# Year-End Inventory Audit Readiness Checklist > Source: https://netray.co/tools/year-end-inventory-audit-readiness-checklist > Publisher: Netray (netray.co), AI and integration engineering for ERP and manufacturing systems. > Section: Free Tools ## Short answer A 28-point checklist covering count, cutoff, valuation, reserves and documentation so inventory is ready before the external auditor arrives. ## Category cost-finance ## Audience - Controller - CFO - Internal auditor - Plant finance manager ## Tool **Kind:** checklist **Groups:** #### Physical count and observation **Items:** **Text:** Count instructions are written, approved and distributed before the count **Critical:** true Auditor has the count date, locations and schedule well in advance **Text:** Count tags or sheets are pre-numbered and accounted for after the count **Critical:** true Teams of counter and independent checker are assigned **Text:** Consigned, customer-owned and third-party stock is identified and segregated **Critical:** true Obsolete, damaged and quarantined stock is tagged during the count **Text:** Count differences above the threshold are recounted and approved before adjustment **Critical:** true #### Cutoff **Items:** **Text:** Last receiving document and last shipping document numbers are recorded at count time **Critical:** true Goods received but not invoiced are accrued at the period end **Text:** Shipments after period end are excluded from period sales and inventory relief **Critical:** true Inventory in transit is classified based on title transfer terms and Incoterms Production orders closed around the period end are posted to the right period Intercompany transfers are recorded on both sides in the same period #### Valuation **Items:** **Text:** Inventory subledger ties to the GL control accounts with reconciling items explained **Critical:** true Standard costs are supported by the latest roll-up and approved Variances capitalised in inventory are calculated and supported **Text:** Overhead absorption uses normal capacity and unallocated overhead is expensed **Critical:** true Costing method (FIFO, average or standard) is applied consistently with prior years Negative on-hand quantities and zero-cost items are reviewed and corrected Foreign currency inventory is translated at the correct rate #### Reserves and documentation **Items:** **Text:** Lower of cost and net realizable value test is performed and documented **Critical:** true **Text:** Excess and obsolete reserve method is written down with aging and usage data **Critical:** true Reserve is compared with subsequent sales and scrap activity Scrap and write-offs are approved and supported by documentation Cycle count history and accuracy are available for the auditor Item master and BOM change log are available for key items Year-end inventory listing is locked and extracted at a documented time Prior-year audit adjustments are reviewed for recurrence **Scoring Note:** Every critical item should be complete before the audit begins. Unfinished critical items are the most likely sources of audit adjustments or delays. ## Content **Intro:** Inventory is usually the largest judgment area in a manufacturer's audit. This checklist covers the count, cutoff, valuation, reserves and documentation steps that auditors ask for, so the work is done before fieldwork starts. **Sections:** #### How to use the checklist **Body:** Assign each group to an owner, such as the plant controller for count and cutoff and the cost accountant for valuation. Work through the items several weeks before year end, finish the count items on the count day, and complete valuation and reserves after the close. Export the list to share with the auditor as part of the prepared-by-client package. #### What auditors test **Body:** Auditors usually observe the count, test cutoff using the last receiving and shipping documents, test valuation by tracing costs to invoices and standards, and challenge the reserve for excess and obsolete stock. They also check that the subledger ties to the GL. Weak spots in any of these areas tend to expand the testing scope. #### Valuation and reserve support **Body:** Keep the roll-up approval, overhead rate calculation and capacity assumptions in one folder. For reserves, keep aging reports, usage by item over a defined period, and evidence of sales prices after the period end. A reserve that uses a simple documented rule applied consistently is easier to defend than a manual estimate with no support. #### Common mistakes **Body:** Letting shipments continue during the count without logging document numbers, recounting only the items with large differences, forgetting consigned and customer-owned stock, leaving negative inventory unresolved, and booking a reserve that cannot be traced to data. **Cta:** If your inventory extracts and reconciliations are manual, we can discuss how to automate the PBC package from your ERP data. **Faq:** #### What does an auditor check in manufacturing inventory? **Answer:** Existence through count observation, completeness and cutoff through document testing, valuation through cost support and standards, and the adequacy of the excess and obsolete reserve. They also test ties between subledger and GL. #### Do we need a full physical count at year end? **Answer:** Not necessarily. Auditors can accept a well-run cycle count program with accurate records. Otherwise a full count or a count close to year end with roll-forward is expected. #### How should unallocated overhead be treated? **Answer:** Fixed overhead should be allocated based on normal capacity. Costs from abnormally low production or idle capacity are expensed in the period rather than added to inventory value. #### What is the lower of cost and net realizable value test? **Answer:** Inventory must not be carried above the amount expected to be recovered from sale. Compare cost with estimated selling price less costs to complete and sell, and write down the difference. ## Search terms year end inventory audit checklist, inventory audit preparation manufacturing, auditor inventory PBC list, inventory cutoff testing checklist, physical inventory observation checklist, inventory valuation audit documentation, inventory reserve audit support, year end inventory count checklist --- Talk to an engineer: https://netray.co/contact?intent=erp_ai | Machine catalog: https://netray.co/agent/catalog.json