Efficient Tests of Balances Series—No. 15: Keys to Effective and Efficient Inventory Observations

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I’ve attached an illustrative Small Audit Tests of Balances Program for Inventories to this blog. Following are some key issues for inventory observations related to this audit program:
Steps A through D focus on planning activities for observing the taking of physical inventories. Understanding risk, reviewing the client’s inventory taking plans, becoming familiar with the inventory composition and reviewing or assisting in preparing inventory instructions lays the foundation for determining accurate inventory quantities in the least time.
Step E chronologically details the observation process. Controlling movement, determining all items are counted and recorded, observing count teams and performing test counts, identifying obsolete items and performing a physical shipping and receiving cut-off are the basic procedures. 
Some common observation mistakes:
  • Test counting all individually significant items and not testing counts of numerous smaller items which are more subject to error or theft.
  • Using haphazard methods for selecting sample units and not avoiding bias (counting easy-to-access items and avoiding difficult-to-count items).
  • Missing the “hollow square” or empty “donut hole.” Failing to move boxes or storage devices to make sure the center of a square or circle in not empty.
  • Recording inventory based on quantities written on boxes, shelves or containers without test counting their contents.
  • Counting consigned or obsolete inventory without making a separate record to make sure it is excluded from inventory totals.
  • Failing to determine all count sheets or tags are collected, controlled and compiled.
  • Not taking corrective action immediately when counting errors are discovered. Recounts should be requested when significant errors are discovered and when count teams make numerous errors.
Live and on-demand webcasts in my Basic Staff Training Series include detailed guidance on how to efficiently audit inventories and other financial statement classifications. You can obtain syllabuses and register by clicking the applicable box on the left side of my home page, www.cpafirmsupport.com.

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