THE ADVANTAGE OF INTERNAL CONTROL
FOR INVENTORY
Created
By:
Rose
Anne Tarida Situmorang
2a-D4
461
12 018
Accounting
Major
Managerial
Accounting
State
Polytechnic Of Ujung Pandang
2014
FOREWORD
Praise
to God all praise belongs to Him, who has given me His blessing and grace so
that I can finish the article that had the title “The Advantage of Internal Control for Inventory”.
I
would like to thank Miss Irma as my English lecture that give this final
assignment of fourth semester of English for Academic lesson. I believe that
she give it to increase my knowledge and to help me to practice my English. I
would like to thank to all my friends too who have been always support me in
the making of this article.
Hopefully,
this article can be useful for readers. Critics
and suggestion is needed here to make this assignment be better. Thank You
May 24,
2014
Rose
Anne Tarida Situmorang
TABLE OF CONTENTS
Cover
Paper ..........................................................................................................
i
Foreword
..............................................................................................................
ii
Table
of Content ..................................................................................................
iii
A. Introduction
.....................................................................................................
1
B. Literature
Review ............................................................................................ 2
C. Discussion
The
Advantage Of Internal Control for Inventory ............................................
6
D. Conclusion
.......................................................................................................
8
E. References
.......................................................................................................
9
A. Introduction
In general, the
company is the place of the activities production and gathering all of the
production factors. Each company must have a goal to get an optimal income in
order to maintain its viability, advance, and develop their business to a
higher level.
One of the most active
unsure in the company is Inventory. The purpose of inventory accounting is to:
1.
Determine profit loss periodic through
the process of confront between the cost of goods sold with the sales in an
accounting period
2. Determine
the amount of the inventory that will be presented in the balance sheet.
Inventory
is the goods that owned by the company for resale or for further processing
into goods available for sale. Trading companies and industrial companies
generally have inventories that amount, type, and the problem aren’t always
same among the companies. Inventory is fairly large asset or even the biggest
compared to other current assets. Inventory is also the most abundant elements
that use the company’s financial resources that should be provided so that
company can operate properly as it should.
In
addition, Inventory also has a dual aspect that is presented in balance form or
in the balance sheet as company asset and it’s also presented in income
statement as an element of cost of goods. Therefore the problems in determining
the value of the inventory, not only will lead to an error in the balance sheet
but also in the company’s income statements for the current period and for the
next period.
Seeing,
the importance of the role of the inventory in the company’s operation so the
management of the company needs to have a good controls system which can ensure
the safety of the inventory of the company. Controls include the steps that are taken by the company’s management to
increase the possibility of achieving the goals that have been set in the
planning phase and also to ensure that all parts of the organization work
appropriate in organization goals.
Internal
control is one type of control that can be applied by the company’s management.
Internal control is the plan, methods, procedures and policies that designed by
the company’s management to give a guarantee that adequate for the achievements
of the efficiency and effectiveness of operations, reliability of financial
report, the security of the assets, compliance to laws, policies and other
regulations. It means that internal control is one type of controls that very
important to control the inventory of the company.
B. Literature Review
In reviewing
related literature, I focus on work featuring internal control and inventory
review.
1.
Definition of Inventory
Inventory is asset of the company which
have a highly influence to the development of company’s financial. In
accounting, inventory is current asset that owned by a company that used for
business to be sold without deformation or for further processing in a
manufacturing company that has a value and a new form and then it will be
marketed.
Ikatan Akuntan Indonesia (2007 : 14.2)
explained that “Inventory encompass purchased goods and are held for resale, example
merchandise that is purchased by retailers is resale or the acquisition of land
and other property for resale. Inventory also encompass finished goods, finished
goods that have been produced, or goods in process that is being produced by
the company, and including materials and equipment that will be used in
production process”.
Kieso, Weygandt and Warfield (2004)
explained that “Inventories are asset item sheld for sale in the ordinary
course of business or goods that will be used or consumed in the production of
goods to be sold”.
The above definitions explain that
inventory is an asset that owned by the company to be sold without fundamental
changes to the goods, either the shape or the benefits of the goods.
