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AUD MCQ – Inventory controls concerning custody of inventory

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

A) Approval of inventory journal entries by the storekeeper.

B) Independent comparisons of finished goods records with counts of goods on hand.

C) Segregation of functions between general accounting and cost accounting.

D) Periodic reconciliation of work in process with job cost sheets.

Independent comparisons of finished goods records with counts of goods on hand is correct. Since the question is focused on custody of inventory, then the control would be focused on making sure that inventory actually exists in the warehouse.

This option is basically describing a physical inventory count, which is when the company observes and counts physical inventory on hand and compares the results to their inventory records. This is a control that is performed monthly or annually to “detect” issues. If inventory is actually missing in the warehouse, the physical inventory count will “detect” the issue.  

All of the other options are incorrect. While these are controls that a company should implement in the inventory cycle, none of these address the custody of inventory. These controls would address the presentation of inventory in the financial statements and would be the best control to “detect” if inventory has been stolen or lost.  

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