An Assessment Of Internal Control Over Inventory Of Merchandizing

Company
(A Case study on KAS international private limited company)

A Research Paper Submitted to the Department of Accounting For The

Partial Fulfillments Of The Requirement Of B.A Degree In Accounting.

Prepared by:- Rahma Redwan

Advisor:- Muhammed Arage

Accounting Department
College Of Business And Economics
Jimma Universtiy

May , 2012
Jimma,Ethiopia
Acknowledgment
First and for most great thanks are given to almighty Allah. He has helped me in
every aspect of my life. Next I am highly appreciative to my respective advisor
Muhammed Arage who tirelessly checked, commented and directed my Paper
work and made it fruitful At last am also greatly owe a favor to my beloved family
for their continuous back-up and closeness.

i
Abstract
The research study conducts on internal control over inventory for KAS
International Trading Private Limited Company. It is worth conducting research
on this topic because internal control over inventory plays a significant role in
order to evaluate the performance of the organization.

It is difficult to collect data or information from all individuals of the organization

because of limitation of resource. To solve this problem the researcher uses
random sampling due to the assumption that the sample provides the required
information easily. The researcher collected data by using questionnaire and
interview because of its lesser time consumption and easy to elaborate and analyse
it.

Finally, conclusion and recommendation made on internal control over inventory

from employees and also create awareness to management of KAS International
Trading Private Limited Company regarding the problem faced on control and
keeping systems and to recommend some suggest solutions to them. The
conclusion and recommendation that given by the researcher uses for various
manufacturing enterprise help for strength of the internal control system of
inventory and lead to increasing their profitability.

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Table of contents
Contents Page
Acknowledgment..............................................................................................................i
Abstract............................................................................................................................ii
Table of contents............................................................................................................iii
Chapter one: Introduction....................................................................................................1
1.1. Background of the organization................................................................................1
1.1.1. Vision.................................................................................................................2
1.1.2. Mission..............................................................................................................2
1.1.3. Objective............................................................................................................2
1.2. Statement of the problem..........................................................................................2
1.3 Research questions.....................................................................................................2
1.4. Objective of the Study..............................................................................................3
1.4.1. General objectives.............................................................................................3
1.4.2. Specific Objectives............................................................................................3
1.5. Significance of the Study..........................................................................................3
1.6. Scope of the Study....................................................................................................3
1.7. Limitation of the study..............................................................................................4
1.8. Organization of the study..........................................................................................4
Chapter Two: Literature review...........................................................................................5
2.1.Concept and definition of internal control.................................................................5
2.1.1. Management responsibility................................................................................5
2.1.2. Responsible assurance.......................................................................................5
2.1.3. Inherent limitation.............................................................................................6
2.2. Definition of inventory.............................................................................................6
2.2.1. The flow of inventory cost.................................................................................7
2.2.2. Inventory costing...............................................................................................7
2.2.3. Inventory Method and cash flow.......................................................................7
2.3. Definition of inventory Control................................................................................8
2.4. Nature of Inventory...................................................................................................8
2.4.1. Periodic inventory system..................................................................................9

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 2.4.2. Perpetual inventory system................................................................................9
2.5. Types of Inventory..................................................................................................10
2.6. Inventory function..................................................................................................11
Chapter Three: Research Methodology and Design..........................................................12
3.1 Research design.......................................................................................................12
3.2. Source of data.........................................................................................................12
3.2.1. Primary Sources...............................................................................................12
3.2.2. Secondary source.............................................................................................12
3.3. Data Collection Technique.....................................................................................12
3.4 Sample size..............................................................................................................12
3.5. Method of data analysis and Presentation..............................................................13
Chapter four: Data Analysis and Interpretation.................................................................14
4.1. Activity of the company.........................................................................................14
4.2. KAS International Trading Private Limited Company organization structure of
administration and finance department.....................................................................15
4.3. The main product export by company....................................................................15
4.4. Demographic characteristics of respondents..........................................................16
4.5 Issuing of material and stock...................................................................................21
Chapter –Five: Conclusion and Recommendation............................................................24
5.1. Conclusion..............................................................................................................24
5.1. Recommendation....................................................................................................25
Appendix............................................................................................................................26
Appendix............................................................................................................................28
Reference...........................................................................................................................29

