Inventory Situation Case Study
Description
On January 1, CBU installed a new computer system for tracking and calculating inventory costs. On December 31, at years-end closing, CBU’s system reported inventory at $4.5 million for financial statement purposes. At midnight, the auditors performed a physical inventory count and found the inventory total to be $3.5 million. To correct the discrepancy, CBU’s accounting staff processed an adjusting entry to reduce inventory by $1.0 million. The next day, 2 accountants were discussing the events of the previous night.
Accountant A was proud of the audit and said it illustrated the benefit of having a good system of internal control. CBU had followed good internal control procedures by having a regular physical inventory count to safeguard a valuable enterprise resource.
Accountant A was relieved that the problem was resolved: the financial numbers were corrected before they were reported. In short, he felt successful and thought CBU should feel fortunate to have his accounting staff as control advisors. Accountant B felt differently. She was concerned about the bad decisions that were made throughout the year based on the incorrect inventory numbers. She felt that she and the other accountants should have helped develop more timely and effective system controls.
With which accountant’s philosophy do you agree? How can you explain the diverse opinions? What policies or procedures, if any, should CBU develop to avoid such problems in the future?
Your response should also include a Biblical perspective.
Also, try to include accounting and auditing standards to support your opinion.
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