Attending the client's inventory count
How an audit team plans, attends and documents a year-end inventory count under ISA 501: count instructions, test counts, cut-off and the final listing.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A first-year trainee is sent to a hardware wholesaler's warehouse on the last day of the financial year with a clipboard and the instruction "do some test counts". By the end of the afternoon, the trainee has counted whichever bins of screws were nearest, has no idea which goods were received that afternoon, and leaves before the count sheets are collected. The working paper says "attended count, no exceptions". Nothing on it would help anyone conclude on inventory.
ISA 501 requires the auditor, where inventory is material, to attend the physical count unless that is impracticable. The attendance has a purpose: to evaluate management's count procedures, observe them being carried out, inspect the inventory and perform test counts, and then make sure the final inventory records reflect what was actually counted. Each of those steps needs planning before the day.
Reading the count instructions beforehand
Ask for the client's count instructions well before the count. Read them as the auditor will later have to defend them:
- Is the warehouse divided into areas, with each area assigned to a team?
- Are count teams independent of the people who look after the stock?
- How are counted items marked, so nothing is counted twice or missed?
- How are count sheets or tags controlled: pre-numbered, issued and returned?
- How will damaged, obsolete and slow-moving items be identified?
- How are goods held for third parties, or held by third parties, treated?
- How will receipts and dispatches be handled during the count, and how is cut-off recorded?
Weak instructions are a finding before the count begins. Raise them with management in time to fix them.
Send the request for the instructions, the location list and the expected count schedule through the RFI console. Staff create, send and track requests for documents, answers and confirmations there, whichever screen a request was raised from, and the request's timeline shows what was asked and when it arrived.
Test counts in both directions
Test counts serve two assertions, and a good attendance does both:
- From the records to the floor: select items from the client's inventory listing or count sheets and find them on the shelf. This tests existence.
- From the floor to the records: select items on the shelf and trace them to the count sheets. This tests completeness.
Focus on high-value lines and lines where errors are likely, not on whatever is nearest the door. If the client's stock listing can be obtained in advance, load it as a population in Achekam's Audit Intelligence: Achekam risk-scores the population and proposes a sample, a reviewer who did not prepare the plan approves it before it is drawn, and every draw can be reproduced from its stored seed. No size is proposed without approved materiality and a confidence level, so plan the count sample after materiality is approved, not on the morning of the count.
Record each test count: item, location, the count per the client's sheet, the auditor's count, and any difference. Differences are discussed with the count supervisor and corrected on the sheets in the auditor's presence.
Cut-off information at the count
Cut-off errors around a count are a frequent source of inventory misstatement. At the count, record:
- the last goods received note and the last dispatch note issued before the count;
- goods physically in receiving or dispatch areas, and whether they were counted;
- goods in transit, if the client's terms mean ownership has passed.
Those document numbers are what the team later uses to test that purchases and sales were recorded in the right period. Without them, cut-off testing at year end becomes guesswork.
Recording the observation for the engagement
Achekam's Inventory Observation module saves its work on the server for the chosen engagement. Use it, or the working paper that holds the attendance, to record the instructions reviewed, the areas observed, the test counts, cut-off details, the condition of stock and the auditor's overall view of whether the count was properly carried out. The ISA number on the module's badge is a label, not evidence of compliance: the evidence is what the team records.
On the attendance work item, each procedure needs a written response and its documents before it can be marked done, or a reason if it is set aside; steps are never deleted. Attach photographs of damaged or obsolete stock, copies of the last receiving and dispatch documents, and a copy of a sample of the count sheets taken at the end of the count.
In the Working Paper Control Centre, the engagement's papers can be grouped by preparer, reviewer, risk or statement line. Grouping by statement line puts the count attendance next to the inventory lead schedule and the valuation work, which is how the reviewer will read it.
Following counts through to the final listing
The count is not finished when the auditor leaves the warehouse. The final inventory listing, prepared days or weeks later, must reflect what was counted:
- Agree the auditor's test counts to the final listing.
- Check that the count sheets the auditor copied appear in the listing with the same quantities.
- Confirm that all pre-numbered sheets issued were returned and included.
- Check that items noted as damaged or obsolete were written down where needed.
- Use the cut-off document numbers to test that receipts and dispatches either side of the count were treated consistently.
- Where the count was not at year end, test the movements between the count date and year end.
How the client's own stock records feed the statements is covered in inventory from the client's stock records. The difference between evidence the auditor observed and evidence the client sends afterwards is discussed in how reliable is evidence the client uploads?.
AccountingTools sets out a step-by-step inventory count procedure, from preparation and count tags to post-count checks, which is a useful benchmark when reading a client's instructions.
Brief the attendee properly
Whoever attends the count should leave the office with the instructions already reviewed, the sample already drawn and a list of what to collect before leaving. A count attended without that preparation is an afternoon out of the office, not audit evidence.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
