CBU Inventory Shortage Discussion Thread
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CBU Inventory Shortage Discussion Thread
I disagree with Accountant A and agree with Accountant B’s philosophy. While audits for public companies are mandatory, this discrepancy of inventory between the actual inventory and what the system said they had would have continued and they would not have known. The audit should not be a backup plan for the company not properly, consistently counting their inventory. Accountant A views the auditors as a backup plan if they had not correctly done their job and they will tell the company how to fix their inventory, while Accountant B views the auditors as another set of eyes in confidence that they had been counting inventory correctly and consistently.
CBU needs to train and educate the employees on a cycle counting method that would work best for their company. Because CBU would have to educate and train employees, a block method might work best so that way all of the inventory is counted throughout the year and it is the simplest method out of the three methods for cycle counting. (Insert in text citation here). The block method would be a good safeguard counting method to make sure the inventory count is accurate and up to date especially with the help of CBU’s new software to help track the inventory. The block method does require more time, but it is very accurate and requires minimal education for the employees. This simpler method for cycle counting would be ideal for CBU so they can get all of the employees and staff on the same page (Walters et al., 2006). This will be essential with the new controls CBU will implement to make sure that this inventory discrepancy is not recurring.
CBU should also implement a better segregation of duties for the roles in the inventory management process. There needs to be a strong segregation of duties between the employees in the business operations processes, but in this particular situation the inventory management process needs controls put in place. The inventory also needs to be counted upon arrival because there could be an instance such as in “A Comparison of Cycle Counting Methods” where the manufacturer had been sending less units than ordered and no one had noticed because it was not being counted upon arrival (Walters et al., 2006). If CBU’s inventory is counted correctly and consistently, then CBU‘s management can better make decisions with the accurate inventory and financial data.
One of the main roles in the inventory management process that need to be segregated are the inventory management function and the cost-accounting function. When the same employee has access to these the cost of the inventory can be easily manipulated. The next segregation of duties that needs to be enacted is the inventory stores function and the cost accounting function. When the same employee has access to both of these it can lead to the employee being able to conceal unsanctioned shipments and theft. The third among duties that need to be separated are the cost accounting function and the general ledger function. When an employee has access to both of these roles, there can be unsanctioned shipments and theft easily covered up. Lastly, the employee that oversees the inventory should be separated from the inventory management and inventory stores function. This could lead to inventory records being altered for unethical activity (Messier, et al., 2019).
When the auditors annually come to CBU and run their tests of the internal controls, they will test assertions on the inventory management process. Some of the main assertions that stuck out for this particular situation were occurrence, completeness, authorization and accuracy. Because the inventory was overstated by $1 million, the current internal control system in place is flawed regardless of if this activity is negligent or fraudulent. When the auditors test these assertions with supporting documentation, they can find whether the reason for this discrepancy is due to fake transactions in the inventory, the inventory not being costed correctly, unauthorized activity, etc. The new software system that CBU has implemented should help the company set better internals controls and segregation of duties (Messier, et al., 2019). However, the employees need to be educated about the inventory counting method and their roles in the company need to be defined and segregated to prevent fraudulent activity and/or negligence.
The loosely defined internal control that CBU has can create temptation among the employees. Temptation can become an issue even if the employee has no malicious intent initially. Many people have nothing but benevolence and Jesus in their hearts, but internal controls have to be put in place for those that give in to the temptation. The verse 1 Corinthians 10:13 reads “No temptation has overtaken you except what is common to mankind. And God is faithful; he will not let you be tempted beyond what you can bear. But when you are tempted he will also provide a way out so that you can endure it,” (Patterson & Kelley, 2018, 1 Corinthians 10:13). In this context, this verse means that when an employee feels temptation to steal inventory or make fraudulent transactions, they can give that feeling of temptation to God and overpower the Devil’s temptation. The Goodner Brothers, Inc. is another prime example of an employee taking advantage of the loosely defined internal controls because of gambling debt. The employee was rather exemplary until he gave into temptation and saw his only option was to steal from his workplace causing a major inventory shortage and a criminal lawsuit (Knapp, 2018). As Christians, we have to lead and give these feelings of temptation to God and pray for him to give us strength to lead by example.