POLE

AUDIT

AUDIT METHODOLOGY
OF THE INVENTORY BY
PHYSICAL OBSERVATION

December 2013
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THE IMPORTANCE OF PHYSICAL INVENTORY

OBJECTIVES OF PHYSICAL INVENTORY

THE AUDITOR'S INTERVENTION IN THE INVENTORY

THE DELIVERABLES OF THE MISSION

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THE IMPORTANCE OF PHYSICAL INVENTORY

The physical inventory ensures the reality and completeness.
quantities in stock. It does not allow for the validation of the valuation but
participate in the depreciation validation process.

It allows compliance with legal obligations in accounting and tax matters.

and corporate law, and also to better understand the reality of operations
who are behind the numbers and ensure a better understanding of
accounting records.
The company is required to conduct an inventory check at least once every
twelve months, the existence and value of the active and passive elements of its
heritage.
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OBJECTIVES OF THE PHYSICAL INVENTORY

Establish the credibility of accounting documents

Ensure the plausibility of the accounting balances

Examine the separation of exercises at the level of recorded operations.

Establish the physical existence of the stock and the plausibility of the figures.
quantities in inventory established by the client

Determine that the items in stock have been correctly evaluated, in

in accordance with an acceptable method that has been applied in a manner
continue
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INTERVENTION OF THE AUDITOR

The auditor's intervention involves three phases:

Phase 1: Before the physical inventory

Phase 2 : Au cours del’inventaire physique

Phase 3: After the physical inventory

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AUDITOR'S INTERVENTION

Phase 1
Before the physical inventory
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INTERVENTION OF THE AUDITOR

Phase 1: Intervention before the inventory taking,

During this first phase, the auditor proceeds to an understanding.

general concerning the following aspects:

Stocks, storage locations and production processes.

The internal control system for purchasing, sales & production

existence of entry and exit transfer bonds, pre-production
numbered or not, separations of tasks

The inventory taking instructions communicated to the inventory team

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AUDITOR INTERVENTION
Phase 1: Intervention before the inventory is taken,

The auditor ensures that the instructions include the information

necessary to ensure the reliability of the entry of quantities and others
information he can use for this assessment:

The checklist of main physical inventory procedures

The physical inventory questionnaire

It is important to obtain the procedures and carry out their evaluations.

sufficiently in advance, so that the company can carry out the
modifications that must be made to ensure the reliability of the counts and their
centralizations.
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AUDITOR'S INTERVENTION
Phase 1: Intervention before stocktaking,

The auditor obtains clarifications on the following points:

The start and end dates and times of the inventory taking,
The terms of inventory taking (complete, partial inventories)
tournants),
The storage locations and the products to be inventoried
The procedures for entering and cross-checking ongoing work,
The existence of stocks in deposits or consignment within the company and
belonging to third parties or stocks owned by the company and
finding with third parties.
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INTERVENTION OF THE AUDITOR

Phase 2
During the physical inventory
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INTERVENTION OF THE AUDITOR

Phase 2: During the physical inventory,

During the physical inventory, the auditor must focus their intervention on the
two following aspects:

1-Ensure the application of inventory instructions and procedures,

2- Conduct a survey of the quantities inventoried by the company.

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AUDITOR'S INTERVENTION

Phase 2: During the physical inventory,

The auditor's controls mainly focus on how the decision-making

inventory is carried out by the company's staff and consequently on
the way procedures are applied.
It is important to attend at the beginning and at the end of the inventory.

Let’s begin by ensuring that:

The inventory will take place under good conditions.
The instructions have been well understood and are being correctly followed.

In the end for:

Control the procedure for centralizing records and counting sheets
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INTERVENTION OF THE AUDITOR

Phase 2: During the physical inventory,

The auditor must ensure through surveys that:

Counting units are used correctly (Cartons, Pieces,…)

- Measuring or counting devices are reliable (Scales, readings of
Surveyor,...)
The contents of the boxes or other containers match the items.
reports (Check the item codes and the contents of the boxes, …)
The batteries do not have any missing ones,
All areas where stocks may be located are well marked.
the factory tour,
The counting sheets are correctly filled out by the teams.
counting (Date and time of the counting, Name of the counter, ...).
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INTERVENTION OF THE AUDITOR

Phase 2: During the physical inventory,

The auditor performs a number of counts which he records in the

files for later control with the final inventory:
Designation, reference, and location of the item, unit of measurement,
Quantity counted by the auditor, by the company staff, and that
possibly appearing on the inventory permanent stock sheets,

The volume of these surveys is determined by the audience function:

From his knowledge of the company,
From the internal control of the stock function,
On the quality of the inventory taking process,
Regarding the quality of the application of this procedure.
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INTERVENTION OF THE AUDITOR

Phase 2: During the physical inventory,

The auditor organizes these controls to ensure that:

All physically existing items are properly recorded.
Every recorded element exists physically.

