Question

If a manufacturing company's inventory of supplies consists of a large number of small items, which of the following would be considered a weakness in internal controls?

a. supplies of relatively low value are expensed when acquired
b. supplies are physically counted on a cycle basis whereby limited counts occur quarterly and each item is counted at lease once annually
c. the stores function is responsible for updating perpetual records whenever inventory items are moved
d. perpetual records are maintained for inventory items only if they are significant in value

Answer 1

A weakness in a manufacturing company's internal controls could be maintaining perpetual records only for high-value inventory items, ignoring the aggregate value of smaller items that could lead to significant discrepancies.

Step-by-step explanation:

If a manufacturing company's inventory of supplies consists of a large number of small items, one potential area of weakness in internal controls could be if perpetual records are maintained only for inventory items that are significant in value.

This approach may overlook the aggregate value of smaller items, which, when combined, could represent a substantial value or quantity. There could be a challenge in tracking the usage and replenishment of these low-cost items accurately, leading to discrepancies in inventory records and actual stock levels.

More frequent physical counts or a change in policy to include all items in the perpetual inventory system, regardless of individual value, could strengthen internal controls. Without these controls, there is a risk that losses or theft of small supplies could go unnoticed, and the financial statements could be misstated due to inventory inaccuracies. Implementing a robust system that takes into account both high-value and low-value items will ensure more accurate accounting and less risk of inventory mismanagement.