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Chapter one: Introduction
According to areans and lobbckin (1999,p288) in their book titled “Auditing and
integrated application” approach, Internal control is a process affected by an entity
board of director and other personal that is designed to provide reasonable
assurance regarding the achievement of the original objective. This include
effectiveness and efficiency of operations, reliability of financial reporting and
compliance with applicable lows and regulations. Internal control also refers to all
coordinate methods and measures with in an organization or with in a system
adopted to safeguard assets, check according and reliability of accounting data
promote operational efficiency and encourage adherence to prescribed managerial
policy
As a part of internal control system, control over procurement of material and
control over proper handing of inventory plays a significant role in order to
evaluate the performance of the origination. Inventory being continually purchased
and sold is one of the most active elements in the operation of any organization.

There fore the control system designed by responsible persona plays a key role for
the achievement of the organization objectives. So this study focus on internal
control over inventory in the case of KAS International Trading Private Limited
Company.

1.1. Background of the organization

As the researcher has observed the organizations website KAS International Private
Limited Company was established in 1991 GC. It is privately owned business
organization engaged in international trading. This organization exports various
types of all seeds, pulses, spice and cereals.
The company has 130 permanent and 1050-1100 temporary employee, also a
member of Ethiopian commodities exchange (ECX). The head office of the
company located at Addis Ababa.

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1.1.1. Vision
With in the coming 10 years KAS international private limited company aspires to
become the center of excellence and one of the most competent in export business.
1.1.2. Mission
The mission statement of KAS international trading causes for developing export
business and strength on of the import from developed countries.
1.1.3. Objective
Export agricultural and manufactured products to the world to do business in
partnership with local and foreign companies jointly for mutual benefit. Import
wide range of goods to satisfy the expending needs of the domestic customers.

1.2. Statement of the problem

In accounting and organizational theory internal control is defined as the process
affected by an organizations people and information technology system, designed
to help the organization accomplish specific goal and objective. It is a means by
which an organization resource are directed, monitored and measured. It plays an
important role in preventing and testing fraud and protecting the organizational
both tangible and intangible assets.
As the researcher has observed in the website at the organizational level, internal
control objectives related reality of financial reporting; timely feedbacks on the
achievement of operational are strategic goal and complains with lows and
regulations. At the specific transactional level, internal control refers to the action
take to achieve a specific objective. Internal control procedure reduces variation,
leading to out come that are more predictable.

1.3 Research questions

Does inventory methods of the company affect the financial performance of the
organization?
What factor affects the internal control of inventory?
What kind of internal control over inventory the organizations have?
What kind of inventory system uses the company?

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1.4. Objective of the Study
This research paper has general and specific objective in which the research work
is based on.
1.4.1. General objectives
The main objective of the study is to assess the internal control system over
inventory of KAS international trading Private Limited Company.
1.4.2. Specific Objectives
1. To identify major problems of the company direct and indirect affect the
internal control
2. To find out what type of internal control over inventory the company
use.
3. To review the main feature of internal control over inventory.
4. To give suggestion & solution in order to solve the problem after
investigation over take.

1.5. Significance of the Study

This study help the management of the organization in order to identify the various
possible risk of failure or mistakes made by employ in relation to internal control
over inventory also enable the managers' aware of the importance of internal
control. It is helpful to the auditor in this organization to know their role in the
organization on the other hand. It allow the researcher to practice a larger similar
study could be performed in organizational sector and it uses as an additional
reference to the existing literature can be used as a spring boards for other
researchers who wish to conduct and search in same area.

1.6. Scope of the Study

Since internal control has many factors like internal control over plant asset, non
cash payment, cash, non cash receipt etc. The research gives more concentration
on material inventory for KAS International Trading Private Limited Company.