To do this, he selects elements:

On the storage areas, ensure that they are or will be properly
entries on the counting sheets,
On the company's counting sheets, ensure that it exists well.
physically.

The surveys conducted must be mentioned on the worksheets of

the auditor. He must also make copies of a certain number of documents.
established by the company's staff.
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INTERVENTION OF THE AUDITOR

Phase 3
After the physical inventory
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INTERVENTION OF THE AUDITOR

Phase 3: After the physical inventory,

After the inventory has been taken, the auditor must ensure that:
The counts carried out by the staff are correctly centralized,
The qualities whose physical existence has been demonstrated are indeed those that
are used to value the inventory,

They also ensure:

From the report of all the sheets on the state of stocks, by sampling based on the
sheets, or by controlling numerical sequences,
That the summaries are arithmetically correct, through surveys.
on the calculations carried out manually,
Any possible information related to the depreciation of stocks
noted during the inventory are taken into account.
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INTERVENTION OF THE AUDITOR

Phase 3: After the physical inventory,

This phase requires a great ability to synthesize and certain skills in

writing.

In this phase, the auditor establishes a report of his mission where he informs.
the company during the inventory mission, errors and the
possible corrections of these errors, he can also propose
improvements.
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Deliverables of the mission

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DELIVERABLES OF THE MISSION

At the end of his mission, the auditor must produce a detailed report on
the inventory operation containing the following information (See Appendix 1):
Summary description of the company (Activity, Visited sites, Nature of
stocks)
- Presentation of the inventory operation carried out by the company (Period
inventory, Composition of the company's teams, Responsibility of
the inventory,.....)
- Presentation of the audit team (Date of intervention, Name and quality of the
listeners,....
Copy of the company's inventory instructions and procedures,
Inventory Physical Assessment Questionnaire (See Appendix Model 2)
Control sheets established by the auditor (See Model Appendix 3)
Main observations and errors noted by the auditor.
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Annexes
Annexe 1: Modèle & Plan du rapport de l’auditeur
Annex 2: Inventory Questionnaire
Annex 3: Control Sheet
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Annex 1: Mission Report Outline

1- Mission context:
This intervention by PROXIMO takes place from the framework of our mission of (Audit,
Commissariat to the accounts, Accounting assistance, Inventory realization, ...) on behalf of
the financial year closed on (date) of the company (Name).

2-Presentation of the company:

The company (Name) operates in the sector of (field of activity). Its stock is composed of
(Nature) stored at the following sites (Address of depots and storage locations)
As part of the annual physical inventory, the company has set the inventory period of (date
from (start date) to (end date).
The company inventory team is composed of the following people:
(Name, role within the company, role within the inventory team)

3-PROXIMO Team:
The PROXIMO team is composed of (Names of the auditors, their role within the team), its
intervention took place on (date) at (address of the sites).
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Annex 1: Report Plan of the Mission - Continuation

4- Evaluation of the inventory procedure:

During our intervention, we noted the instructions and the inventory procedure of the
Company whose copy is attached (Attach the procedure or describe the procedure in case of absence
the document) similarly we conducted an evaluation based on the attached questionnaire
(Attach the duly completed questionnaire).

Surveys and controls carried out by the audit team:

We conducted a randomized check of the inventoried quantities and compared the result of
Our polling with the counting sheets developed by the company.
The conclusions of our work are as follows (Attach the Control Sheet),

6-Conclusions and observations:

At the end of our intervention, we present below our main findings &
recommendations:
(Constatations, Erreurs détectées, Ajustements nécessaires, recommandations).
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Annex 2 - Inventory Questionnaire

SOCIETY
EVALUATION OF THE PHYSICAL INVENTORY

Closed Exercise: Coll.

QUESTIONNAIRE TO BE COMPLETED BY THE AUDITOR
Date

Chapter 01 Preparation of the inventory

Control 01 Written instructions
Are written instructions provided and transmitted: ……………………………
to the inventory managers? YES NO ……………………………

to the execution staff? YES NO ……………………………

to the Audit team? YES NO ……………………………

Control 02 Verification of the coverage of storage locations
Are all storage locations and all types of stocks covered? YES NO ……………………………

Stocks held by third parties? YES NO ……………………………

Stocks belonging to third parties? YES NO ……………………………

Control 03 Checking the storage

Does prior organization allow for easy counting? YES NO ……………………………

Control 04 Verification of stock identification

Is the inventory identification done? YES NO ……………………………
How? (labels, etc.....) …………………………………………………
Control 05 Double counting

What is the procedure in case of a difference? …………………………………………………

Control 06 Permanent inventory

Is there a perpetual inventory? YES NO ……………………………

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Annex 2 - Inventory Questionnaire

Chapter 02 PERSONNEL

Control 01 Existence of an independent person from the store service?

