Weaknesses In Inventory Count Procedures And Bank Reconciliation Errors

Inventory Count Procedures at Smith Equipment

Question 1:

You ,the auditor, attended the inventory count (stocktake ) of your client Smith Equipment and observed the following during the count:

1. Warehouse staff counted specific areas of the stock as determined by the warehouse supervisor; staff members ,including the warehouse supervisor , were allocated their own area to count on their own.

2. Several blank sheets of paper were issued to each member of staff doing the counting.

3. Staff were instructed to write down the stock description and number counted .

4. Staff were told to write the stock quantities in pencil on the sheets to ensure errors can be corrected .

5. Any staff that completed a section early were allocated to another area to help out one of the other staff .

6.The supervisor collected all sheets at the end of the count to finalise the stock count .

Required :

Identify the weaknesses in the stocktake procedures above and identify how they could be improved.

You , the auditor , have spent 5 years as an auditor . In this time you have come across numerous errors in performing bank reconciliations . The following are some of these errors:

1. An unreconciled item of $340 was on the final bank reconciliation of the client and was deemed by the client to be immaterial.

2. Two deposits totalling $4070 relating to accounts receivable were collected on 3July ( 30 June year end) but recorded as cash receipts on 30 June.

3. An amount from an associate company of $40,000 was banked 2 days before the end of the year in the client’s bank account and then paid back 1 week after the end of the year.

4. A cheque for $6,000 was omitted from the outstanding cheque list on the bank reconciliation at 30 June . It cleared the bank on the 14 August .

5. A bank transfer of $20,000 was included as a deposit in transit at 30 June in the accounting records.

Required :

(a) What control should be implemented to reduce the likelihood of each of the above?

(b) What is an audit procedure to detect or prevent each of the above?

The following is an extract from a working paper containing the results of the tests of controls in the
accounts payable area:

Test                                                            Result                                                   Conclusion

Selected a number of supplier           Six out of 50 invoices tested had                    Accepted as the
invoices and checked that the            not been authorised .Incorrect discounts         errors in the
pricing and discounts have been        were recorded for these invoices.A follow        discounts claimed
reviewed and authorised by the         up of the four incorrect invoices did not           were immaterial .
purchasing manager                           not highlight a pattern or specific reason for the errors. 

Bank Reconciliation Errors

(a) Identify the key assertion addressed by the test procedure .

(b) Provide an explanation as to why the conclusion reached is appropriate or inappropriate.

(c) Outline the key control procedure that you believe needs to be performed.

Counting the item in the stock is considered to be one of the most significant task in managing the stock effective which help to maintain the inventory and thus maintain the stock which eventually help to maintain the supply of the product at a optimum level.  The weakness in the stock take procedure helps to determine the issue and loophole and thus help to provide clear and precise idea about the measure to improve the weakness in the stock take procedure (Bragg, 2011).

A stock take procedure is considered to be one o the most critical and difficult job specifically if the product quantity is in large amount and require several staff member along with warehouse supervisor. In Smith Equipment, during auditing of the stock take several activities are observed and noticed which help to determine several key issue and loopholes in the overall stock take procedures.

Stock takes procedure help to increase the business margin and overall efficiency (Braiotta, 2004). The process Smith and Equipment follow are counting and recording the overall amount and value of the stock held by the organization.

The key weakness in the overall stock take process in the Smith Equipment is that all the staffs are provided with key specific areas assigned by the supervisor staff members which includes warehouse supervisor. Several blank sheets were provided to each staff which lacks proper heading and detail of the equipment which need to be calculated as per the stock. Staffs were given the task to write the description regarding stock which can be tampered by the staff which will eventually lead to the improper stock inventory detail (Conradie, Moyce and Kirsch, 2012). Another issues identified which result into one of the most significant weakness of the stock take procedure of the Smith Equipment are stock quantities entries was written on pencil which can be easily tampered. The weakness of the stock take can be improved in the smith equipment with following the essential step which includes,

1. Know the actual what you are required to count and value- Regular stock are usually considered to be one of the primary reasons which make it essential to count and value all the direct cost stock items (Eisen, 2000).

