposes,
which leads to a cluttered Additions: Compare open purchase orders to current requirements.
21
The purchasing staff may have placed purchase orders that are no longer needed because the
production schedule was changed subsequent to placement of the purchase orders. This problem
is automatically spotted by a material requirements planning system, which generates a report
listing those purchase orders that should be closed. However, in the absence of an MRP system,
a process should be in place to frequently compare open purchase orders to current requirements,
resulting in the elimination of unneeded inventory receipts.
Additions: Reward managers based on a reduced working capital investment.
One of the classic frauds is to greatly increase the size of value-added on-hand inventory so that
more overhead costs are assigned to the inventory instead of flowing through the cost of goods
sold and reducing reported profits. To avoid this problem, an excellent passive control is to
include the reduction of a company’s working capital investment in the management bonus plan.
By doing so, anyone increasing inventory levels to manipulate profits would end up reducing his
profit because of the increased investment in working capital.
3-5 Inventory Storage
Inventory storage tends to be the area in which the most controls are implemented. Traditionally,
the key control targets have been over the loss of inventory through pilferage, as well as the
record accuracy for inventory contained within the warehouse. The following list also includes a
third category addressing the ownership of inventory contained within the warehouse. Additional
controls related to accuracy levels are described in the “Inventory Transactions” section of this
chapter. Possible controls are as follows:
22
Loss: Review for case overhang on pallets.
Inventory can be damaged if cases are incorrectly stacked on pallets. If they overhang the edge
of a pallet, the weight of the stack bears down on the overhanging cardboard walls of the cases,
potentially causing damage to their contents. A simple control is to include in the cycle counting
review a brief visual inspection of the stacking pattern on pallets to see if any overhang is
occurring. This review can also be done by audit teams as part of other investigations.
Loss: Restrict warehouse access to designated personnel.
Without access restrictions, the company warehouse is like a large store with no prices—just
take all you want. This does not necessarily mean that employees are taking items from stock for
personal use, but they may be removing excessive inventory quantities for production purposes,
which leads to a cluttered
23
24
Additions: Compare open purchase orders to current requirements.
The purchasing staff may have placed purchase orders that are no longer needed because the
production schedule was changed subsequent to placement of the purchase orders. This problem
is automatically spotted by a material requirements planning system, which generates a report
listing those purchase orders that should be closed. However, in the absence of an MRP system,
a process should be in place to frequently compare open purchase orders to current requirements,
resulting in the elimination of unneeded inventory receipts.
Additions: Reward managers based on a reduced working capital investment.
One of the classic frauds is to greatly increase the size of value-added on-hand inventory so that
more overhead costs are assigned to the inventory instead of flowing through the cost of goods
sold and reducing reported profits. To avoid this problem, an excellent passive control is to
include the reduction of a company’s working capital investment in the management bonus plan.
By doing so, anyone increasing inventory levels to manipulate profits would end up reducing his
profit because of the increased investment in working capital.
3-5 Inventory Storage
25
Inventory storage tends to be the area in which the most controls are implemented. Traditionally,
the key control targets have been over the loss of inventory through pilferage, as well as the
record accuracy for inventory contained within the warehouse. The following list also includes a
third category addressing the ownership of inventory contained within the warehouse. Additional
controls related to accuracy levels are described in the “Inventory Transactions” section of this
chapter. Possible controls are as follows:
Loss: Review for case overhang on pallets.
Inventory can be damaged if cases are incorrectly stacked on pallets. If they overhang the edge
of a pallet, the weight of the stack bears down on the overhanging cardboard walls of the cases,
potentially causing damage to their contents. A simple control is to include in the cycle counting
review a brief visual inspection of the stacking pattern on pallets to see if any overhang is
occurring. This review can also be done by audit teams as part of other investigations.
Loss: Restrict warehouse access to designated personnel.
Without access restrictions, the company warehouse is like a large store with no prices—just
take all you want. This does not necessarily mean that employees are taking items from stock for
personal use, but they may be removing excessive inventory quantities for production purposes,
which leads to a cluttered
26
27
Additions: Compare open purchase orders to current requirements.
The purchasing staff may have placed purchase orders that are no longer needed because the
production schedule was changed subsequent to placement of the purchase orders. This problem
is automatically spotted by a material requirements planning system, which generates a report
listing those purchase orders that should be closed. However, in the absence of an MRP system,
a process should be in place to frequently compare open purchase orders to current requirements,
resulting in the elimination of unneeded inventory receipts.
Additions: Reward managers based on a reduced working capital investment.