2. The
Types of Inventory
The
inventory in each company is different from other companies depending on the
company’s business activity. Inventory can be classified as follows:
a) Merchandise
Inventory
Goods on hand that are
purchased by retailers or trading companies such as importers or exporters to
be resold. Usually the goods that obtainable for resale physically not modified
by the company’s buyers, the goods remain in finished goods when leaving the
factory. In some respects can occur multiple component are purchased and then
are assembled into finished goods. For example, bicycles are assembled from the
frame, wheels, overdrive, etc as well as sold by retailer bicycles is one
example.
b) Manufacturing
Inventory
Joint inventory from
manufacturing entity, consisting of :
1) Materials.
Intangible goods that are bought or obtained in other ways (e.g. with mine) and
kept for direct use in making goods for resell. Part of spare parts that are
produced before used sometimes classified as supplies spare components.
2) Goods
In Process. Goods that requires further processing before the completion and
selling. Goods in process, also called an goods in process inventory, includes
direct materials, direct labor, overhead cost that
is happening until the date.
3) Cost
of Finished Goods Inventory includes direct
materials, direct labor, and overhead cost pertaining
to manufacturing.
4) Manufacturing
Inventory Supplies. Goods such as lubricants for
machinery, cleaning materials, and other items that are the less important part
of the finished product.
c) Miscellaneous
Inventory Goods as office supplies, cleanliness, and delivery. The inventory
commonly used immediately and usually noted as selling or general expenses when
it’s bought.
3. Definition
of Internal Control
Alvin
A. Arens and James K. Loebecke in their book Auditing and Integrated Approach (2000:315) explained that
“Internal control is a process designed to provide reasonable assurance the
achievements of management’s objectives in the following categories:
a) Reliability
of Financial Reporting
b) Effectiveness
and Efficiency of Operations
c) Compliance
with Applicable laws and Regulations
So it can be concluded that internal control is a
process that is done to achieve the objective of the organization consisting of
various policies, procedure, techniques, physical equipment, documentation, and
human.
According to its purpose, the internal control
system can be divided into two kinds, as follows:
1) Internal
Accounting Control, and
2) Internal
Administrative Control.
Internal
Accounting Control that is a part of the system of internal control, including
organizational structure, methods and measure that are coordinated primarily to
keep the assets of the organization and check the accuracy and reliability of
accounting data.
Internal
Administrative Control includes organizational structure, methods and measure
that are coordinated primarily to promote the efficiency and compliance the management policies.
4.
The Elements of Internal Control
Niswonger
Warrer Fess (1999) argues, to achieve the objectives of internal
control, management is responsible to design and implement the five elements of
internal control. These elements are, as follows:
1) Control
Environment
Control environment is the attitude
toward internal control and control consciousness established and maintained by
the management and the employees of an organization. It is a product of
management's philosophy, style and supportive attitude, as well as the
competence, ethical values, integrity, and morale of the organization's people.
The organization structure and accountability relationships are key factors in
the control environment.
2) Communication
Communication is the exchange of
useful information between and among people and organizations to support
decisions and coordinate activities. Within an organization, information should
be communicated to management and other employees who need it in a form and
within a time frame that helps them to carry out their responsibilities.
Communication also takes place with outside parties such as customers,
suppliers and regulators.
3) Assessing
and Managing Risk
Risks are events that threaten the
accomplishment of objectives. They ultimately impact an organization's ability
to accomplish its mission. Risk assessment is the process of identifying, evaluating
and determining how to manage these events. At every level within an
organization there are both internal and external risks that could prevent the
accomplishment of established objectives.
Ideally, management should seek to
prevent these risks. However, sometimes management cannot prevent the risk from
occurring. In such cases, management should decide whether to accept the risk,
reduce the risk to acceptable levels, or avoid the risk. To have reasonable
assurance that the organization will achieve its objectives, management should
ensure each risk is assessed and handled properly.