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1.7. Limitation of the study
In conducting the study, some constraints age faced. The constraints are.
Lack of time and finance to go every day and collect the data in detail.
Some staff members are not willing to give the right answer.
The class schedule is not suitable for the researcher to go in depth.

1.8. Organization of the study

The study will have five main chapters. The first chapter tries to provide
background of the study, background of the organization, statement of the
problem, objective of the study significance of the study, scope and limitation of
the study and organization of the paper.

The second chapter summarize the literature review. The third chapter presents
research design, source of data and data collection, target population & sampling
methods, and method of data analysis and presentation. Then fourth chapter,
which is the main body of the paper KAS international Trading Private Limited
Company data analysis and presentation is presented, and the fifth chapter
provides conclusion and presentation of the study.

4
Chapter Two: Literature review
This part of the study reviews the importance of internal control over inventory for
an organization. It reviews definition of internal control by many authors in there
book, the components of internal control and also define inventory in brief. At last
review the methods of a ascertaining the inventory quantity.

2.1.Concept and definition of internal control

Areans Lobbeck (1999,p310) in Auditing and integrated approach book define
internal control as a system that consists of policies and procedures are often
called control and collectively they comprise intities internal control. An
understanding of internal control specially those controls related to reliability of
financial reporting are important to the auditors purpose
Before examining both client and auditor to concern about internal control, set us
see a review of several key concepts related to internal control in general.

According to Areans Lobbeck (1999.p311) in his book “Auditing and integrated

approach” there are three concepts underlies the study of internal control The thee
concepts are;

2.1.1. Management responsibility

Management not the auditor must establish and maintains the entity’s control. This
concepts is consists with the requirement that the management is responsible for
the preparation of financial statement in accordance with GAAP.

2.1.2. Responsible assurance

A company should develop internal control that provides reasonable, but not
absolute assurance that the financial statements are fairly stated. Internal control
are developed by management after considering both the cost and benefit of
controls. Management is often unwilling to implement an ideal system, because
the cost may be too high. It also less expensive to have auditors to do more
expensive auditing than to occur high internal control cost.

5
2.1.3. Inherent limitation
Internal control never be regarded as completely effective regardless of case
followed in their designed and implementation. Even the system personal could
design an ideal system. Its effectiveness depends on the competence and
dependability.

ALCP professional standard defines internal control as a process affected by an

entity board of director, managers and other personal designed to provide
reasonable assurance regarding the achievement of objectives in the following
category;

Operational control-relating to effective and efficient use of entity resource.

Financial reporting–control relating to preparation of reliable published financial
statement.
Compliance control-relating to entity’s compliance with applicable laws and
regulations.

2.2. Definition of inventory

Dobler in his book purchasing and supply management stated that one of the
largest current assets of are tars store as of a whole sale business is inventory of
merchandise. The sale of this merchandise is the major source revenue. Inventory
is converted in to cash with in the companies operating cycle and, there fore, is
regarded as a current asset in the balance sheet, inventory is listed immediately
after account receivable, because it just one step further removed from conversion
in to cash than account receivable.

In merchandizing company, the entire inventory is purchased is ready to sell

condition. A manufacturing company how ever, has three type of inventory that
are finished good which is ready for sale, wore in process, which are goods in the
process of being manufactured and raw material which are materials and

6
component parts used in the manufacture of finished products. 2.2.1.The flow of
inventory cost

2.2.1. The flow of inventory cost

Inventory is an asset and like most other assets usually shown in the balance sheet
at its cost. As item are as item are sold from this inventory their costs are removed
from the balance sheet and transfer in to cost of good sold, which is offset against
sales revenue in the income statement.

2.2.2. Inventory costing

If the items in inventory are homogenous in nature (identical, except for
insignificant differences). It is not necessary for the seller may follow the more
convenient practice of using cost flow assumption.

