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Best Practices for Virtual Inventory Counts

For most companies with inventory on their balance sheet, the existence of that inventory is going to be a relevant assertion for auditing purposes. Historically, auditors have been able to obtain evidence of the existence of this inventory by physically going to the company’s location and observing the company’s inventory count.

Unfortunately, with COVID-19 restrictions in place during the past year have made it increasingly difficult for third parties to be physically present for a company’s inventory count, whether it be because of the company restricting gatherings or due to various travel restrictions. However, these restrictions do not excuse the auditor from the requirement to get comfortable with the existence of inventory.

What is the solution? Virtual inventory observations.

Although, not necessarily the most ideal situation, virtual inventory observations have been shown to meet the auditing requirements of the AICPA.

According to the AICPA, AU-C §501.A34:

In some cases, attendance at physical inventory counting may be impracticable. This may be due to factors such as the nature and location of the inventory (for example, when inventory is held in a location that may pose threats to the safety of the auditor).

As mentioned above, a virtual inventory count is not the most ideal situation, so if it is determined that a virtual inventory observation must be performed, there are a number of ways to prepare yourself in order to help make the process run as smoothly as possible when the time comes.

Based on various experiences, listed are some best practices identified to prepare for and execute a virtual inventory count:

Preparation:

  • Make sure you have multiple devices capable of video steaming available with your preferred video communication application downloaded. Also, make sure this application is communicated with the auditor and that the auditor is able to download this application ahead of time as well.
  • Test the video steaming with the third party prior to the day of the count.
  • Make sure there is internet/mobile access throughout the entire warehouse. Perform a walkthrough of the location where all inventory is located using the video streaming application well before the scheduled count day to determine where access will be lost or limited in order to plan ahead. Consider the use of an internet hotspot to help with connectivity prior to the observation or they will need the ability to move the inventory to a location where auditors can get access to view the inventory.
  • Make sure employees assigned with the task of “being the auditors eyes” understand the technology and video steaming application being used.
  • Try to keep the warehouse as clean and organized as possible for the count date.
  • If possible, make all inventory items accessible by foot. Spread out inventory as much as feasibly possible to improve the ability to count items.

Execution:

  • Keep in mind, on the day of the observation, the auditor will likely need you to prove that they are at the inventory location either through visible signage or a visible location address on the door.
  • The auditor will also likely request a virtual tour and layout of the count location and how and where inventory is located and organized, including obsolete inventory locations.
  • As always, it is important to keep an inventory listing by location for the auditors to make their testing selections from. The selections should then be organized based on location within the warehouse. This will help the auditor map out their location in the warehouse and should allow the auditor to have a feel for where they are in the warehouse at all times.
  • Have one employee control the streaming device and at least one other employee with them to actually perform the counts. If only one employee is available consider the use of a tri-pod to hold the camera while the employee is counting.
  • For each group of items, first get the camera close enough to the item tag to prove that it is the correct item selected, then move away from the items to try and get the frame of all the items within that group.
  • When focusing the camera on a group of selected items for the auditor to count, try to stand as far away as possible, so that the observer can see the full range of items. From there, have the other employee begin counting the group of items on camera.
  • If possible, snapping a still picture of a group of items may make it easier for the auditor to count the group themselves. This picture would need to include every item being counted within its frame.
  • Any variances identified in the count will likely need to be reconciled. It is important to be able to show all inventory in one place. If missing inventory within the selected item is in another location of the warehouse, you may need another employee to bring that inventory to the location being counted so that it can be counted all in one place.

Other considerations:

  • A flying drone with a video camera for counting hard to reach areas of the warehouse may be an option.
  • Sudden movement and spinning of video camera can cause motion sickness for observers, so try to keep the device mounted on something stable.

These are just a few ideas for virtual inventory count best practices. The most important things are to be practical and to make sure a detailed plan is discussed and agreed upon with your auditor well ahead of the count date.

Teal, Becker & Chiaramonte Certified Public Accountants