Professor Adams' Lecture Materials

Learning Objective 9-04: Identify important internal control activities present in a properly designed system to mitigate the risk of material misstatements for each relevant assertion in inventory management.

Internal Control Activities and Design Evaluation

Control risk assessment drives substantive testing scope. For manufacturers, controls cover raw materials, work-in-process, and finished goods, unlike retailers focused on acquisition.

Entity-Level Controls

Controls like restricted facility access, visitor escorts, and timely production report reviews prevent theft and unauthorized actions, supporting existence and completeness assertions.

Control Considerations

Segregation separates authorization (production planning), custody (inventory handling), and recording (cost accounting). Specific controls include approved production orders, reconciled material requisitions, and periodic counts, addressing all assertions.

Custody

Production workers have temporary custody of “moving inventory” (work-in-process), controlled via accountability measures like cost analysis and quality checks, supporting existence and valuation.

Internal Control Questionnaire

An ICQ gathers control details, organized by assertions (occurrence, completeness, accuracy, cutoff, classification), aiding initial understanding.

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