Three flow assumption are widespread use:

Average cost- This assumption value all merchandise unit sold and unit remaining
in inventory at the average for unit cost. (in effect, the average cost method
assumes that the units are with draw from inventory in random order.
First in First out (FIFO)- As the name implies, FIFO invoves the assumption that
good sold are the first units that were purchased, that is the oldest goods on hand.
Thus the remaining inventory is comprised of the most recent purchased.
Last in first out (LIFO)- under LIFO, the unit sold are assumed to be those most
recently acquired the remaining inventory, therefore, is assumed to consists of
earliest purchases.

2.2.3. Inventory Method and cash flow

The cash payment relating to inventory occur when supplier are paid. In the
statement of cash flow, these outlays are included among the cash payments for
operating activity. For merchandizing and manufacturing businesses, these
payment represent the companies largest use of cash.

7
2.3. Definition of inventory Control
According to Cushing Romney (1993,p304) in his book “Accounting information
system in business organization’ define inventory as it is a stored resource that
used to satisfy a current as future need.

Inventory control is a process being controlled by an inventory control system in

operation of ordering, storing and making available when needed with in the
organization various.

The most significant input variable to an inventory control system is either the
expected rate of sale company of the plane usage requirement for including the
amount of inventory purchases, purchase return, spoilage and shiping items are
also important consideration. These variables are used to predicate the future
inventory level in order to determine the best time to record.

2.4. Nature of Inventory

Moushich (1999, p397) in his book ‘Intermediate accounting’ stated that inventory
consists of good held for consumer parciully completed goods, materials, and
supplies to be used in production. Inventory items are acquired and sold
continuously by mechanizing enterprise or acquired place in production, convert to
finished product and sold by manufacturing enterprises. The sale of merchandize
or finished product is primary source of revenue for must non service business
enterprise.

In a retail or merchandizing operation, inventories consists principles of products

purchased for resale in their existing form. Aretais enterprise also may have an
inventory of supply. Such as wrapping paper, cartons and stationeries. A
manufacturing enterprise has several type of inventory: material part, factory
supply, good in process sand finished goods.
Material and parts are basic commodities or others products obtained directly from
natural resources or acquired from others which will be incorporated physically

8
into the finished product. Factor supplies are similar to material, but the relation to
the end product is directly for example in manufacture of shirts, closes is
inventories as materials where as the clearing supplies and the oil to lubricants the
machinery are classified as factory supply.

Good in process, consists of partially completed products and includes the cast of
direct materials, direct labour and factory over head. Finished good are item that
are completed and ready for sale and include the same cast elements as those good
in process.
Mousech (1998, p398) and others stated the two methods of ascertaining the
inventory qualities.

2.4.1. Periodic inventory system

Relies on a physically count of goods on hand as a basis for control, management
decision and financial accounting. Although this procedures may give accurate
result on a specific date, there is no continuing record of inventory.

2.4.2. Perpetual inventory system

Requires continuous record of all receipts and withdrawals of each item of
inventory. The perpetual record is sometimes is kept in terms of quantity only.

This procedure provides a better bases for control is obtained under the periodic
system. When the perpetual system is used, physical count of goods owned by a
business enterprise must be made periodically to verify the accuracy of inventory
report in the accounting record. Any discrepancy discovered must be made
periodically t verify the accuracy of inventory report in the accounting record. Any
discrepancies discovered must be corrected, so that the perpetual inventory records
are in agreement with the physical count.

9
2.5. Types of Inventory
There are two type of inventory these are merchandize and manufacturing
inventory.

Merchandizing inventory acquires merchandize for resale to customers. It is the

selling of merchandise, listed of service, that means the activity of merchandizing
enterprises differ from the activity of service enterprises (Fess. Warren 1984. p.
138).

The cast of merchandising inventory include the purchase price plus any other
costs necessary to get the good in condition and location of sale. (Horncren,
2003:P.686)

Unlike merchandising companies, manufacturing companies actually produce the

goods they sell to whole sellers, retailers, or other manufactures. Inventory for
manufacturing consists of raw materials, work in process and finished goods
(Horncren, 2003 P. 38)

Raw materials represent the cost of components purchased from other

manufactures that will become part of the finished product.