One of the classic frauds is to greatly increase the size of value-added on-hand inventory so that
more overhead costs are assigned to the inventory instead of flowing through the cost of goods
sold and reducing reported profits. To avoid this problem, an excellent passive control is to
include the reduction of a company’s working capital investment in the management bonus plan.
By doing so, anyone increasing inventory levels to manipulate profits would end up reducing his
profit because of the increased investment in working capital.
3-5 Inventory Storage
28
Inventory storage tends to be the area in which the most controls are implemented. Traditionally,
the key control targets have been over the loss of inventory through pilferage, as well as the
record accuracy for inventory contained within the warehouse. The following list also includes a
third category addressing the ownership of inventory contained within the warehouse. Additional
controls related to accuracy levels are described in the “Inventory Transactions” section of this
chapter. Possible controls are as follows:
Loss: Review for case overhang on pallets.
Inventory can be damaged if cases are incorrectly stacked on pallets. If they overhang the edge
of a pallet, the weight of the stack bears down on the overhanging cardboard walls of the cases,
potentially causing damage to their contents. A simple control is to include in the cycle counting
review a brief visual inspection of the stacking pattern on pallets to see if any overhang is
occurring. This review can also be done by audit teams as part of other investigations.
Loss: Restrict warehouse access to designated personnel.
Without access restrictions, the company warehouse is like a large store with no prices—just
take all you want. This does not necessarily mean that employees are taking items from stock for
personal use, but they may be removing excessive inventory quantities for production purposes,
which leads to a cluttered
29
30
Additions: Compare open purchase orders to current requirements.
The purchasing staff may have placed purchase orders that are no longer needed because the
production schedule was changed subsequent to placement of the purchase orders. This problem
is automatically spotted by a material requirements planning system, which generates a report
listing those purchase orders that should be closed. However, in the absence of an MRP system,
a process should be in place to frequently compare open purchase orders to current requirements,
resulting in the elimination of unneeded inventory receipts.
Additions: Reward managers based on a reduced working capital investment.
One of the classic frauds is to greatly increase the size of value-added on-hand inventory so that
more overhead costs are assigned to the inventory instead of flowing through the cost of goods
sold and reducing reported profits. To avoid this problem, an excellent passive control is to
include the reduction of a company’s working capital investment in the management bonus plan.
By doing so, anyone increasing inventory levels to manipulate profits would end up reducing his
profit because of the increased investment in working capital.
3-5 Inventory Storage
31
Inventory storage tends to be the area in which the most controls are implemented. Traditionally,
the key control targets have been over the loss of inventory through pilferage, as well as the
record accuracy for inventory contained within the warehouse. The following list also includes a
third category addressing the ownership of inventory contained within the warehouse. Additional
controls related to accuracy levels are described in the “Inventory Transactions” section of this
chapter. Possible controls are as follows:
Loss: Review for case overhang on pallets.
Inventory can be damaged if cases are incorrectly stacked on pallets. If they overhang the edge
of a pallet, the weight of the stack bears down on the overhanging cardboard walls of the cases,
potentially causing damage to their contents. A simple control is to include in the cycle counting
review a brief visual inspection of the stacking pattern on pallets to see if any overhang is
occurring. This review can also be done by audit teams as part of other investigations.
Loss: Restrict warehouse access to designated personnel.
Without access restrictions, the company warehouse is like a large store with no prices—just
take all you want. This does not necessarily mean that employees are taking items from stock for
personal use, but they may be removing excessive inventory quantities for production purposes,
which leads to a cluttered
32
33
Additions: Compare open purchase orders to current requirements.
The purchasing staff may have placed purchase orders that are no longer needed because the
production schedule was changed subsequent to placement of the purchase orders. This problem
is automatically spotted by a material requirements planning system, which generates a report
listing those purchase orders that should be closed. However, in the absence of an MRP system,
a process should be in place to frequently compare open purchase orders to current requirements,
resulting in the elimination of unneeded inventory receipts.
Additions: Reward managers based on a reduced working capital investment.
One of the classic frauds is to greatly increase the size of value-added on-hand inventory so that
more overhead costs are assigned to the inventory instead of flowing through the cost of goods
sold and reducing reported profits. To avoid this problem, an excellent passive control is to
include the reduction of a company’s working capital investment in the management bonus plan.
By doing so, anyone increasing inventory levels to manipulate profits would end up reducing his
profit because of the increased investment in working capital.
