This section describes controls for only the most basic inventory manage­ment system, where there is no perpetual inventory tracking system in place, no computerization of the inventory database, and no formal planning sys­tem, such as manufacturing resources planning (MRP II) or just-in-time (JIT).

When there is no perpetual inventory tracking system in place, the key control tasks of the warehouse staff fall into four categories:

1. Guard the gates. The warehouse staff must ensure that access to in­ventory is restricted, in order to reduce theft and unauthorized use of inventory. This also means that warehouse staff must accept only prop­erly requisitioned inventory and must conduct a standard receiving re­view before accepting any inventory.
2. Orderly storage. All on-hand inventories must be properly organized, so it can be easily accessed, counted, and requisitioned.
3. Accurate picking. The production department depends on the ware­house for accurate picking of all items needed for the production process, as is also the case for picking of finished goods for delivery to customers.
4. Timely and accurate requisitioning. When there is no computer system or perpetual card file to indicate when inventory levels are too low, the warehouse staff must use visual reordering systems and frequent in­ventory inspections to produce timely requisitions for additional stock.

Exhibit 1 expands on the general control categories just noted. In the general category of “guarding the gates,” controls include rejecting unau­thorized deliveries as well as inspecting, identifying, and recording all re­ceipts. The orderly storage goal entails the segregation of customer-owned inventory and the assignment of inventory to specific locations. To achieve the accurate picking goal calls for the use of a source document for picking, while the requisitioning target requires the use of prenumbered requisitions and document matching. A number of supplemental controls also bolster the control targets.

Exhibit 1 Controls for Basic Inventory Storage and Movement

The controls noted in the flowchart are described at greater length next, in sequence from the top of the flowchart to the bottom. Also, a few con­trols from the last section (concerning requisitions and receiving) are re­peated in order to form a complete picture of all required controls.

• Reject unauthorized deliveries. To enforce the use of purchase orders for all inventory purchases, the receiving staff should be instructed to reject all deliveries for which there is no accompanying purchase order number.
• Conduct receiving inspections with a checklist. The receiving staff is responsible for inspecting all delivered items. If staff members perform only a perfunctory inspection, then the company is at risk of having ac­cepted goods with a variety of problems. To ensure that a complete in­spection is made, create a receiving checklist describing specific inspection points, such as timeliness of the delivery, quality, quantity, and the presence of an authorizing purchase order number. Require the receiving staff to initial each item on the receiving checklist and then file it with the daily receiving report.
• • Identify and tag all received inventory. Many inventory items are dif­ficult to identify once they have been removed from their shipping containers, so it is imperative to properly identify and tag all received items prior to storage.
• • Record all receipts in a receiving log. A primitive control over receiv­ing records is to maintain a file of bills of lading, sorted by date. A more organized approach is to record receiving information in a re­ceiving log, so that users can more quickly research when items were received as well as quantities and descriptions received. The receiving log is a standard tool used by the accounts payable staff to complete its month-end cutoff calculations. A sample receiving log is shown in Ex­hibit 4.4.
• • Put away items immediately after receipt. It is difficult for the ware­house staff to determine whether more inventory should be requisitioned if the inventory is sitting in the receiving area rather than in its designated location. Consequently, a standard part of the receiving procedure should be to put away items as soon after receipt as possible.
• • Segregate customer-owned inventory. In situations where customers send inventory to a company for inclusion in a finished product, there is a significant risk that the company will inadvertently include the customer-owned inventory in its own inventory valuations. To avoid this problem, route all such incoming inventory into a physically sep­arate storage area.

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