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Annual Physical Inventory

It is required with auditor's observation for audit, and a part of internal control. Can the annual count be eliminated if the company only requires review report and has reasonable proof of the accuracy of its inventory quantity?


Topic Expert
Joseph Ori
Title: CEO
Company: Paramount Capital Corporation
(CEO, Paramount Capital Corporation) |

I would never not take a physical inventory even with a review. Inventory fraud, theft, obsolescence, etc. are one of the biggest problem areas of acct and auditing.

Sara Voight
Title: Controller
Company: Critical Signal Technologies, Inc
(Controller, Critical Signal Technologies, Inc) |

Controls should not be put in place AFTER an event happens. You should operate with the appropriate controls from the beginning. What might be considered extra steps are really time and money saving processes to avoid what Joseph refers to in his comments (fraud, theft, obsolescence).

Topic Expert
Keith Perry
Title: Director of Global Accounting
Company: Agrinos, Inc.
(Director of Global Accounting, Agrinos, Inc.) |

I'm interested in what "reasonable proof" would be.
That being said (and echoing the above); for operational purposes, streamlining the inventory reviews makes sense. Boil it down to what you need to know operationally; use spot checks to test the process (random selection).

For audit purposes, however, you're solving a different problem. The audit should ensure that the process result matches reality. To do that you actually need to check the inventory.

Topic Expert
Wayne Spivak
Title: President & CFO
LinkedIn Profile
(President & CFO, |

What type of inventory are you talking about? An annual inventory (where what ever problems are discovered can be 12 months old) or cycle counting where all inventory is counted at least once if not monthly (or better) and a system where the same people don't count the same inventory.

That together with MRP/DRP or JIT would provide enough "proof" that inventory numbers were sold. If you kept running out of parts then something is wrong (with JIT you find out very quickly (no or extremely limited safety stock), with MRP/DRP you find out when you know your dipping into safety stock).

Jack Judd
Title: Retired
Company: Retired
(Retired, Retired) |

You might want to take the physical inventory even if you do not need an audit currently. By doing the physical, if a need arises in the future for an audit, you could go back easier and get them done.

Unless you have significant inventory balances, having the audit firm observe and review inventory counts, should not be that significant of a cost.


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