In typical conditions, onsite physical inventory observations are a fundamental process at year-end for a majority of organizations, and of particular importance for those requiring annual audits. This year, the COVID-19 pandemic has made site visits and inventory testing a serious challenge. Many businesses have been forced to suspend visits from non-essential staff and third parties, and audit firms themselves are limiting business travel and asking staff to work from home.
With the year-end looming, businesses must take steps to ensure internal reporting and audit deadlines are met without compromising the health and safety of anyone. In the following, we will layout out some preferable alternatives to on-site inventory counting that protect your time while ensuring auditing and reporting standards are satisfied.
Video-enabled facility tours
Depending on the nature of the industry you operate in, there may be an opportunity to collaborate with your internal inventory count team and/or audit provider to conduct inventory observations via video or photography. It is possible to schedule a live call on a video application like Facetime or Zoom and conduct a live video tour of your facility, walking the inventory count team through the appropriate areas, answering questions as they come up, and satisfying any requests for other perspectives or information. Whenever possible, it is recommended that you record the footage for future reference, this is especially valuable in the case of an audit. The best practice, in this situation, would be to have an impartial third-party hold the camera and coordinate the video process, but this may not be possible depending on the COVID-19 restrictions in place.
Another possibility for inventory observations would be to take detailed and comprehensive photographs of inventory, with time stamps. These are likely to be adequate for internal reporting reasons, but may not satisfy audit requirements.
Implement cycle counting processes
The reasons for needing an accurate inventory count go far beyond annual audit needs. If your organization is preparing for a major event, like a merger or acquisition, restructuring, or an exit, inventory counts will be a central process for verifying the value of your operation.
In the absence of a comprehensive inventory count, it may be permissible to implement cycle counting processes. Cycle counts are a common inventory management technique where subsets of inventory are counted on a regular schedule. There are a number of cycle count methods that could be employed:
- Control Group Count: Often used initially to establish an appropriate cycle counting method, Control Groups focus on small groupings of items counted frequently until a technique provides an accurate count.
- Random Sample Count: A random number or item type is counted regularly to extrapolate inventory numbers. You can take a constant population approach, where the type of item counted is random, but the same number is counted each time, or diminished population approach, where counted items are excluded from future counts until all items are counted.
The efficacy of cycle counting is predicated on repetition and regular reports. This makes cycle counts not entirely viable as a short-term inventory count solution. But if you aren’t racing against an immediate deadline, you can collaborate with your internal inventory count team to establish optimal cycle count processes and gain the operational advantages while avoiding future inventory observation issues.
Implement an inventory roll forward or roll back
Another option employs the not-unusual method of performing an inventory roll forward or roll back. This is a common practice that external auditors undertake when they are brought it after year-end and need inventory counts to perform the audit. This works by taking current count and perform additional testing on sales and purchases subsequent to year end. It is possible to do this the other direction as well, using the most recent inventory count prior to year-end, and account for sales and purchases.
To support a roll forward/back, it is recommended that you prepare essential documentation that will validate calculations. This includes detailed receipts/invoices of sales and purchases, and shipping manifests and other documentation supporting transactions. Transfers from different inventory categories should also be tracked, for example: raw materials, work in process, and finished goods.
Prepare additional supporting evidence
Collaborating with and agreeing on an approach with your inventory count team and/or audit provider is central to all of these methods. But one thing you can start doing immediately, and will help in all circumstances, is start building a library of supporting evidence. Consider the functionality of your systems – do certain reports need to be run on specific dates if there is not historical reporting capabilities? Ideally, you’ll have internal control processes that may not directly count inventory, but from which you can infer or support count estimates. These can include analytical reviews, sales trends, previous inventory counts, etc.
How MGO can help
As businesses across the globe face emerging financial, operational and reporting challenges, collaborating with a professional services provider like MGO can help uncover new solutions and opportunities. If you’re facing difficulty with inventory counts, or anything else, please reach out to us for a consultation.