Stock Counts: What the Auditor Is Actually Doing There

If you hold inventory and it is material, your auditor will turn up to your stock count. The common assumption is that they are there to count the stock alongside you, as a second pair of hands or a second opinion on the quantity.

They are not. They are there to test whether your count can be relied on, which is a different exercise and explains most of what they do on the day.

Testing the count, not doing it

The distinction matters because it changes who is responsible for what. The count is management’s. The auditor observes it, checks that the procedure is being followed, and performs their own sample checks in both directions to see whether the result holds.

Two directions, both necessary. From the floor to the sheet, picking items in the warehouse and confirming they appear on the count records at the right quantity, which tests completeness. From the sheet to the floor, picking recorded items and finding them physically, which tests existence. A count that passes one test and fails the other has a specific and diagnosable problem.

They will also watch how the count is run: whether counters work in pairs, whether sheets are controlled and sequentially numbered, whether counted areas are marked, whether anyone is recounting their own work. A count with weak controls produces a number the auditor cannot rely on, however accurate it happens to be.

Cut-off, which is where the errors are

Most inventory errors are not miscounts. They are cut-off: goods recorded in the wrong period.

The auditor will note the last few goods received notes and the last few despatch notes before the count, and the first few after, and trace each one through to the ledger and to the count. Stock received on the thirty-first but invoiced on the first. Goods despatched on the thirty-first but still sitting in the warehouse awaiting collection. Items in transit where title has passed but the goods have not arrived.

Each of these gets both inventory and either payables or revenue wrong simultaneously, which is why they matter more than a few miscounted units.

Make this easy for yourself. Freeze movements during the count if you possibly can. If you cannot, segregate anything moving and document it. Record the last document numbers in each direction and keep that note with the count file.

Valuation and condition

Existence is only half of it. Stock has to be carried at the lower of cost and net realisable value, so the auditor is also looking at what the goods are worth.

On the day, that means watching for the physical signals: dusty pallets, damaged packaging, items in a corner nobody has touched, obsolete product lines. They will ask about anything that looks slow-moving, and an answer prepared in advance is considerably better than a guess.

Afterwards it means testing cost. How overheads are absorbed, whether absorption is based on normal capacity, what the ageing profile looks like, and how your provision for slow-moving and obsolete stock was calculated. A provision based on a documented ageing policy applied consistently will be accepted far more readily than a round sum that appears each year.

Work in progress

If you carry work in progress, expect more attention rather than less. The quantity is a judgement about stage of completion, the cost is a judgement about what has been absorbed, and neither is observable by looking at it.

Have the basis written down before the count: how completion is assessed, who assesses it, what evidence supports the assessment. This is one of the areas where a position paper written in advance saves genuine time.

Preparing properly

Write count instructions and give them to counters beforehand rather than on the morning. Tidy the warehouse so that like goods sit together. Identify and segregate third-party stock, customer-owned goods and consignment items, all of which are commonly counted in error. Pre-number the sheets. Brief someone senior to be available on the day to answer questions rather than leaving the auditor to find whoever looks knowledgeable.

And give the date early. Attendance at a December count has to be staffed, December is when every other client also has a year end, and the firms allocate those dates weeks in advance. A count date confirmed in September gets you the person who knows your business. Confirmed in mid-December, it gets you whoever is left.