2. Establish a proper recording system- there are numerous stock taking system which help to provide accurate and precise detail of the total stock available in the warehouse from an excel sheet to a critical software program which will help the employee and staff to calculated and store the detail easily and it is less time consuming as well (Gudum, 2002).

Making counting easy will help to reduce the time taken to complete the stock take procedure. Maintain a proper and well organised storage system will help to decrease the tome in stock taking. Storage of the all the equipment in the clearly distinguished from different similar item, store all the item in a synchronised manned such as in row and stack which helps to defer the delicacy counting or omission of equipment  and also prevent item in and out of stock during counting. Faulty equipment or tampered equipment should be removed and updated accordingly in the stock take sheet which will help to provide accurate detail of the stock and their reason for the removal from the warehouse (Jones, 2006).

Controls to Reduce Error Likelihood

With proper measure such as surprise checking s per the convenient, frequent checking helps to maintain the warehouse in well structured and in organised form and random and unscheduled checking help to decrease the inefficiency and dishonesty. Staff therefore will not have any idea about the stock taking process in advance which will decrease the opportunity to any irregularities (Kimbell, 2002).

(a) Account reconciliation is considered to be one of the most unappreciated yet one of the most major factor that control which helps to ensure the organization financial integrity.  Issue and weakness in reconciliation lead to improper financial statement. An efficient, accurate and precise timing financial close cycle can helps to create a proper foundation for determining and evaluating the business performance, organization decision and thus help to provide satisfying the overall financial reporting needs and requirement (Madeira, 2010). Following control should be implemented which will eventually help to decrease the likelihood of error in performing bank reconciliation. The keys control is as follows,

  1. Bank reconciliation need to be accurate and precise.
  2. Bank reconciliation should be executed and completed and properly reviewed in a proper timely manner.
  3. The bank reconciliation process should be reviewed and analysed on a continuous basis and enhanced.
  4. The bank reconciliation required to be accurate.
  5. The bank reconciliation should helps to provide proper support to the appropriate accounting principles.

(b) Key audit procedure to overcome the error are given below,

1. The individual preparing and reviewing the account should have normal and basic understanding of what the actual account is being used for and that is the core purpose to support the overall balance. Proper endurance should be provided which reflect that the account updated in the balances is being reconciled (McMillan, 2003).

2. Bank reconciliation should be in a proper timely manner, it helps to provide a clear and precise date which help to provide due dates for the reconciliation. It haves the proper mechanism to identify and determine the overall status of each reconciliation (Ravindranath and Ostwald, 2008). It helps to helps to make provide high risk account reconciliation due to the proper close cycle to determine and identify any proper potential problems.

3. Proper control regarding the due dates for the reconciliation with appropriate mechanism need to be identified and tracked which help to provide clear and precise idea about the status of reconciliation. High risk account reconciliation which helps to provide a clear and precise idea about the close cycle to determine and identify the potential problems.  

4. Bank reconciliation should be complete, all appropriate account should be reconciled which also include new accounts, proper well structured reconciliation policy and it should be related with the company (Saxena et al., 2010).

5. Bank reconciliation should follow proper accounting principle and policies which help to maintain the rule and code of conduct for the proper recording of accounting or financial statement record which eventually utilise for different purpose. Reconciliation should amend and follow according to the company or firm polices which help to ensure the reconciliation are objective and identify the material include in the accounting record.

(a) The key assertion addressed by the test procedure above is to emphasise the authorisation process of purchase which was found to be largely unauthorised with respect to the invoices. The assertion is that the company did not bother to make authorisation of invoices mandatory and there was lack of responsibility o the part of the purchase manager (Riggs, 2007). The discounts that were provided to the suppliers were not correct and the reason for the erroneous discounts was not provided. This shows that the discounts were given in an arbitrary manner and reasons for giving discounts were not recorded. The assertion made is also to the extent that the management were not very clear and were not in the habit of keeping relevant records of discounts which seem to be unusual to the auditor. There was also slackness on the part of the management to show clear and written down reasons for the unusual discounts claimed and granted.