Work in process inventory refers to the product that are not yet complete the cost
of work in process include the cost of raw materials used in production. The cost
of labour that can be directly traced to the goods in process, and an allocated
portion of other manufacturing cost, called manufacturing over head.

Finished good manufacturing companies generally dieselize, either in a note or

directly in the balance sheet the doll or amount of each inventory category.

10
2.6. Inventory function
Dable Burt stated that the function of inventory include the following:
Inventory is used to meet anticipated customers demand- inventory referred to as
anticipation stock because they are held to society expected demand and also used
to smooth production requirements. That is, firms that experience seasonal patters
in demand often build up inventories during pre-season periods to meet overly
high requirement during seasonal periods.

To do couple operations firms have used inventories as butter between successive

operations to maintain continuity of production that would otherwise be disrupted
by events such as breakdowns of equipments and accidental causes a portion of
operations to shot down temporarily on the other hand to protect against stock
outs:- delayed deliveries and unexpected increases in demand increases the risk of
shortage. The risk of shortage can be reduced by holding safety stock, which is
stock in excess of average demand to compensate for variability in demand and
lead time. Other functions of inventory are: taking advantage of order cycles to
minimize purchase requirements to hedge against prices- occasionally a firm will
suspect that a substantial price increases in about to occur and purchase largest
normal amounts to beat the increase. Permiting operation: There will be some
work in process inventory and taking advantage of quantity discount; suppliers
may give discount on large order.

11
Chapter Three: Research Methodology and Design
This chapter contains the method that the research use in conducting and the way
how the researcher reaches to the conclusion.

3.1 Research design

In order to carry out well organized study research method is important. The
research method applied in this study is descriptive research design because the
main purpose of the research is to study on internal control over inventory of KAS
international private limited company.

3.2. Source of data

3.2.1. Primary Sources
The primary source of the data is collected from questionnaire and interview with
financial manger, purchasing department and production design and store keepers.

3.2.2. Secondary source

The secondary source of the data is gathered from internal and external written
documents of the company. Such as financial statement, Broacher, production
manual, inventory manuals and so on.

3.3. Data Collection Technique

The researcher used quationary and interview with random sampling method,
because this technique is easy to evaluate lots sample and does not take much
time.

3.4 Sample size

The sample size for this research is 20 these largest population consists of 2 from
administration, 10 from production, 2 from store, 4 from purchasing and 3 from
marketing department.

12
3.5. Method of data analysis and Presentation
The researcher used necessary qualitative and quantitative method to analyze the
data collected from primary and secondary source. Based on the analysis the
researcher present some conclusion and recommendation.

13
Chapter four: Data Analysis and Interpretation
The research was focus on KAS international trading private limited company. Inventory
control system. In conducting the research the methodology adopted are interview
questionnaires, and also the researcher get a chance to observe the inventory record, their
situation, coding and procedure followed to inward and out ward inventories from stores.
This chapters presents the result obtained from the analysis of the study, interpretation
and discussion. The discution section follows data analysis and interpretation.

4.1. Activity of the company

As the researcher observed from the 2011/12 broachunts of the company KAS
International Trading Private Limited Company is established in 1991 E.C as import,
Export and Commission agent. Satisfying customers are the main achievement and goal
for the organization. it’s more than 17 years of hard working and experience in export of
Ethiopian agricultural product to Europe, USA, middle east and far east brought the
company to passion it hold now in the market.

The company has modern warehouse scattered at different site all over the country, the
ware house are built a side each of the major formers of these products and the central
Warehouse in Addis Ababa is a good sited to process and send the average product
immediately to the customers in all over the world.

14
4.2. KAS International Trading Private Limited Company organization structure of
administration and finance department

General Manager

Administration and Finance

Administration and Finance General Service

General Service

General Cost Account

Account

4.3. The main product export by company

As the company is established as import export agent auto spare part and decoder,
building material and other machineries are used as import items. As a part of all
seed and poses which contain sesame seed, Niger seed, write pea beans, red
kidney beans, brown beans, horse bean chick peas, haricot bean, light speckled
beans, many beans are export items and also part of spice which contain pepper
(whole), pepper (powder), black comin, dry ginger, ginger fresh, Turmeric, Fenu
Greek, and mustard are export item.

