Question

Which of the following most likely would be an internal control procedure designed to detect errors and fraud concerning the custody of inventory?

1) Physical counts of inventory are compared to recorded amounts on a regular basis.
2) Inventory is stored in a secure area with limited access.
3) Inventory records are reconciled to general ledger accounts on a periodic basis.
4) Employees responsible for inventory are rotated periodically.

Answer 1

Physical counts of inventory are the primary method to detect errors and fraud as they provide direct evidence of the actual inventory on hand.

Step-by-step explanation:

The question asks which procedure would most likely be an internal control designed to detect errors and fraud concerning the custody of inventory. Among the given options:

1. Physical counts of inventory are compared to recorded amounts on a regular basis.
2. Inventory is stored in a secure area with limited access.
3. Inventory records are reconciled to general ledger accounts on a periodic basis.
4. Employees responsible for inventory are rotated periodically.

Options 1 and 3 are the most directly involved in detecting errors and fraud regarding the quantity and valuation of inventory. Physical counts (option 1) make it possible to spot discrepancies between the actual inventory and the amounts listed in inventory records which may indicate errors or fraudulent activities. Reconciling inventory records with the general ledger (option 3) also serves to detect irregularities that could suggest error or fraud. However, while both controls are important, physical counts are usually considered the primary method of detecting discrepancies as they offer direct evidence of the actual inventory on hand.