Audit Procedures to Detect and Prevent Errors

(b) The conclusion related to the discounts claimed is not acceptable as the checking of accounts payable requires that such discounts be listed in the current liability. The discount claimed and given is a liability list towards the cost of goods to the company that the company let go in favour of the suppliers. The transaction has been noted to be unusual as there was no recorded reason for granting of the discounts to the suppliers as was evident from inspection of the invoices. The disclosure was not available even for the open files related to the discounted invoices (Schaeffer, 2004). This is violation of the presentation and disclosure format of accounts payable testing norms. The reasons for the unusual discounts claimed and given in relation to party transactions should have been clearly mentioned and recorded as footnotes to the invoice recording. There was also no mention of any management letter that explains the unusual discounts given in the purchase invoices of suppliers. These defects are generally considered to be malpractices to accounting as the discounts result in loss of money to the company and hence the result is unacceptable (Schaeffer, 2007).

(c) The key control procedure that needs to be performed in this case is the proper presentation and disclosure of the accounts and invoices related to party payables. Control should be induced in listing supplier payments as current liability and mentioning of special discounts or claims for discounts and the reason for granting of such claims in the footnote. Is it is not possible to mention the above in the foot note then the same should be done in a separate file so that it is revealed during checking of accounts payable (Riggs, 2007). In the case of unusual concessions being made to suppliers, the notes should provide sufficient logic behind the granting of and claiming of the discounts. Since the discounts granted and given for purchase are potential losses to the company, it needs to be clearly reasoned and clarified to ensure clarity and completeness. Letters and communications from the management regarding unusual discounts should be recorded for reference and providing of enough reasoning behind the discounts claimed and granted. This is necessary for the providing of clear justification for the discounts during the checking and testing procedures for the accounts payable area (Schaeffer, 2004).


Riggs, H. (2007). Understanding the financial score. [San Rafael, Calif.]: Morgan & Claypool Publishers.

Schaeffer, M. (2004). Accounts Payable Best Practices. New York: John Wiley and Sons Ltd.

Schaeffer, M. (2007). Controller and CFO’s guide to accounts payable. Hoboken, N.J.: Wiley.

Saxena, R., Srinivas, K., Rai, U. and Rai, S. (2010). Auditing. Mumbai [India]: Himalaya Pub. House.

Bragg, S. (2011). Bookkeeping essentials. Hoboken, N.J.: Wiley.

Braiotta, L. (2004). The audit committee handbook. New York: Wiley.

Conradie, E., Moyce, M. and Kirsch, D. (2012). Study & master accounting. Cape Town, South Africa: Cambridge University Press.

Eisen, P. (2000). Accounting. Hauppauge, N.Y.: Barron’s Educational Series.

Gudum, C. (2002). A safety stock adjustment procedure to enable target service levels in simulation of generic inventory systems. Kbh.: Copenhagen Business School, Dept. of Management Science and Statistics.

Jones, M. (2006). Accounting. Chichester, England: Wiley.

Kimbell, L. (2002). Audit. London: Book Works.

Kremer, B. (2001). Audit. Luxembourg: Casino Luxembourg.

Madeira, L. (2010). QuickBooks 2010 solutions guide for business owners and accountants. Indianapolis, Ind.: Que Pub.

McMillan, E. (2003). Model policies and procedures for not-for-profit organizations. Hoboken, NJ: John Wiley.

Mitra, S. (2001). Kosovo. Washington, DC: World Bank.

Ravindranath, N. and Ostwald, M. (2008). Carbon inventory methods. Dordrecht: Springer.

Saxena, R., Srinivas, K., Rai, U. and Rai, S. (2010). Auditing. Mumbai [India]: Himalaya Pub. House.

Schaeffer, M. (2002). Essentials of accounts payable. New York: Wiley.

Schaeffer, M. (2004). Accounts payable best practices. Hoboken, N.J.: John Wiley & Sons.

Schaeffer, M. (2007). Controller and CFO’s guide to accounts payable. Hoboken, N.J.: Wiley.

Whittington, O. (2014). Wiley CPAexcel Exam Review 2015 Study Guide (January). Hoboken: Wiley.

Wild, A. (2004). Improving inventory record accuracy. Boston, MA: Elsevier Butterworth Heinemann.

Wink, G. and Corradino, L. (2011). Intermediate accounting demystified. New York, NY: McGraw-Hill.

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