The researcher distributed 20 questionnaires from those questionnaires 18 are

collected. This paper is interested to asses and evaluate internal control system of
KAS international Trading Private Limited Company.

15
4.4. Demographic characteristics of respondents
As explained in the above paragraph from the total respondent of 18, 14 are male
and 4 are female which means the male take the majority number.
Graph 4.1 Age of respondents

60 55.5
Percentage of respondents

50
40
27.78
30
20 16.67

10
0
20-25 30-35 40-45
Answer

Source: Questionnaire
From the above graph 55.5% of respondents age between 26-35age, 27.78 of the
respondents are between 20-25 and 16.67% of the respondent are above 35 from
this most of the respondents are 26-35 age.

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Graph 4.2: respondents educational back ground

Percentage of respodnents
50 44.44

40
27.77
30
16.66
20
5.55
10

0
Certificate Diploma First degree Above degree
Answer

Source: Questionnaire
As it is indicated in the above graph, the respondents educational level is more of
the first degree. This insures that most of the employees are well educated and
they are much aware of internal control over inventory.

Out of 18 respondents from the company 2 of them are purchased, 3 marketing, 9

production department, 1 store keeper and 2 administration.

Graph 4.3. Respondents work experience

45 38.89
40
35 27.78
Percentage of
respondents

30 22.2
25
20 11.1
15
10
5
0
1-3 year 4-6 year Answ er 7-10 year abvoe 10 year

Source: Questionnaire
As it is indicated in the above graph the service respondent is categorized in to
four categories that is from 1-3 years, 4-6 years, 7-10 years and above 10 years.

17
This insures that most of the employees are well experienced, so they can do their
work in a good.
KAS International Trading private limited company has different kind of stock
that is use for accomplishing of its objectives. In the company there are mainly
two stores and control by one store keeper. The stores being arranged in a ay that
material can be accessed easily in the time of issue of physical inventory taking.
The stores main an efficient system of stock record and control system however; it
uses manual system of recording and controlling

Graph 4.4 Responsibility of purchasing requisition

Percentage of respodnents

60 55.55
50
40
27.77
30
20 16.66

10
0
store keeper any body we don't know
answer
Answer

Source Questionnaire
Graph4.4. show from the total respondent of the organization employees ten
respondents answer that in the organization the store keeper is responsible for
prepaying purchase requisition an five, respondents said we don’t know the
responsible person the remaining three respondents said no body can be body can
be prepared purchase requisition.

From the above graph the researcher has interpreted that from total respondents of
the organization employees 56% of the respondents that the store keeper is
responsible to prepare purchase requisition so that the organization is working in a
good situation.

18
Graph 4.5: Material receiving

70 58
percentage of respodnents

60
50
33
40
30
20 11
10
0
After compard Not compared we don't know
with order with order
Answ er

Source: Questionnaire
Graph 4.5 indicates that from total respondent of the organization 58%
respondents answer that all materials received after compared with the order and
11% respondents answer that all materials are not received after order and the
remaining 33% respondents answer we don’t know.

To receive goods, which is purchased or received in a form of gift or other, the

store keeper should get the appropriate documents. These documents like invoice
description of goods, purchase order, the supplier’s packing list, supplies advice
note, letter (if necessary). These documents must be provided with good supplied
by the purchasing section or purchaser.
The store keeper should check;
- weather the item area per the section
- weather quantity received is as per the order
- If there is any discrepancy the store keeper will report the store section
head. If the item purchased needs technical inspection the concerned
department representative usually the person who requested the item)
should be presented when the stock keeper receives the item.

19
The stock keeper will prepare a good receiving note. This good receiving note
should contain the description of the purchased item like.

