An effective internal check system for stores (inventory) is essential for ensuring that all inventory transactions, including receipt, storage, and issue of goods, are accurately recorded, properly authorized, and regularly monitored. A robust internal check system helps prevent theft, misappropriation, errors, and inefficient use of inventory, contributing to better resource management and financial integrity. Here’s how an effective internal check system can be implemented for stores (inventory):
1. Segregation of Duties
Receipt of Goods: One person or department should be responsible for receiving inventory items from suppliers. This individual should inspect the goods and compare them to the purchase order and delivery note to ensure accuracy. This person should not be involved in recording or issuing the inventory.
Recording Inventory: A separate person or department should be responsible for recording the received inventory in the inventory records or stores ledger. This ensures that all items received are accurately documented and entered into the system.
Issuing Goods: The responsibility for issuing inventory should be handled by a different person, typically a stores clerk or manager. The person issuing goods should not be involved in the receipt or recording process, ensuring a check on all inventory movements.
Inventory Reconciliation: A different employee, typically in the accounting or audit department, should periodically reconcile physical inventory counts with the inventory records to ensure the accuracy of the recorded quantities.
2. Proper Documentation
Goods Received Note (GRN): Upon receipt of inventory, a goods received note (GRN) should be prepared, detailing the items received, their quantities, and any discrepancies from the purchase order. This document should be signed by the person receiving the goods and retained for future reference.
Issue Requisition: When inventory items are needed by various departments, an inventory requisition form should be filled out by the requesting department, specifying the items and quantities needed. This form should be approved by a supervisor before the goods are issued.
Stores Ledger: A stores ledger or electronic inventory system should be maintained to record all inventory movements—both receipts and issues. The ledger should reflect the quantities, unit cost, and total value of the inventory on hand.
3. Stock Identification and Labeling
All inventory items should be clearly labeled with a unique identification number or SKU (stock-keeping unit) to ensure that they are easily identifiable. Proper labeling helps reduce the risk of errors when recording or issuing goods.
Physical stock should be arranged systematically in the stores area, with clear separation between different items to avoid confusion.
4. Physical Security and Access Controls
The stores or inventory area should be physically secured, with access restricted to authorized personnel only. This can be achieved by using locked storage areas, security cameras, or electronic access control systems.
Regular checks should be conducted to ensure that inventory items are stored securely and are not vulnerable to theft, loss, or damage.
5. Regular Inventory Reconciliation
Periodic physical inventory counts should be conducted to verify that the quantities recorded in the stores ledger match the actual physical stock on hand. Any discrepancies between the recorded and actual quantities should be investigated and resolved.
Inventory reconciliations can be done monthly, quarterly, or annually, depending on the nature and value of the inventory. High-value items should be reconciled more frequently.
6. Perpetual Inventory System
A perpetual inventory system should be used to maintain a continuous record of inventory balances. This system automatically updates the inventory records whenever goods are received or issued, providing real-time information about stock levels.
The perpetual inventory system should be supported by regular physical counts to verify the accuracy of the system and detect any discrepancies.
7. Control over Slow-Moving and Obsolete Stock
Regular reviews of inventory records should be conducted to identify slow-moving or obsolete stock. These items should be flagged for disposal, sale, or write-off to ensure that inventory levels remain efficient and do not become a financial burden.
Controls should be in place to ensure that obsolete or damaged stock is properly accounted for and removed from inventory records.
8. Reordering and Stock Levels
Minimum and maximum stock levels should be established for each inventory item to ensure that there are adequate supplies without overstocking. Automatic reorder points can be set in the inventory system to trigger new orders when stock falls below the minimum level.
Regular monitoring of stock levels ensures that the organization does not run out of essential items or tie up capital in excess inventory.
9. Independent Audits and Surprise Stock Checks
Regular independent audits of the inventory system should be conducted to ensure that internal controls are being followed and that inventory records are accurate. These audits can identify areas where controls may be weak or where fraud may be occurring.
Surprise stock checks should be conducted without prior notice to the store staff. This ensures that any discrepancies in inventory are detected and prevents attempts to conceal shortages or overstatements.
10. Valuation and Reporting
Inventory should be valued accurately using a consistent valuation method, such as First-In-First-Out (FIFO), Last-In-First-Out (LIFO), or Weighted Average Cost. The valuation method should comply with accounting standards and reflect the true value of the inventory.
Regular inventory reports should be generated and reviewed by management. These reports provide insights into stock levels, inventory turnover, and the overall efficiency of the inventory management process.
An effective internal check system for stores (inventory) is vital for maintaining control over inventory levels, preventing theft, and ensuring that all inventory movements are accurately recorded and monitored. By implementing key controls such as segregation of duties, proper documentation, regular reconciliations, and independent audits, organizations can safeguard their inventory and improve overall efficiency. These measures help prevent financial loss, ensure accurate reporting, and support better decision-making regarding stock management.
