Year-End Inventory Audit Readiness Checklist

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10 critical items still open - these are the highest-risk gaps.

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Physical count and observation

Count instructions are written, approved and distributed before the countCRITICALAuditor has the count date, locations and schedule well in advanceCount tags or sheets are pre-numbered and accounted for after the countCRITICALTeams of counter and independent checker are assignedConsigned, customer-owned and third-party stock is identified and segregatedCRITICALObsolete, damaged and quarantined stock is tagged during the countCount differences above the threshold are recounted and approved before adjustmentCRITICAL

Cutoff

Last receiving document and last shipping document numbers are recorded at count timeCRITICALGoods received but not invoiced are accrued at the period endShipments after period end are excluded from period sales and inventory reliefCRITICALInventory in transit is classified based on title transfer terms and IncotermsProduction orders closed around the period end are posted to the right periodIntercompany transfers are recorded on both sides in the same period

Valuation

Inventory subledger ties to the GL control accounts with reconciling items explainedCRITICALStandard costs are supported by the latest roll-up and approvedVariances capitalised in inventory are calculated and supportedOverhead absorption uses normal capacity and unallocated overhead is expensedCRITICALCosting method (FIFO, average or standard) is applied consistently with prior yearsNegative on-hand quantities and zero-cost items are reviewed and correctedForeign currency inventory is translated at the correct rate

Reserves and documentation

Lower of cost and net realizable value test is performed and documentedCRITICALExcess and obsolete reserve method is written down with aging and usage dataCRITICALReserve is compared with subsequent sales and scrap activityScrap and write-offs are approved and supported by documentationCycle count history and accuracy are available for the auditorItem master and BOM change log are available for key itemsYear-end inventory listing is locked and extracted at a documented timePrior-year audit adjustments are reviewed for recurrence

Every critical item should be complete before the audit begins. Unfinished critical items are the most likely sources of audit adjustments or delays.

Audit package automation

Optional: talk through how to generate the inventory PBC package from your ERP automatically.

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How to use the checklist

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

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

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

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.

Frequently Asked Questions

What does an auditor check in manufacturing inventory?

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?

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?

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?

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.

If your inventory extracts and reconciliations are manual, we can discuss how to automate the PBC package from your ERP data.

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