Data receiving, quantity receiving, unit price, total price, stock or fixed asset code,
store ad purchase request number, suppliers name, suppliers invoice number,
remark place of signature. Appropriate personnel, store keeper, store head, should
sign the prepared good receiving note. The original good receiving note should be
given to purchaser with the suppliers invoice. The store keepers will arange the
item on its own bin card. Bin card contains description of items and stock codes,
location number, unit of issue, quantity received and issued, balance remaining
goods receiving note number and delivery, number and date. The store section will
record the receiving item on the stock. The stock card form is the same with that of
bin card. It will be prepared for controlling purpose.

According to the above graph, the researcher can be concluded about receiving of
materials, the company has to adjust its policy. The receiving materials issue is
crucial for the company profitability.

Graph 4.6 Safety stock in the company

percentage of respodnent

50 44.44
38.88
40

30

20 16.66

10

0
Very good Good Poor
Answer

Source: Questionnaire

Graph 4.6 shows that from the total respondent of the organizations employee 3 of
respondent answer that the organization has uses minimum inventory level of

20
safety stock and 7 respondents answer that there is a case that the material is
purchased after the inventory become below safety stock and the remaining 8
respondents answer, minimum stock of the company is poor or low.

Safety stock is very important for the company. From the above graph the
researcher has collected that from total respondent of organizations the company
did not understand the use of safety stock. So that it has to wake up to prepare a
good manual indicate about safety stock.

The company is working in manual. This is very difficult to get update

information quickly. From the above statement the researcher can suggest the
company has to change the manual to computerize.

4.5 Issuing of material and stock

Stock keeper is able to issue materials requested when properly authorized
requisition are presented. They keep specimen signature of personal authorized to
approve issues according to the company’s authority guidelines. The requisition
should be properly filled and the store section head will check the request is
according to budget. The store keeper will also check the adequate availability of
requested item. If the item are available to issue voucher, the store keeper will
with draw the items are receives of the item should sign on the store issue voucher.
The store keeper also sign on the store issue voucher. The store keeper fills the
quantity issued on bin card. The researcher observed that material ledger card are
maintained for receipt and issuance of materials.

21
Graph 4.7 Method of storing the product

Percentaage of respondents 80
67
70
60
50
40
30 22.22
20 11.11
10
0
Particcular place Note store in we don't know
particular space
Answer

Source: Questionnaire

Graph 4.7 shows that from the total respondents of the organization employee 12
respondents answers that the materials are stored in a particular place and
protected carefully and 4 respondents answer that materials are not stored in a
particular place and protected carefully the remaining 2 respondents answer we
don’t know. From graph 4 the researcher has interpreted that from the total
respondent of the organization employee 67% of respondent answered that
materials are stored in a particular place. The company has a good situation in
storage materials. The company uses perpetual inventory control system.

Scrap inventory:- materials which have outlived their useful life as for which there
is no demand in their original form are classified as scrap. Scrap is defined as
process wastage. KAS International trading private Limited Company should
collect its scrap inventory in one place and sale for animal fatening.

22
Graph 4.8 Internal control system of the company

Percentage of respondents
100
83.33
80

60

40
17
20

0
Very good Good
Asnswer

Source: Questionnaire

Graph 4.8 indicates that from the total respondent of the organization employee 15
respondents answer that there is strong internal control over inventory. 3
respondents answer that there is no strong internal control over inventory From the
above graph the researcher can concluded about the organization internal control
system of inventory is very good.

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Chapter –Five: Conclusion and Recommendation
5.1. Conclusion
The main point of the study is to point out the major findings and results of the
study and to foreword some recommendations regarding major constraints and
problems regarding the internal control over inventory of KAS International
trading private limited company.
- The company has only one permanent employee who is working in two
stores regarding inventory control. This is very difficult to handle inventory
of the company.
- The company prepare purchase requisition before any materials purchasing.
- Stocks card recording and bin card maintain by the store keepers in
quantity. Receipt of material will be evidenced by pre numbered financial
inventory goods receiving note.
- The company uses perpetual inventory system for all its stocks to determine
the amount of inventory on hand.
- The company is applying weighted average method to determine the cost of
materials used and ending inventory.
- After counting is finished, the result of inventory will be present in report
to management and finance division.
- Damaged, broken and spoilage, items are stored separately in condiment
way for count how every; the company did not utilize these items
efficiently.
- The company does not consider the ordering, holding and stock out cost
unlike other companies do
- KAS international trading private limited company uses manual recording
for controlling system currently.
- The company should collect its scrap inventory in one place and sale for
animal fattening.

