Rift Valley University

Accounting Department
Faculty of Business and Economics

Research Proposal on Assessment of Internal Control of over Inventory the Case of

KAS international plc.

Prepared by: - 1. Yitagesu Ayalew

2. Mekdes Jifara
3. Eyerusalem Endalemaw
4. Yohannes Abele
5. Abdulhalid Bereka

A senior Essay submitted to the department of Accounting & Finance for the
partial Fulfillment of the requirement of B.A Degree in Accounting

Advisor: - Girma Gudisa (MSC)

June, 2022
A.A, Ethiopia
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
analyses 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.
 Table of contents

Page
List of Tables……………………………………………………………………………...i
Abstract…………………………………………………………………………………..ii
Chapter One: Introduction…………………………………………………………...........1
1.1. Background of Study................................................................................................1
1.2. Background of Organization.....................................................................................2
1.3. Statement of the problem………………………………………………………......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 Limitation 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.............................................................................................5
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
2.4.2. Perpetual inventory system................................................................................9
2.5. Types of Inventory..................................................................................................10
2.6. Inventory function..................................................................................................11
Chapter Three: Research Methodology and Design..........................................................13
3.1 Research design.......................................................................................................13
3.2. Source of data.........................................................................................................13
3.2.1. Primary Sources...............................................................................................13
3.2.2. Secondary source.............................................................................................13
3.3. Data Collection Technique.....................................................................................13
3.4 Sample size..............................................................................................................13
3.5. Method of data analysis and Presentation..............................................................14
Reference...........................................................................................................................15
 Chapter one
1. Introduction
According to arenas 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 laws and regulations. Internal control also refers to all
coordinate methods and measures within 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 handling 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.

Therefore 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 Study

Inventory control is a system that deals with the integration of data information,
logistics, purchasing, inspection, material handling and warehousing, packaging,
control of suppliers and occasionally security of inventory (Keaf, 2003).
Discovering and maintaining optimal levels of investment in all types of
inventories and maximizing the flow of goods, data, and other related resources
like human resources and energy from the point of origin to the final point of
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consumption (customer) is the main objective of managing inventories. (Knot,
2005).Inventory control and planning aim to determine the basic elements of
Supply Chain Management (What to order, When to order, How much to order)
and placing these elements into action
The objective of internal over inventory is to provide uninterrupted production,
sale and customer service at a minimum cost since for many companies inventory
is the largest item in the current asset category, Inventory management problem
can and do contribute to loses or even business failures. (R.S, Saxena, 2009, P.4).
Like other organization KAS International Private Limited Company have different
inventories. KAS International Private Limited Company was established in 1991 GC.
It. The established objective of the company is to supplies and distribute import
and export commodity for all. In this company, there is inventory controlling
system problem, so that, the researcher will investigate it.

1.2 Background of 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.
1.2.1. Vision
Within 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.
1.2.2. Mission
The mission statement of KAS international trading causes for developing export
business and strength on of the import from developed countries.

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 1.2.3. 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.

1.3. 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 outcome that are more predictable

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.

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 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.
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
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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.

Chapter Two
2. 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 Lob beck (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 entities internal control. An
understanding of internal control especially those controls related to reliability of
financial reporting are important to the auditor’s 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 Lob beck (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

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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.

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

Dabbler 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 within the companies operating cycle and, therefore, 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 however, has three type of inventory that are
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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
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 goods 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 involves 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

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operating activity. For merchandizing and manufacturing businesses, these
payment represent the company’s largest use of cash.

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 within 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 shipping 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 partially 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.

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Material and parts are basic commodities or others products obtained directly from
natural resources or acquired from others which will be incorporated physically
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 whereas 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 overhead. Finished goods 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.

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 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 overhead.

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

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

2.6. Inventory function

Dable Burt stated that the function of inventory include the following:

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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
patterns in demand often build up inventories during pre-season periods to meet
overly high requirement during seasonal periods.
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 manager, 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 quaternary and interview with random sampling method,
because this technique is easy to evaluate lots sample and does not take much
time.

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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.
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.

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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