Implement these seven internal controls to prevent inventory fraud

43984, 05 Nov. 2014

Tags: inventory, internal controls for inventory, how to prevent inventory fraud

Inventory represents a current asset on your Statement of Financial Position (balance sheet).
As a retailer or manufacturer, your inventory is core to your business since it’s the stock you’ll sell and receive money from it. At year end, you’ll have stock that you’ve bought and haven’t sold yet and you must record this on your financial statements.
The big problem with inventory is it makes you vulnerable to fraud. If, for example, you sell small goods that have a large value, such as jewellery, gadgets, etc your employees could easily steal them. And this can have devastating effects on your company’s bottom line.
The good news is there are ways to prevent this from happening in your business if you have the know-how…
Here are seven internal controls you should implement in your inventory process to prevent fraud
The best way to prevent fraud is to use documentation to trace any movement of inventory as it moves around your warehouse:
1. When your warehouse gets goods, have someone sign for them using a “Goods Received Note”.
2. Restrict access to your stores and only release goods from the stores with an approved release slip.
3. Put security measures in place, for example, cameras or physical security presence.
4. Have controls around the inventory as it moves around in the production process.
For example, as products are being manufactured, staff will need raw materials to work with. These raw materials should be signed out of “Raw Materials” and into “Production”.
Use an internal document that resembles a delivery note (Inventory Movement Slip) and make both the “Raw Materials” and “Production” staff sign it to prove that the goods left the “Raw Materials” area and were moved to “Production”.
5. Only release goods from the finished goods store on receipt of an approved picking slip.
This slip must be approved to stand as an approved sales order.
6. Picked goods must move to the despatch area and relevant staff must prepare a delivery note. This note must be compared to the picking slip and signed off by relevant staff.
7. The delivery note must be signed and stamped by security before leaving the premises.
The bottom line: If you deal with inventory, there’s a high risk of fraud. But you can reduce this risk by implement these internal controls in your inventory process.

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