LEVEL OF IMPORTANCE OF INTERNAL CONTROL OF INVENTORIES

WITHIN THE CONCEPTUAL FRAMEWORK OF A COMPANY

Ortega Marqués Ana one

Padilla Dominguez Sandy Patricia two

Torres Duran Johana Isabel 3
Ruz Gomez Alexander 4

RECEIVED: February 28, 2017 APPROVED: May 4, 2017

1. INTRODUCTION

The basis of any commercial enterprise is the purchase and sale of goods or services;
hence the importance of inventory management by it. This accounting management will
allow the company to maintain control in a timely manner, as well as to know at the end
of the period a reliable state of the economic situation. It is useful to maintain inventories
in companies because, the prediction capacity is taken into account in order to plan
capacity and establish a production schedule, also fluctuations in bone demand, a
reserve of inventories at hand that implies protection, instability of supplies, price
protection, quantity discounts, lower order costs.

Within this context, internal control arises, determined as a key factor to achieve

an adequate corporate management of the business, since it provides security

regarding the achievement of the objectives and goals set within the framework of

efficiency, effectiveness and economy; These are constituted as the three pillars

that support and protect the resources and assets of the company.

In this sense, Gómez (2003), in his book "Internal Control: considers that it is a

responsibility of all members of the business organization" says the following: "Internal

Control has been designed, applied and considered as the most important tool for the

achievement of the objectives, the efficient use of resources and to obtain the

productivity, in addition to preventing fraud, errors, violation of accounting, fiscal and tax

principles and regulations. "

 The main purpose of the inventory is to provide the company with the necessary materials,

for its continuous and regular development, that is, the inventory has a vital role for the

consistent and coherent operation within the production process and in this way face the

demand, consequently The primary objective of Inventory Control is to determine the most

economical level of inventory in terms of materials, work-in-process, and finished products.

In this sense, the most important current assets on the balance sheet of most companies

are cash, accounts receivable and inventories. Of these three, inventory is generally the most

valuable. Selling merchandise at a price higher than cost provides businesses with the main

source of profit. If production and delivery were instantaneous, there would be no need for

inventories except as a hedge against price changes.

Due to the materiality of this asset, an error in its evaluation can cause a distortion of high
incidence in the financial situation and in the determination of the results of operations. Then,
provide or properly distribute the necessary materials to the company, making them available
at the right time to avoid an increase in lost costs of the same, allowing to correctly satisfy the
real needs of the company to which they must remain fully adapted. Therefore, inventory
management must be carefully controlled and monitored.

An adequate inventory management depends on the efficiency in the registration,

rotation and evaluation of the same; since throughout this process we determine the results
(profits or losses) in a reasonable way, thus being able to establish the financial situation of
the company and the necessary measures to improve or maintain said situation.

Since ancient times, with the problem of dealing with periods of scarcity, in the times of the
Egyptians and other peoples, it was customary to store everything that was necessary in the
different situations arising from external factors, in order to ensure the survival of its inhabitants
and the normal functioning of their lives, this motivated the existence of inventories in a very
subtle and informal way, but not too much at present.

The sustenance of a company is the supply through purchases as well as the sales of the
same articles, facing the demand. It is therefore that inventory management is an important
and vital part for the operation, development and growth of a company. Ethics and Inventory
Management.
 1. THEORETICAL ASPECTS OF INTERNAL CONTROL AND ITS RELATION

TO INVENTORIES.

To initiate this approach, (Estupiñan 2012, p21.) Is cited who states that control “is the
process to determine what is being carried out, valuation and, if necessary, applying corrective
measures, so that the execution is develop according to plan. " Meanwhile (Kirschenbaum,
Mangulan, 2004) maintain that internal control is the basis on which the activities and
operations of a company rest, that is, that the activities of production, distribution, financing,
administration, among others, are governed by internal control. . Internal control is a process
carried out by the board of directors, management and other personnel of the entity, based on
the establishment of strategies for the entire company, designed to identify potential events
that may affect the entity.

