Don’t be caught off guard by your next inventory count by a certified public accountant (CPA). While the process can be stressful and time-consuming, there are a few key ways you can prepare to make your next public company audit engagement go as smoothly as possible. In this article, we will dive into discussing essential steps you can take to ensure your next inventory count is a success.
Are Inventory Audits by a Certified Public Accountant Required?
Observation of inventory counting is a generally accepted auditing procedure (GAAP). So, certified public accountant firms commonly require an inventory observation as part of their year-end audit procedures. The audit team is looking for evidence that the client’s internal controls over inventory are adequate and functioning properly.
For private company audits, AICPA Auditing Standards indicate that inventory audits are required if the inventory is considered material. The Public Company Accounting Oversight Board (PCAOB) reaffirms this accounting requirement for PCAOB audits.
Inventory Counting Methods
There are two main types of inventory counting methods: physical inventory counts and cycle inventory counts. The PCAOB auditor will be present with a physical inventory count to observe the counting process. This is usually done at the end of the year and can be time-consuming. The other method, a cycle count, is done throughout the year and is less disruptive to business operations. A cycle count is a partial count of a small subset of inventory items. The auditor will use this information to extrapolate the total inventory count.
How to Prepare for Your Inventory Audit
Now that we have gone over some fundamentals—let’s discuss how you can prepare for your inventory audit. Here are a few ways organizations can plan for success.
Organize Your Inventory Stock
A well-organized system for inventory will help the auditor move quickly and efficiently through the counting process. If a company’s inventory is mixed or similar products are stored in the same location, the auditor may have to spend extra time sorting through the materials. This extra effort can lengthen the audit process and lead to frustration on both sides.
Gather the Required Documents
The auditor will need to see certain documents to understand a business’s inventory system. Be sure to have these documents readily available. Examples of required documents include:
- Inventory records
- Purchase orders
- Sales invoices
- Shipping and receiving reports
- Proof of inventory ownership
- Inventory manuals and protocols
The inventory audit process will go much smoother with a well-organized inventory system. The CPA can quickly verify the records and move on to the next step in the audit.
Minimize Work-in-Progress Inventory
Work-in-Progress (WIP) inventory can be challenging to value and lengthen the audit process. To minimize the impact of WIP inventory on the audit, companies should try to complete projects ahead of the audit and reduce the amount of WIP inventory they have on hand.
Outline an Inventory Audit Schedule
Inventory observations can get in the way of everyday business operations. To minimize the disruption, outline an inventory observation schedule with the audit team in advance. A schedule can make sure operations are not interrupted due to the audit.
Prepare Personnel for the Audit
Preparing personnel for the inventory audit is critical to minimize errors and fraud. Ensure everyone who handles inventory understands the audit process and what to expect. Select a designated inventory manager who will be responsible for overseeing the audit. The inventory manager can act as a liaison between the audit team and the personnel.
Communication With the Audit Team
Once you have scheduled an inventory count, find out their specific requirements and what type of inventory count they will be performing. This way, you can be sure to have everything prepared in advance. If there are any changes to your inventory system, be sure to communicate these changes to the auditor.
What To Anticipate From a Certified Public Accountant
Ultimately, the CPA will want to know three things: the quantity of inventory on hand, the value of that inventory, and whether the client’s procedures are adequate. They will use their findings to provide recommendations for improving internal controls. The key assertions of the audit of inventory will be:
- Existence: The certified public accountant firm will want to confirm the presence of inventory items.
- Completeness: All inventory items must be accounted for in the audit.
- Valuation and Allocation: The CPA will determine the value of each inventory item and whether it is correctly accounted for in the financial records.
- Rights and Obligations: The auditor will verify that the company has the legal right to possession of the inventory and that there are no outstanding obligations associated with the inventory.
- Presentation and Disclosure: The audit team will review the organization’s financial statements to ensure that inventory is presented fairly and in accordance with GAAP.
The goal of any CPA firm is to provide an objective and unbiased opinion on the financial statements. To do this, they must have a clear understanding of the client’s inventory system. Thankfully, with a bit of preparation, the inventory audit process can be smooth and efficient.
Work With A Trusted Audit Team
Audited financial statements must be presented according to generally accepted accounting principles (GAAP). It’s essential to work with a trusted and experienced certified accounting firm to help your company provide clear and transparent financial statements. To learn more about our audit and assurance services, contact us at 1.888.410.2323 or fill out our contact form.
