Question

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?

1) supplies of relatively little value are expensed when purchased
2) the warehouse manager is responsible for maintenance of perpetual inventory records
3) perpetual inventory records are maintained only for items of significant value
4) the cycle basis is used for physical inventory counts

Answer 1

The internal control weakness is the warehouse manager being responsible for perpetual inventory records, as it causes a conflict of interest and segregation of duties is not maintained.

Step-by-step explanation:

The internal control weakness for a company with a large number of individual inventory items is: the warehouse manager being responsible for maintenance of perpetual inventory records.

Assigning the responsibility for the maintenance of perpetual inventory records to the warehouse manager is a control weakness because it presents a conflict of interest. The manager who is also involved in the physical handling of the inventory could potentially manipulate records to conceal errors or irregularities. Good internal control practices require that duties be segregated. This means that the physical custody of assets, such as inventory, should be separate from the record-keeping of such assets.

To enhance internal controls, a different individual or department should be tasked with maintaining the records, ideally someone with no direct access to the inventory. This segregation reduces the risk of theft, fraud, and errors, providing better safeguarding of the assets. In contrast, the other options listed are accepted practices: expensing low-value supplies simplifies accounting, maintaining records only for high-value items focuses resources where they are most needed, and using a cycle count for inventory is a recognized method for periodic reconciliation.