3-5 Inventory Storage
34
Inventory storage tends to be the area in which the most controls are implemented. Traditionally,
the key control targets have been over the loss of inventory through pilferage, as well as the
record accuracy for inventory contained within the warehouse. The following list also includes a
third category addressing the ownership of inventory contained within the warehouse. Additional
controls related to accuracy levels are described in the “Inventory Transactions” section of this
chapter. Possible controls are as follows:
Loss: Review for case overhang on pallets.
Inventory can be damaged if cases are incorrectly stacked on pallets. If they overhang the edge
of a pallet, the weight of the stack bears down on the overhanging cardboard walls of the cases,
potentially causing damage to their contents. A simple control is to include in the cycle counting
review a brief visual inspection of the stacking pattern on pallets to see if any overhang is
occurring. This review can also be done by audit teams as part of other investigations.
Loss: Restrict warehouse access to designated personnel.
Without access restrictions, the company warehouse is like a large store with no prices—just
take all you want. This does not necessarily mean that employees are taking items from stock for
personal use, but they may be removing excessive inventory quantities for production purposes,
which leads to a cluttered
35
36
V Additions: Compare open purchase orders to current requirements.
The purchasing staff may have placed purchase orders that are no longer needed because the
production schedule was changed subsequent to placement of the purchase orders. This problem
is automatically spotted by a material requirements planning system, which generates a report
listing those purchase orders that should be closed. However, in the absence of an MRP system,
a process should be in place to frequently compare open purchase orders to current requirements,
resulting in the elimination of unneeded inventory receipts.
Additions: Reward managers based on a reduced working capital investment.
One of the classic frauds is to greatly increase the size of value-added on-hand inventory so that
more overhead costs are assigned to the inventory instead of flowing through the cost of goods
sold and reducing reported profits. To avoid this problem, an excellent passive control is to
include the reduction of a company’s working capital investment in the management bonus plan.
By doing so, anyone increasing inventory levels to manipulate profits would end up reducing his
profit because of the increased investment in working capital.
3-5 Inventory Storage
37
Inventory storage tends to be the area in which the most controls are implemented. Traditionally,
the key control targets have been over the loss of inventory through pilferage, as well as the
record accuracy for inventory contained within the warehouse. The following list also includes a
third category addressing the ownership of inventory contained within the warehouse. Additional
controls related to accuracy levels are described in the “Inventory Transactions” section of this
chapter. Possible controls are as follows:
Loss: Review for case overhang on pallets.
Inventory can be damaged if cases are incorrectly stacked on pallets. If they overhang the edge
of a pallet, the weight of the stack bears down on the overhanging cardboard walls of the cases,
potentially causing damage to their contents. A simple control is to include in the cycle counting
review a brief visual inspection of the stacking pattern on pallets to see if any overhang is
occurring. This review can also be done by audit teams as part of other investigations.
Loss: Restrict warehouse access to designated personnel.
Without access restrictions, the company warehouse is like a large store with no prices—just
take all you want. This does not necessarily mean that employees are taking items from stock for
personal use, but they may be removing excessive inventory quantities for production purposes,
which leads to a cluttered
38
39
Additions: Compare open purchase orders to current requirements.
The purchasing staff may have placed purchase orders that are no longer needed because the
production schedule was changed subsequent to placement of the purchase orders. This problem
is automatically spotted by a material requirements planning system, which generates a report
listing those purchase orders that should be closed. However, in the absence of an MRP system,
a process should be in place to frequently compare open purchase orders to current requirements,
resulting in the elimination of unneeded inventory receipts.
Additions: Reward managers based on a reduced working capital investment.
One of the classic frauds is to greatly increase the size of value-added on-hand inventory so that
more overhead costs are assigned to the inventory instead of flowing through the cost of goods
sold and reducing reported profits. To avoid this problem, an excellent passive control is to
include the reduction of a company’s working capital investment in the management bonus plan.
By doing so, anyone increasing inventory levels to manipulate profits would end up reducing his
profit because of the increased investment in working capital.
3-5 Inventory Storage
40
Inventory storage tends to be the area in which the most controls are implemented. Traditionally,
the key control targets have been over the loss of inventory through pilferage, as well as the
record accuracy for inventory contained within the warehouse. The following list also includes a
third category addressing the ownership of inventory contained within the warehouse. Additional
controls related to accuracy levels are described in the “Inventory Transactions” section of this
chapter. Possible controls are as follows:
Loss: Review for case overhang on pallets.
