A warehouse count can be accurate while the financial statements contain incorrect inventory quantities. Corrections can disappear during compilation, goods can move between count dates, and another company can own items occupying the client's shelves.
The auditor must test ending inventory through evidence connecting identified goods, quantities, condition, ownership, and the reporting date to the completed inventory records. Attendance supplies essential observations; the conclusion depends on what ultimately enters those records.
- Existence: Recorded goods are physically present at the relevant date, either with the entity or at another identified location.
- Completeness: Goods belonging in inventory appear in the records, including eligible goods away from the entity's premises.
- Condition: Physical deterioration, damage, expiration, or obsolescence may affect usability and require additional valuation evidence.
- Rights and obligations: The entity's contractual rights support including the goods; physical possession alone does not establish ownership.
Management designs and performs the inventory counting procedures, resolves discrepancies, and prepares the final inventory listing. The auditor evaluates those procedures and obtains independent evidence without assuming management's counting responsibilities.
Common mistakes
- Duplicated count correction. Subtracting adjustment record 41 again from the corrected 116-unit starting count removes four P-14 units twice.
- Transfer treated as disposal. Removing the thirty units sent to Elm from total owned inventory overlooks the supported receiving-location balance.
- Correct sheet, incorrect listing. Accepting the added S-08 count entry without checking compilation leaves thirty owned units missing from the draft.
Bottom line
- Management owns the count; the auditor evaluates instructions, observes execution, inspects condition, and performs independent test counts.
- Sheet-to-floor testing principally addresses existence, while floor-to-sheet testing principally addresses completeness.
- Counts away from year-end require supported intervening movements and appropriate cutoff testing.
- Contracts and actual transfer events determine inventory rights across warehouses, consignments, and goods in transit.
Exam shortcut
Start with the requested conclusion: count-date quantity, year-end quantity, ownership, condition, or final-record accuracy. Mark the evidence direction before selecting an assertion, then check the unit of measure. For a movement bridge, establish whether the starting quantity already includes count corrections. Label transfers by sending and receiving location. For goods away from the client, read the contract before using an invoice, dispatch date, or later receipt.
The full lesson (about 4,676 words, 31 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.E3
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