While for (Mantilla 2005), it is an instrument of efficiency and not a plan that provides a police-

type or tyrannical regulation, the best internal control system is one that does not damage
business relationships with customers and maintains a high level of human dignity employer-
employee relationships.

The accounting management of the inventory allows the company to exercise timely control
over it, as well as to have information both at any time and at the end of the real, reliable,
transparent accounting period of the economic situation of the company. (Indira López • July
14, 2016).

In Colombia, inventories are of vital importance for the useful life of companies in general

according to the following research by Frankl r. (2008) says: Logistics audit to evaluate the level of
inventory management in companies; Inventory management research is based on the study and

application of mathematical models, segmented into distribution operations or specific processes that

impact inventory without a comprehensive vision. Applying research models for their greater
effectiveness.

The main purpose of the inventory is to provide the company with the necessary materials,
for its continuous and regular development, that is, the inventory has a vital role for consistent
and coherent operation within the production process and thus meet the demand. (Norberto,
2008: 37).

According to the investigation of Edgar Tovar (Venezuela “AUDITOOL” Global Network of

Knowledge in Auditing and Internal Control) Internal control is one that refers to the set of
automatic verification procedures that are produced by the coincidence of the data
reported by various departments or operating centers.

The inventory line is generally the one with the greatest significance within current

assets, not only in its amount, but also because the company's profits come from its

management; hence the importance of the implementation of an adequate internal

control system for this area, which has the following advantages:

• Reduces high financial costs caused by holding excessive amounts of inventories

• Reduces the risk of fraud, theft or physical damage
• It prevents sales from being stopped due to lack of merchandise. It
• avoids or reduces losses resulting from low prices. It reduces the
• cost of taking the annual physical inventory.

Inventory control functions can be seen from two points of view: Operational

Control and Accounting Control.

Operational control advises keeping stocks at an appropriate level, both in

quantitative and qualitative terms, from which it is logical to think that control begins to

be exercised in advance of the same operations, because if you buy without any criteria,

you can never control the level of inventories. This pre-operational control is known as

Preventive Control.

Preventive control refers to the fact that what is needed is really bought, avoiding

excessive accumulation.

The audit, inventory analysis and accounting control, allow to know the efficiency

of preventive control and point out weak points that deserve corrective action. Let's

not forget
that records and the technique of accounting control are used as valuable tools in

preventive control.

The information raised by Luis Alberto Cámara, managing partner of PKF México, August 09,
2009 is highlighted. The correct management of the level of inventories can be a factor of
success or failure of a company. Drawing a parallel between a company and the human body,
cash is like the oxygen that provides the energy processing element for the organs, but
inventories are the food itself, without which the body simply dies. Both elements are important,
and one cannot exist without the other. The company needs raw materials and inputs to be able
to process, convert it into a finished product and sell it, that is, to operate its objective.

The typical processes in inventory management are: purchases, reception, stock

management, consumption, production control and exit for sale. Within the raw material
and input purchase controls, the following risks and controls are the most common:
Figure 1 Purchase controls

Risk

Not carrying out the purchase with

Buy at a price above the Make the acquisition more expensive due to
opportunity, buying below the needs or in
excess. value fair market. undue payments and hidden commissions.

Control

Have determined the minimum and maximum Supervision by personnel outside the process in
essential for the operation and establish the Request quotes from at least three order to monitor that the operation is carried out
points where the purchase has to be different providers. in accordance with the ethics and
requested. conflict of interest of the company.

Source: Own Elaboration (2017)

 Figure 2. Reception controls.

Risk Control

Verification by quality control personnel of the quantities

Receive materials with quantities, specifications or qualities
different from the ordinate and characteristics of the material received. If applicable,
reject, return to the supplier and document the rejection.

Failure to properly record the type and quantity of material Registration of the material in the inventory management system
received. and independent verification of the receipt of the material.

Incorrect valuation of the material in the information systems Registration in the system and its supervision by personnel of a
of the company. different area than the one that receives and guards the warehouse.

