INVENTORY CASE STUDY 2
Inventory Case Study
CBU installed a new computer system to help track inventory and the cost of inventory
during the year. When the year-end inventory count was conducted on December 31, it illustrated
a vast difference in what the computer systems showed versus the physical count done by the
auditors. While Accountant A was proud of fixing the inventory shortage by making an adjusting
entry to reduce the inventory, they either forgot or ignored the fact that a difference in inventory
reporting also affects the cost of goods for the company as well as having financial implications
for the business. Some questions should be asked to discover why this discrepancy happened in
the first place, such as how such a difference happened, whether counts were done correctly
earlier in the year and whether there may have been a better way to control inventory.
On the other hand, Accountant B was and should be concerned with the difference in the
inventory count conducted at the end of the year and the decisions made regarding this
discrepancy. This accountant understood that there were bad decisions made during the year
regarding inventory which could have been corrected earlier with better internal controls.
Accountant B understands that honesty and integrity are essential in any business, and there must
be answers to the questions that should have been asked. Finding solutions to those questions
may reveal theft or improper conduct when handling inventory. God teaches people to be honest
and to conduct themselves righteously. Matthew Chapter 7 speaks of how people are known by
what they do and their actions [ CITATION Hol971 \l 1033 ]. Verses 16-20 show that if a person
lives a life of honesty and integrity, others know that person as honest. Matthew 7:18 Jesus
speaks from the sermon on the mount, saying, “A good tree cannot bring forth evil fruit; neither
can a corrupt tree bring forth good fruit.).” By living according to the word of God, people are
known for their actions of good or evil.
INVENTORY CASE STUDY 3
The installed computer system should have had a program for adequately tracking
inventory, even if there were regular physical counts during the year. When the auditors counted
on December 31, some procedures should have been implemented to perform this count.
According to an article on Accounting CPE Courses & Books website, some guidelines should
be followed before counting inventory, and these procedures could take several days to complete
[ CITATION Acc22 \l 1033 ]. Among these guidelines illustrated on this website, the list should
be prepared, such as having the correct tags on each product and pre-count inventory that are
small and then placed in a container and labeled with the number of items in the container.
According to the textbook Accounting Information Systems, the Sarbanes-Oxley Act of
2002 has forced companies to change how auditors audit companies [ CITATION Gel17 \l
1033 ]. The information in the assignment does not state whether the auditors were part of the
organization or not. Still, the Sarbanes-Oxley Act states that auditors must be independent of the
business, which means they should hold no stake in how the company operates daily
[ CITATION HR322 \l 1033 ]. If the auditor is not independent, they may not care if Accountant
A makes the adjusting entry to the computer system to fix the inventory discrepancy. Title II,
Section 204 of the Sarbanes-Oxley Act states that the auditors who performed the year-end
inventory count must also report to audit committees on the policies and procedures used to
perform their duties during the audit.
The inventory in the computer system is overstated, affecting many things on the
financial statement for the company. When Accountant A made the adjusting entry to lower the
amount of inventory, it also changed the cost of goods sold, the profit, and the number of assets
for the organization. The adjusting entry to correct the inventory count also affects the company's
INVENTORY CASE STUDY 4
profitability; financial statements will be incorrect unless the computer system is programmed to
adjust the cost of goods sold and the other statements regarding the organization.
For example, suppose the company had a computer system programmed with barcode
numbers for items purchased during the year. In that case, it could have followed the intake and
sales of things being delivered to the business. This way, items being delivered or sold would
automatically be added or subtracted to the inventory count. This would have illustrated a better
way to control the inventory. Another method of managing inventory would have been
implementing cycle counting in the business. In this way of counting inventory, the counting
timing would have found any discrepancies earlier in the year, and adjustments could have been
made at those times. The article, A comparison of cycle counting methods, tells that discrepancies
in inventory leads to many problems in the organization that could have been corrected with the
implementation of cycle counting methods [ CITATION Aco22 \l 1033 ]. There are three
different methods of cycle counting; block, random, and ABC, but these can also result in
discrepancies if there is no training on how to use these methods when counting. The article also
states that if the plans are used correctly during the year, it can improve the accuracy of the
amounts of inventory within the company.
Even with the correct methods of counting inventory within the organization, there could
still be discrepancies in the amount of inventory counted and the amount shown in the computer
system. With effective counting methods, the shortage or overage of inventory could have been
addressed at different periods instead of attempting to justify the deficit with just an adjusting
entry into the accounting system. Finding the cause of the difference in inventory when being
counted and the amount of inventory in the accounting system is essential to prevent this
discrepancy in the future. Relying at specified times on during the year could determine whether
INVENTORY CASE STUDY 5
inventory was not being counted correctly when it arrived at the business or if the theft was done
with items. When products arrive at the company, specific persons should be able to count
merchandise and enter those numbers into the system, but no one person should be able to do
that alone. Having more than one person count items is crucial to do it correctly and honestly.
In conclusion, having a computer system that would have the ability to recognize items
being brought into the company while also being able to identify items being sold, used, or
discarded would get the added value of knowing what items are within the business. The counts
being done at separate times by the various cycle counting methods would prevent such a large
discrepancy in the number of items in inventory from the system and those counted by whoever
would be conducting the counts.
INVENTORY CASE STUDY 6
References
A comparison of cycle counting methods. (2022, October 29). https://web-s-ebscohost-
com.ezproxy.liberty.edu/ehost/pdfviewer/pdfviewer?vid=2&sid=fbac533d-60ad-474a-
a791-237d10457ede%40redis
Accounting Tools. (2022, October 29). https://www.accountingtools.com/articles/inventory-
count-procedure
Gelinas, U., Dull, R., Wheeler, P., & Hill, M. (2017). Accounting Information Systems. Boston:
Cengage Learning.
H.R.3763 - Sarbanes-Oxley Act of 2002. (2022, October 29). ttps://www.congress.gov/bill/107th-
congress/house-bill/3763#:~:text=Sarbanes%2DOxley%20Act%20of%202002%20%2D
%20Title%20I%3A%20Public%20Company,3)%20inspect%2C%20investigate%2C
%20and
Holy Bible (KJV). (1997). Grand Rapids: World Publishing Inc
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