The following are the procedures that an auditor should complete when observing a client's physical inventory. Refer to Exhibit to list these procedures in the order in which they would be completed, from step (1) to step (7).
Steps to Take When Observing a Client's Physical Inventory
1. Upon arriving at each site:
a. Meet with client personnel, obtain a map of the area, and obtain a schedule of inventory counts to be made for each area.
b. Obtain a list of sequential tag numbers to be used in each area.
c. Observe the procedures the client has implemented to shut down receipt or shipment of goods.
d. Observe that the client has shut down production.
e. Obtain document numbers for the last shipment and receipt of goods before the physical inventory is taken.
Use the information to perform cutoff tests.
2. Meet with the client to discuss the procedures, timing, location, and personnel involved in taking the annual physical inventory.
3. Review the inventory-taking procedures with all audit personnel.
Familiarize them with the nature of the client's inventory; potential problems with the inventory; and any other information that will ensure that the client and audit personnel will properly recognize inventory items, high-dollar-value items, and obsolete items; and understand potential problems that might occur in counting the inventory.
4. Document your conclusion as to the quality of the client's inventory-taking process, noting any problems that could be of audit significance. Determine whether a sufficient inventory count has been taken to properly reflect the goods on hand at year end.
5. Determine whether specialists are needed to test or assist in correctly identifying inventory items.
6. Observe the counting of inventory and note the following on inventory count working papers:
a. The first and last tag number used in the section.
b. All tag numbers and the disposition of all tag numbers in the sequence.
c. The product identification, product description, units of measure, and number of items on a count sheet.
d. Items that appear to be obsolete or of questionable value.
e. All high-dollar-value items included in inventory.
f. Movement of goods into or out of the company during the process of inventory taking. Determine if goods are properly counted or excluded from inventory.
7. Review the client's plans for counting and tagging inventory items.