Inventory Count Procedures: A Year-End Playbook

For trading and manufacturing businesses, the year-end inventory count is the single most important audit procedure. Get it wrong and your inventory balance, usually the largest current asset, is unreliable. Here is the playbook.

Pre-count preparation

One week before count: clean the warehouse, label all items with SKU and quantity, separate received-but-not-processed stock and goods-in-transit. Print count sheets sorted by location for the count team. Brief the team on procedure.

Count team: at least two people per area (one counts, one verifies). Avoid the people who handle the stock day-to-day for the verifier role, independence matters. Auditors typically attend and observe.

Count procedure

Walk through each shelf or bin systematically. Count physically, do not rely on the system's screen number. Record on the count sheet. Mark each location complete with a coloured tag so it cannot be re-counted by mistake.

Count sheets should not include the system's expected quantity. The count is independent; comparison happens afterward. Pre-populating the sheet biases the counter toward the expected number.

Cut-off and exceptions

Stop receipts for the count period. Stop issues. Note exceptions: goods-in-transit (we sent but customer has not received, still our stock until delivered), goods-on-hand-not-yet-billed (customer paid but pickup pending, still our stock), consignment stock (we hold for someone else, not our stock).

Document each exception clearly. Auditors test cut-off by examining the last shipment in and the first shipment out. Cut-off errors are the second most common inventory adjustment after slow-moving provisions.

After the count

Reconcile count to system. Investigate variances above tolerance, typically 2% by line value, 0.5% by total. Adjust the system to count where the variance is supported. Document the variance and the resolution for each line.

Acowntant and Zoho Books have inventory adjustment workflows for this. The adjustment posts to a Stock Adjustment account in P&L. Auditors examine this account for trends, recurring large adjustments suggest systemic stock control issues.

This guide is general information, not professional advice. For situations that involve specific facts, talk to your accountant, or hire one of ours from the marketplace.