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Manufacturers & Distributors, Tax & Assurance Guidance

Tips for a Good Year-End Inventory Observation

Posted on October 5, 2016 by

Dave Van Damme

Dave Van Damme

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As business processes become more complex, the balance between the efficiency and effectiveness of operational procedures becomes more critical to examine. With the calendar year-end quickly approaching, it is important for management to start developing a streamlined plan for ensuring the accuracy of inventory as this area is material for many product-driven businesses. In developing this plan, the entity will ultimately be preparing its operational team for the performance of an inventory observation or cycle count, the goal of which is to verify the existence and condition of an entity’s inventory.  To assist in the development of the plan, below are some important tips to consider in preparing for a physical inventory observation.

1. Choose an appropriate date for the performance of an inventory observation

There are many factors to consider when setting a date for an observation. Management must consider that production could be suspended for a significant amount of time while the count is being performed.  Therefore, the inventory observation should be strategically planned around peak production times.  Additionally, it may be good practice to extend customers’ estimated delivery dates around this time as shipments should also be suspended.

2. Document the count plan in writing and distribute to the appropriate employees

Consider a plan that documents sequential procedures. It’s also important to note any assigned duties of count personnel. This is significant regardless of the size of the count or the operational team involved as everyone needs to be performing the count with the same precision.

3. Design effective inventory tags

The design of the inventory tags is critical in the success of a physical inventory observation as they not only assist the counters in documenting the completion of their tasks, but tags are viewed by personnel having to make final count determinations and assist auditors observing the count.  Tags should be pre-numbered to ensure no omission of goods or double counting of inventory items occurs. If any tags are mislabeled or misused, they should be voided so all tags can be counted at the end of the count period.

4. Segregate obsolete, damaged or consignment goods

To ensure proper exclusion of certain inventory classes, plant areas should be designated and properly labeled for items fitting these categories. It may be beneficial to include a plant map within the count instructions outlining the location of goods.  This is an area commonly highlighted by auditors to ensure the identification of items listed in these special categories on the inventory detail.

The success of a year-end inventory observation begins with a thorough plan and management instruction. If problems arise, management should consider the need for inventory procedures throughout the year to proactively address any issues in a timely manner. As there is not a ‘one size fits all’ plan, it is important to note aspects relevant to the inventory in the entity’s business environment and design a comprehensive inventory observation.

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Dave Van Damme

Shareholder, Advisory & Assurance

Leading the firm's advisory & assurance group, Dave supports closely held businesses with audits, financial reporting and fraud analysis.

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