The year-end physical inventory count can be a daunting task for companies that have large amounts of inventory. Having a successful physical inventory count relies heavily on planning, emphasis and direction provided by management. There can be significant ramifications to an unsuccessful inventory count such as recounts of total inventory, material adjustments to accounting records, deficiencies in internal controls and/or a potential modification to the opinion in the auditor’s report. Having detailed written instructions prepared in advance by management and reviewing those instructions with all employees performing the count prior to the count can drastically reduce errors.
What major topics should be included in management’s count instructions?
Below is a list of important topics that should be addressed in management’s count instructions (this is not an all-inclusive list):
- A description of where the inventory is located on the premises, especially the location layout or areas where high dollar inventory items reside.
- A description of what is used to record inventory counts, such as tags or count sheets. Describe what information will need to be recorded such as inventory item numbers, inventory descriptions, quantity of units, inventory location on the premises and what information to document for damaged or obsolete items.
- A description of how to prevent duplicate items from being counted after they have been originally counted. This can include hanging tags or marking items already counted.
- A description of how to accumulate identical items that are spread out in numerous areas on the premises into a grand total.
- A description of how to count items that require special counting procedures or volume conversions for items that are stored in bulk. This can include inventory stored in silos or massive piles.
- A description of whether production or movements of inventory on premises will be halted. Describe if they will not be halted, how the moving items will be handled during production phases or when they are sold.
- A description of what specific inventory will be and not be counted for cutoff purposes.
- A description of what procedures are used to gather all count tags or sheets from various areas on the premises or locations to ensure that all inventory was counted.
- A list of all personnel involved in the count.
Patrick Herrera, CPA