Source: Own Elaboration (2017)

Figure 3. Stock management controls:

Restricted access to the

Risk Control warehouse area, registration of
Loss due to theft or loss of
entries and exits of both
material in the warehouse.
people and materials.
Physical count of the regular inventory
at least once a year, analysis,
Loss of control over the investigation and control of the
existence in the warehouse. differences and explanation of them.
Supervision of this process by an area
other than the custody of the materials.
Monitoring at least monthly at the level of
Loss of value of materials due to stocks and age of materials. Independent
deterioration or slow movement authorization by an appropriate level of
dispositions or destructions of obsolete or
damaged material

Source: Own Elaboration (2017)

Figure 4. Production control

Risk Control
Excessive use of raw materials or Use of formulas
inputs in production, waste above preparation, orders or production
the acceptable standard, low level plans with specifications
of production in relation to
precise use of the
with the materials used. subjects

Source: Own Elaboration (2017)

 Figure 5. Consumption of raw materials and outlets for sale:

Risk Control for consumption Control for Sales

• Unauthorized inventory • All exits must be

• all departures must
departures authorized and correspond to an order /
recorded in the remission / invoice
inventory system. to a valid customer.

Source: Own Elaboration (2017)

1.1.Analysis of control activities.

As explained (Perdomo 2008), control activities must be integrated into the risk
assessment process. Once the risks have been analyzed, the administration will develop
control activities that must be carried out appropriately and in a timely manner. They ensure
that the necessary actions are taken to cover the risks that affect the achievement of the
objectives.
Control activities occur throughout the organization, at all levels and in all functions, including
the processes of approvals, authorizations, verifications, reconciliations, review of operational
performance, and so on. Control activities are classified as follows: preventive controls,
detection controls, corrective controls, manual or user controls, computer or information
technology controls, and administrative controls.

Whatever the classification scheme used, control activities must be appropriate to

minimize risks. There is a range and variety of specific monitoring activities that employees
perform each day to ensure that the company adheres to action plans and assurance
regarding achievement of objectives.

Continuing with the previous example in the risk assessment, we identify current problems of the

child as an external risk as well as the physical risk of loss and / or theft of some stock in the
warehouse. In view of this, the control activities implemented by management, in the opinion of
(Ariza & Villasmil 2014) it may be that annually before the child's season the procedure is to carry

out the impact measurement activity and be able to foresee and have contingencies and thus
comply with a preventive control.
 Regarding the physical control of stocks, the control activity will be that any entry and

exit of the same is well documented and approved as a preventive control and the taking

of inventories as a corrective control.

We must bear in mind the various aspects of inventory responsibility affect many
departments, and each department exercises some degree of control over products as
they move through the various inventory processes. All these controls that cover, from
the procedure to develop budgets and sales and production forecasts to the operation
of a cost system by the accounting department for the determination of inventory costs,
constitutes the internal inventory control system, the general functions are: Planning,
purchasing or obtaining, reception, storage, production, shipping and accounting.

Nowadays, since the records and controls of inventories according to (Márquez

2011) are usually carried out by applying computerized systems, which are more

reliable, few companies stop their operations once a year to take inventories, as it is

more reliable and any anomaly is better detected if these are carried out continuously

throughout the year. It is suggested that a physical inventory be taken:

a) When the purchase request is made for any type of article, since at that time they

are usually in their minimum quantity and the counting will be easier and faster.

b) Divide the warehouse into different sections and order that properly planned

rotating and sporadic physical inventories be taken.

c) For critical items due to their value, due to their influence on production or sales, and
depending on their turnover rate, order the taking of inventories more frequently than

the rest of the items.

1.2. Inventory accounting control.

In this regard, (López 2011) argues that by establishing the perpetual inventory
system, which rests on three general ledger accounts, called: warehouse, cost of sales
and sales, in this area, the warehouse account has the character of collective, and its
balance is analyzed by subaccounts, one for type of item, forming the warehouse
assistant with cards, loose leaves, disk or magnetic tape where all entries, exits and
Stock of each type of item, both in units and in amounts at cost price, however, the sum

of balances of the warehouse assistant subaccounts will be equal to the global balance

of the “Warehouse” G / L account; any discrepancies are investigated and corrected.

