Today was pretty much exhausting. I flew to a client location and back in one day for an inventory count. It was surprisingly less hassle than I thought it would be, considering how messed up my flights were last time I traveled, but I still had to get up really early for the flight out!

What are inventory counts and why do you need to fly there?

For those who don’t know, inventory counts are what manufacturing companies do around the end of the year to see exactly how much inventory they have. The inventory count must be done after production for the past year ends, and before production for the new year begins, otherwise it becomes much more difficult to keep track of what to count as inventory as of ¹²⁄₃₁.

As auditors, we participate in inventory counts soon after the client has finished counting the inventory. We only have this small window of opportunity, because in a few days, the inventory levels will be different. We want to make sure that the inventory records are correct as of ¹²⁄₃₁.

Inventory Counting Process

The client’s employees will spend a few days counting everything in the warehouse (or warehouses.) When the client’s employees count the inventory, they keep track of what they count on count sheets. They should also put stickers or tags on each piece of inventory to make it clear which pieces have already been counted.

Inventory Audit Test: Sheet-to-Floor

Our first inventory count test is called “sheet-to-floor.” For this test, we selected inventory items from the count sheets. Then we traced these sheets to the actual inventory on the floor, and recounted it. For inventory, auditors are most worried about the existence assertion: Does the inventory recorded on the books really exist?

Inventory Audit Test: Floor-to-Sheet

However, as auditors we are also making sure that they count was done well. We perform a second test called “floor-to-sheet” where we select an item of inventory out on the warehouse floor. We count the items, and then trace them to their count sheet to make sure that the client’s counters recorded to same number that we did. This tests for completeness: Is all the existing inventory recorded on the books?

In the case of fraud, it is much more likely that a company would overstate inventory, so existence is the most important test. However, counters can also make mistakes, and auditors are also checking for errors - in fact, most of the discrepancies we find as auditors are due to errors, not fraud.

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