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5.1. Recommendation
KAs International Trading private Limited Company has a good internal control
over inventory, Nevertheless, there are some problems regarding to inventory
Control in this company. These include that the company order and purchase
inventories experience. It does not consider ordering, holding and stock out cost
moreover; manual system of recording and controlling stock is the other abstract
to user activity. There fore recommendation or suggestion will be forward to KAS
International Trading Private limited company.
- One of the objective of achieving an effective internal control structure is to
establish a logical plan of organization with clear line of authority and
responsibility. And segregation of the operating recording and custodian
functions among divisions or individuals. Failure to segregation key duties
and responsibilities increases the possibility of asset being
misappropriation. There fore the company has to assign an independent
staff members to perform a reconciliation of physical inventory of the
company.
- KAS International Trading has to recruit additional employees to control
the store because one permanent staff is not sufficient for two stores.
- The company, should calculate and know the reorder point of inventories at
what point order has to be placed.
- The company has to change the broken, damage and spoilage materials to
capital. It must utilize efficiently.
- The company should replace the existing manual system of inventory
management by automated system. Automation helps to proper managing
of inventory classifying and reporting of stock. If the company will use the
above suggestion, the mentioned problems will be avoided.

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Appendix

Jimma University
College of business and economics
Department of accounting

Questionnaire for employee and managers

Dear Respondents
The objective of this questionnaire is to collect relevant data on internal inventory
control in your organizations. Your response will be used only for conducting
research for the completion of BA degree in accounting your response will be kept
confidentially and will not be used for any other purpose. therefore, you are
kindly required to respond by putting “” mark on the box ad give additional
explanation of required. I would like to thank you in advance for your cooperation
in filling this questionnaire.

I. General questions
1. Gender Male  Female 
2. Age of respondent 20-25  25-30above 35
3. Educational status: Certificates  Diploma /TVET 
First degree  Above first degree 
4. Your position in the company
Purchasing  production  store 
marketing  Inventory control 
5. Employeement Permanent  Temporary 
6. Work experience
1-3 years  4-6 year  7-10 years  above 10 years 
7. who is responsible to prepare purchase requisition? ____________________
______________________________________________________________

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8. Did all materials received after compared with order?
Yes  No 
9. If the answer for question No 2 is yes when ___________________________
_______________________________________________________________
10. How do you see the safety stock in the company
Poor  Good  very good 
11. Do you think the material stored in a particular place and protected carefully
Yes  No  we don’t know
12. What do you think about the company internal control system?
Good  Very good 

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Appendix
Interview with financial mangers, purchaser and marketing mangers

1. What are the main product the company export?

2. What are the main component of inventory product?
3. What type of inventory method followed by the organization?
4. What kind of internal control over inventory the company have?
5. How many store did your company have?
6. Did every inventory have three own stock?
7. Are materials stored in a particular place and protected carefully
8. Is the any division of responsibility for each department which is directly
contact with inventory?
9. Is there any division of responsibility for each department which is directly
contact with inventory?
10. I there any tring you want to tell me, that is fell to as but necessary to my
study?

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Reference
Areasns and Lobbeckin (1999) Auditing and integrated application
Cushing Romney (1993) Accounting information system in business organization
Doncel, Dobler (1996) Purchasing and supply a management
Fess warren (1984) Accounting Principle.
Horngren, Data, Poster (2005)m 1tg ed, cost accounting, a managerial emphasis
prentice-hall in inia
Lary F.Rornath (1998) Auditing Concept and application
Mousech A.N (1999) Intermediate accounting
www.kasethio.com

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