Regarding the Control Environment, this is determined by Aspects that are

particularly significant when examining the inventories and the cost of the products

sold, among them are:

1. Commitment to competition and human resource policies and practices, They help

ensure that qualified and trained personnel are assigned responsibility for purchasing,

receiving, and storing goods and services. Commitment to the competence of plant

personnel helps to ensure that the manufacturing process is effective and efficient and

that mandatory control activities are carried out.

2. Integrity and ethical values, purchases and cash disbursements These are the
activities that offer a great opportunity for employees, as well as executives, to commit
fraud. Communicating the integrity and ethical values of the latter contributes to two

things: disbursements go to authorized and legitimate assets that are actually received;

the purchase accounting is correct.

3. Organizational structure and assignment of authority and responsibility. Internal

control improves when the customer's organizational structure is appropriate, when the

levels of authority and responsibility in purchasing and production activities are clearly

communicated. It is very important that the personnel in charge of purchasing,

receiving and producing know their responsibility regarding the application of the

controls.
1.2.1. Risk assessment. The risk of material error in financial statements decreases
when executives evaluate and manage the risks related to the purchase and production
of goods and services. Among the aspects that interest them are the following:

1) availability of a supply of goods, services and skilled labor;

2) stability of prices and wage rates;

3) generation of sufficient cash flow to pay for purchases;

4) changes in technology that affect manufacturing processes;

5) inventory obsolescence

1.2.2. Monitoring Purchasing cycle monitor controls include establishing a formal

process to obtain feedback from suppliers, including their complaints regarding
payment. One of the controls of the production cycle is that the production supervisors
observe the execution of various activities and functions, as well as quality and
performance evaluations. Managers should also have a formal process to address the
recommendations of the internal auditors, aimed at improving the purchasing and
production functions, as well as the respective control activities.

It should be noted that the objective of inventory management for (Hugos 2003), is
to maintain stability in the availability of products, which does not mean maintaining
high levels of inventory, but rather that inventory must be balanced to achieve low
levels that guarantee high level of customer service.

In addition to this, reference is made to what was raised by Vieira and Roux (2012),
who state that there are 3 questions that are fundamental for success in logistics
operations, which are: How to define logistics performance? How to measure results?
And what improvement actions should be implemented?

In this sense, to answer these questions, there are generally 2 types of actions:
diagnosis and audit, the fundamental difference between these being that diagnosis is
widely used and allows determining strengths and weaknesses without necessarily
having a previously established reference, while that the audit uses previously
established references such as standards, procedures, regulations, good practices,
among others; to be able to compare the audited with a certain requirement.
3. CONCLUSION

In conclusion, it is necessary to highlight and remember that the internal control

system in organizations has increased in recent years, this due to the practicality of

measuring efficiency and productivity when implementing them; especially if it focuses

on the basic activities that they carry out, since they depend on it to stay in the market.

It is good to highlight that the company that applies internal controls in its operations

will lead to know the real situation of the same, that is why, the importance of having a

planning that is capable of verifying that the controls are fulfilled to give you a better

vision about its management.

Therefore, internal control comprises the organization plan in all the procedures
coordinated in a coherent manner to the needs of the business, to protect and
safeguard its assets, verify its accuracy and reliability of accounting data, as well as
bring efficiency, productivity and custody in operations to stimulate adherence to the
demands ordered by management. From the above it is clear that all the departments
that make up a company are important, but there are dependencies that will always be
in constant change, in order to refine their functionality within the organization.

Inventory management has reached the pinnacle of business administration problems

because it is a critical component of productivity. If inventories are kept too high, the
cost could lead a company to have financial liquidity problems, this occurs because a
"stopped" inventory immobilizes resources that could be better used in more productive
functions of the organization.

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Strategic Leadership Vol. 7 No. 1- January-December 2017. Universidad Simón Bolívar Colombia,
ISSN: 2463-0217. http://revistas.unisimon.edu.co