Is there at least one person independent of the Store department in the teams?
YES NO ……………………………
of counting?
Control 02 Verification of the instructions given

Have the counting teams received clear instructions on the work?

YES NO ……………………………
what they were supposed to do?

Control 03 Verification of the competence of counting teams

Is there at least one person in each counting team who has the
YES NO ……………………………
sufficient technical knowledge to identify stocks?

Chapitre 03 COUNTING

Control 01 Control of counting techniques

Are the counting techniques (weighing, counting, measuring) well defined? YES NO ……………………………

Have we properly understood the issue of tare? YES NO ……………………………

Control 02 Quality check of the items

Is there a quality check of the articles? YES NO ……………………………
contents of packaging, sampling of liquids and products
chemicals)
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Annex 2 - Inventory Questionnaire

Chapter 04 Ridings

Control 01 Stock movements during the inventory

Are there movements of items during the inventory-taking period? YES NO ……………………………
Control 02 Double counting and omissions

If the answer to the previous check is 'yes', what has been done to avoid duplicates?
…………………………………………………
counts and omissions?

Control 03 Verification of the existence of incoming and outgoing vouchers

Are the entries and exits done according to the entry and exit voucher? YES NO ……………………………

Control 04 Verification of some entry and exit vouchers

If the answer to the previous check is 'yes,' note down the numbers of some good ones.
…………………………………………………
input and output before and after the inventory operations.

Control 05 Determination of ownership of stocks

If the answer to control number 3 above is 'no', what has been done to determine the
…………………………………………………
ownership of inventoried stocks?

Control 06 Supplier delivery during inventory

Were there any deliveries from suppliers during the inventory? YES NO ……………………………

If so, what measures have been taken to identify these deliveries? …………………………………………………

Control 07 Shipments to customers during inventory

Were there any shipments of goods to customers during the inventory? YES NO ……………………………

If so, what measures have been taken to identify these shipments? …………………………………………………

Control 08 Consignment articles

How were consignment articles handled? …………………………………………………

Control 09 Goods held by third parties

How were the goods held by third parties treated? …………………………………………………

Have confirmation requests been made? YES NO ……………………………

Control 10 Analysis of the reconciliation of entry and exit vouchers

What is the result of the reconciliation between the entry and exit slips collected
…………………………………………………
(see control 04 above) and the stock sheets?
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Annex 2 - Inventory Questionnaire

Chapter 05 STOCK MONITORING

Control 01 Reconciliation of counting with stock release sheets

Are the counts compared with the inventory sheets by individuals?

YES NO ……………………………
different from warehouse workers and counting teams?
Mention the main reasons for the differences between inventoried quantities and
…………………………………………………
stock sheets.
Control 02 Correction of stock cards
Une enquête est elle effectuée préalablement à toute correction substantielle des
YES NO ……………………………
stock sheets?
Control 03 Communication to Management

Is the list of deviations communicated to management? YES NO ……………………………

Chapter 06 ADDITIONAL CONTROLS

Control 01 Supplementary controls

The Auditor must perform the following additional checks:

- Suivre les équipes de COMPTAGE et noter comment elles effectuent leur travail. DID NOT DONE

Check the contents of the packages (quantity and quality) FACT NOT DONE

Retrieve some filled counting sheets to bring to the state

DID NOT DONE
of inventory.

Before the end of operations, select a few records or counting sheets and
DONE NOT DONE
check the counting.

At the end of the inventory, check the premises to see if everything has been properly inventoried. FACT NOT DONE
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Annex 2 - Inventory Questionnaire

Chapter 07 CONCLUSIONS

Control 01 Inventory procedures and organization

Feedback on inventory procedures and organization: SATISFACTORY UNSATISFYING

Control 02 Execution of the inventory

Feedback on the execution of the inventory: SATISFACTORY UNSATISFACTORY

Control 03 Suggestions for improvement

Suggestions to improve inventory tracking:

Auditor's Visa Team Leader Visa

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Annex 3 - Counting Sheet

Client: PHYSICAL INVENTORY CHECKLIST
Closed Exercise: Coll.

Mission : Date

Inventory DETAIL COUNT PERFORMED BY THE REALIZATION COMPLETE

Storage location:
Permanent SOCIETY BY THE AUDITOR
Qty Qty Qty Qty Quantity Cart Quantity Observations
Nature of Value Sheet of 1er 2th Finale Auditor vs
Code article Designation Article Unit Auditor
stocks Unitary stock Counting Counting Retention Finale

Auditor: Head of the audit team: Page ……. of……