Abstract

Current business trends have made it imperative for almost all large organisations to maintain effective internal control systems. Internal control has attracted intense debate and scholarly attention across industries in accountancy and auditing literature over the past decades. This study was conducted into the effectiveness of the internal controls of the CDC.

The main objective of the study is to determine the relationship between the internal control systems of the CDC and the management of inventory. The specific objectives were; to identify the different types of internal control for inventory management of the company; to examine the various components of internal control at the company and determine the relationship between internal control and inventory management at CDC.

Related literature was reviewed. The study adopted the explanatory research design since the study was a case study type. The study population was the staff of the CDC. A sample size of fifteen respondents was used for the study. The purposive sampling technique was adopted. Data was collected through a questionnaire.

The data collected were analysed using tables and graphs. Some of the findings made included: It was revealed that the internal control components at CDC were very effective as all of the respondents agree with that assertion. In reviewing the different types of internal control for inventory systems at CDC, the study found that accounting controls, supervision, approval, and segregation of duties were amongst the controls available.

The study used three sets of hypotheses of all the alternative hypotheses that were accepted and the nulls rejected. The study concluded as follows: the components of internal control have a significant impact on inventory management at CDC, the different types of internal control for inventory have a significant impact on inventory management and there is a significant relationship between internal control and inventory management at CDC.

CHAPTER ONE

INTRODUCTION

1.1       Background To The Study

One of the best defences against the poor stock management by enterprises and also an important driver of business performance, is having effective internal control. In every business sector, the market is constantly changing, and this requires changing the attitude to internal control from treating it only in the financial aspect to the management of the control process. Successful management of inventory by a company has been when it takes advantage of opportunities and counter threats, in many instances through effective application of controls, and therefore improve their performance.

Internal controls for inventory are the protective measures and policies a company establishes to protect its assets. While most often inventory is thought of as products that are in stock and offered for sale, inventory also includes raw materials used to produce products. Inventory is often the largest current asset of a company, and effective internal controls are essential for minimizing shrinkage.

In the past decade, internal control failures were the reason for the most explosive accounting scandals of the world (Kratz, 2008). The Enron case is the best example in the United States. Before Enron collapsed in 2001, the company stated earnings of $200 million and according to the stock market was worth billions of dollars.

Conversely, the stock price of Enron was driven up by fraudulent accounting practices and earnings management. At the end of a similar year, it declared that it had overstated its earnings over the last four years and owed about $6 billion to its lenders. Many investors lost their money, employees lost their jobs and even employee’s pensions evaporated after the collapse because the company’s pension scheme had invested in its own shares (Kratz, 2008).



The Worldwide known collapses of such companies as Enron, WorldCom, Ahold, Parmalat, and others determined to issue in 2002 the Law of Sarbanes–Oxley (SOX) in the USA, in which attention is focused on the effectiveness of the enterprise internal control system and its assessment.

Such a significant law as that of Sarbanes–Oxley has clearly shown that not only the internal control system must be concretized and clearly defined, but also the means of implementing the internal control system and assessing their effectiveness must be covered (Kratz, 2008).

It is worth noting that internal controls only provide reasonable but not absolute assurance to an entity’s management and board of directors that the organization’s objectives will be achieved. “The likelihood of achievement is affected by limitations inherent in all systems of internal control” (Hayes et al., 2005). To ensure that the system checks itself, management could use devices such as segregations, supervision of work and acknowledgment of performance. The effective arrangement and implementation of this control system would ensure the proper management of inventory.

1.2       Statement Of Problem

Internal control which in most cases is usually neglected in companies is one of the most important instruments that ensure better management. Unlike audit control which is a detective control, internal control is a preventive control that helps in inventory management.

High rates of customer dissatisfaction, poor sales, wastage, and inefficient use of resources, poor management decisions, and high rates of product errors, loss of records, carelessness, and mistakes generally demonstrate poor business practices and ineffective management thus the need for proper internal control policies. The benefit of a properly used and maintained inventory management system is that it allows management to be able to know how much inventory it has at any given time.

The absence of adequate internal control measures exposes the stock management of an organization to certain threats such as:

• Incorrect valuation of total inventory items.
• Stealing and mismanagement of company stocks.
• Incorrect and unreliable recording of inventory may lead to incorrect financial records.

When companies get lax with their internal controls, opportunities for fraud increase. If your business doesn’t have internal controls, each employee might use their own methods for handling their processes and procedures. When problems arise, you might be in a better position to defend yourself against lawsuits if you can prove that you had internal controls in place.



Internal controls can help businesses avoid slowdowns in their activities, prevent fraud and limit errors. When employees don’t follow these policies and procedures, a business can suffer not only from internal problems but also experience external public relations problems and possible legal sanctions.

Internal controls over a company’s inventory are meant to ensure that management has an accurate count of what materials and goods it has available for sale and to protect those goods from being spoiled, stolen or otherwise made unavailable for sale. In short, inventory internal controls are meant to ensure that a company always has sufficient resources to produce and sell goods to meet its customers’ needs without having an oversupply. The following research questions will be used to form the research hypothesis.

1.3       Research Questions

The study was guided by the following questions;

1. What are the various components of internal control?
2. What are the types of internal control for inventory?
3. What relationship exists between internal control and stock management?

1.4       Objectives Of The Study

A well-defined internal control structure helps management to manage inventory in an orderly manner. This enhances operational and efficiency, which is an important feature of internal control. The main objective of this study is to examine the impact of internal control on stock (inventory) management.

Specific Objectives of the Study

The study was guided by the following specific objectives:

• To determine how the various components of internal control impact stock management.
• To analyze how the different types of internal control for inventory impact stock management.
• To establish the relationship between internal control and inventory management.

1.5       Hypotheses

This research is undertaken on the basis of the following hypotheses.

Hypothesis One (1)

Ho: The components of internal control do not have any significant impact on inventory management.

Hi: The components of internal control have a significant impact on inventory management

Hypothesis Two (2)

Ho: The different types of internal control do not have any significant impact on inventory management.

Hi: The different types of internal control have a significant impact on inventory management.

Hypothesis Three (3)

Ho: There is no significant relationship between internal control and inventory management.

Hi: There is a significant relationship between internal control and inventory management

Further Readings

IMPACT OF INTERNAL CONTROL SYSTEM ON THE PERFORMANCE OF FINANCIAL INSTITUTIONS IN CAMEROON (CASE STUDY; BANQUE ATLANTIQUE S.A.)