4) Control
Activities
Control
activities are tools - both manual and automated - that help prevent or reduce
the risks that can impede accomplishment of the organization's objectives and
mission. Management should establish control activities to effectively and
efficiently accomplish the organization's objectives and mission.
5) Monitoring
Monitoring is the
review of an organization's activities and transactions to assess the quality
of performance over time and to determine whether controls are effective.
Management should focus monitoring efforts on internal control and achievement
of organization objectives. For monitoring to be most effective, all employees
need to understand the organization's mission, objectives, and responsibilities
and risk tolerance levels.
C.
The
Advantage Of Internal Control For Inventory
Inventory is the goods that owned
by the company for resale or for further processing into goods available for
sale. Inventory is fairly large asset or even the biggest compared to other
current assets. Seeing, the importance of the role of the inventory in the
company’s operation so the management of the company needs to have a good
controls system which can ensure the safety of the inventory of the company.
Internal control is one type of
control that can be applied by the company’s management. Internal controls over
a company's inventory are meant to ensure that management has an accurate count
of what materials and goods it has available for sale and to protect those
goods from being spoiled, stolen or otherwise made unavailable for sale. In
short, inventory internal controls are meant to ensure that a company always
has sufficient resources to produce and sell goods to meet its customers’ needs
without having oversupply.
This process is affected by the
company's structure, its employees, and its informational systems. Since a
company's inventory is directly tied to the business's ability to generate
profit, the internal controls must be comprehensive and require significant
thought when being designed. Internal controls for inventory of a company are
divided into three controls function, as follows:
a) Internal
Control of The Physical Inventory
Internal
controls are importance over
physical inventory because the inventory is
easy to move to other place
of insecurity.
b) Internal Control Over Recording
Inventory
Control exists because
of the amount of inventory in the inventory card that taken and goods report as
addition and evidence and the use of partial reduction of inventory that are
ready for sale that while still in the
warehouse.
c) Internal
Control Over The Amount of Inventory
After entering the installation
process of expanding production or organization should prepare a production
budget for material processing based on design.
Based
on the three functions of internal controls over inventory above, then the
internal controls over inventory useful for assuring that:
a) The
existence of adequate controls on inventory mutation,
b) All
inventory transaction have been recorded and classified appropriately,
c) Physical
inventory counting has been implemented in accordance with the established
procedure,
d) The
cost of the inventory has been determined precisely, and
e) The
adjustment of slow moving inventory, obsolete and damaged has been done
properly.
D.
Conclusion
Based
on the description that has been described, it is concluded that:
Inventory
is one of the most important assets of the company that must be maintained
properly, so the management of the company needs to have a good controls system
which can ensure the safety of the inventory of the company and one of the
appropriate type of controls is internal control.
Internal
control is very useful for controlling the inventory of the company. Internal
controls over a company's inventory are meant to ensure that management has an
accurate count of what materials and goods it has available for sale and to
protect those goods from being spoiled, stolen or otherwise made unavailable
for sale.
In
short, inventory internal controls are meant to ensure that a company always
has sufficient resources to produce and sell goods to meet its customers' needs
without having oversupply.
E.
References
Nurmailiza,
Tengku. 2009. “Analisis Pengendalian Intern Atas Persediaan Barang Dagang
PT.Sabda Cipta Jaya”. Program Pascasarjana. Universitas Sumatera Utara. Medan
Nanang
Budianas, 2013. ”Pengendalian Intern Atas Persediaan”. Http://nanangbudianas.blogspot.com/2013/02/pengendalian-intern-atas-persediaan.html. Accessed
on Monday, 19 June 2014.
State
University of New York, “What Are The Components Of Internal Control?”. Http://www.purchase.edu/Departments/BusinessOffice/internal
%20control/componentsofinternalcontrol.aspx. Accessed on Thursday 22 June
2014.
Sentoso,
2006. “Manfaat Pengendalian Internal Persediaan Dalam Menunjang Efektivitas
Pengelolaan Persediaan Barang Dagangan (Survei Pada PT A XA Bandung). http://repository.widyatama.ac.id/handle/10364/867. Accessed
on Thursday 22 June 2014.