Inventory can be damaged if cases are incorrectly stacked on pallets. If they overhang the edge
of a pallet, the weight of the stack bears down on the overhanging cardboard walls of the cases,
potentially causing damage to their contents. A simple control is to include in the cycle counting
review a brief visual inspection of the stacking pattern on pallets to see if any overhang is
occurring. This review can also be done by audit teams as part of other investigations.
Loss: Restrict warehouse access to designated personnel.
Without access restrictions, the company warehouse is like a large store with no prices—just
take all you want. This does not necessarily mean that employees are taking items from stock for
personal use, but they may be removing excessive inventory quantities for production purposes,
which leads to a cluttered
41
42
Additions: Compare open purchase orders to current requirements.
The purchasing staff may have placed purchase orders that are no longer needed because the
production schedule was changed subsequent to placement of the purchase orders. This problem
is automatically spotted by a material requirements planning system, which generates a report
listing those purchase orders that should be closed. However, in the absence of an MRP system,
a process should be in place to frequently compare open purchase orders to current requirements,
resulting in the elimination of unneeded inventory receipts.
Additions: Reward managers based on a reduced working capital investment.
One of the classic frauds is to greatly increase the size of value-added on-hand inventory so that
more overhead costs are assigned to the inventory instead of flowing through the cost of goods
sold and reducing reported profits. To avoid this problem, an excellent passive control is to
include the reduction of a company’s working capital investment in the management bonus plan.
By doing so, anyone increasing inventory levels to manipulate profits would end up reducing his
profit because of the increased investment in working capital.
3-5 Inventory Storage
43
Inventory storage tends to be the area in which the most controls are implemented. Traditionally,
the key control targets have been over the loss of inventory through pilferage, as well as the
record accuracy for inventory contained within the warehouse. The following list also includes a
third category addressing the ownership of inventory contained within the warehouse. Additional
controls related to accuracy levels are described in the “Inventory Transactions” section of this
chapter. Possible controls are as follows:
Loss: Review for case overhang on pallets.
Inventory can be damaged if cases are incorrectly stacked on pallets. If they overhang the edge
of a pallet, the weight of the stack bears down on the overhanging cardboard walls of the cases,
potentially causing damage to their contents. A simple control is to include in the cycle counting
review a brief visual inspection of the stacking pattern on pallets to see if any overhang is
occurring. This review can also be done by audit teams as part of other investigations.
Loss: Restrict warehouse access to designated personnel.
Without access restrictions, the company warehouse is like a large store with no prices—just
take all you want. This does not necessarily mean that employees are taking items from stock for
personal use, but they may be removing excessive inventory quantities for production purposes,
which leads to a cluttered
44
45
Additions: Compare open purchase orders to current requirements.
The purchasing staff may have placed purchase orders that are no longer needed because the
production schedule was changed subsequent to placement of the purchase orders. This problem
is automatically spotted by a material requirements planning system, which generates a report
listing those purchase orders that should be closed. However, in the absence of an MRP system,
a process should be in place to frequently compare open purchase orders to current requirements,
resulting in the elimination of unneeded inventory receipts.
Additions: Reward managers based on a reduced working capital investment.
One of the classic frauds is to greatly increase the size of value-added on-hand inventory so that
more overhead costs are assigned to the inventory instead of flowing through the cost of goods
sold and reducing reported profits. To avoid this problem, an excellent passive control is to
include the reduction of a company’s working capital investment in the management bonus plan.
By doing so, anyone increasing inventory levels to manipulate profits would end up reducing his
profit because of the increased investment in working capital.
3-5 Inventory Storage
46
Inventory storage tends to be the area in which the most controls are implemented. Traditionally,
the key control targets have been over the loss of inventory through pilferage, as well as the
record accuracy for inventory contained within the warehouse. The following list also includes a
third category addressing the ownership of inventory contained within the warehouse. Additional
controls related to accuracy levels are described in the “Inventory Transactions” section of this
chapter. Possible controls are as follows:
Loss: Review for case overhang on pallets.
Inventory can be damaged if cases are incorrectly stacked on pallets. If they overhang the edge
of a pallet, the weight of the stack bears down on the overhanging cardboard walls of the cases,
potentially causing damage to their contents. A simple control is to include in the cycle counting
review a brief visual inspection of the stacking pattern on pallets to see if any overhang is
occurring. This review can also be done by audit teams as part of other investigations.
Loss: Restrict warehouse access to designated personnel.
Without access restrictions, the company warehouse is like a large store with no prices—just
take all you want. This does not necessarily mean that employees are taking items from stock for
personal use, but they may be removing excessive inventory quantities for production purposes,
which leads to a cluttered
47
48
49
