Audit and Assurance Practice Exam

What should an inventory control system ensure with respect to purchases?

1. Only that all transactions are recorded

2. That purchases are authorized and transactions are recorded accurately

3. That all employees have access to inventory records

4. That inventory is regularly counted

The correct answer is: That purchases are authorized and transactions are recorded accurately

An effective inventory control system plays a crucial role in managing purchases by ensuring that they are both authorized and accurately recorded. This is essential for several reasons. First, having a process for authorization helps prevent unauthorized purchases, which can lead to financial discrepancies, increased costs, or even fraud. Establishing who has the authority to approve expenditures ensures that all inventory purchases align with the organization's budgetary guidelines and strategic objectives. Moreover, accurately recording transactions supports the integrity of financial reporting. It enables accurate tracking of inventory levels, helps in maintaining accurate financial statements, and provides useful data for analysis, such as evaluating sales trends and performing cost management. By having both authorization and accurate recording in place, an inventory control system enhances accountability and transparency within the purchasing process. This diligence not only helps maintain inventory accuracy but also supports better decision-making in inventory management. Other options do not encompass the comprehensive requirements of an effective inventory control system. For instance, simply recording all transactions does not prevent unauthorized purchases or ensure data accuracy. Allowing all employees access to inventory records may lead to confusion and potential misuse of information, and regularly counting inventory, while important for accuracy, does not directly address the need for purchase authorization and accurate transaction recording.