Many businesses are closed or are limiting third-party access as COVID-19 surges across the United States. These restrictions could still be in place at year end — a time when external auditors traditionally observe physical inventory counts for calendar-year entities. Here’s how you can identify and overcome the challenges associated with inventory counts during the pandemic.
What’s expected to change?
Companies conduct manual counts at the end of the accounting period to ensure that the inventory balance reflected on their balance sheet matches what’s held on-site in raw materials, work-in-progress and finished goods. The extent to which your counting procedures will need to change during the COVID-19 crisis depends on your circumstances.
For example, you may need to make only minimal changes to protect employees and third parties, if your inventory is stored in one warehouse and requires only a small team to conduct the count. Possible safety measures might include:
- Requiring employees to wear personal protective equipment,
- Providing hand sanitizer and disinfectant spray, and
- Setting up counting stations and other procedures to facilitate social distancing and capacity restrictions.
In some extreme situations (for example, if local stay-at-home mandates have been issued), your management team may decide to delay or even forgo an inventory count. If you face this situation, document the reasoning for your decision and share it with your auditors, board of directors and audit committee.
Be prepared for these groups to suggest alternative ways to conduct an inventory count. They might also request that your team identify an alternate date to conduct the count. If the count date is significantly later than the financial statement date, the audit team will pay close attention to how the count differed from what’s recorded in your inventory records.
What if your auditor can’t attend a physical count?
There are several reasons your auditor might be unable to observe your physical count in person, including government restrictions and company or audit firm policies designed to mitigate the spread of COVID-19. If this happens, you and your audit team will need to devise alternate ways to gather audit evidence pertaining to your company’s inventory.
The options available depend on the accuracy and integrity of your company’s inventory records, coupled with the auditor’s previous experience and observations related to your company’s inventory counts. For example, your auditors could use the inventory balance associated with the last count they observed, coupled with subsequent sales and purchases data to roll forward and generate a new inventory balance.
Alternatively, some companies use cycle count procedures. This is a form of sampling that involves counting a small amount of inventory on a regular basis and making corrections to the inventory system. These counting methods can circumvent the need for an annual inventory count.
Technology to the rescue
If you proceed with an inventory count, don’t overlook technology and its ability to document the existence of inventory and its location. For example, those involved in the inventory count could wear body cameras with GPS capabilities, or auditors could use drones, to observe the count in real-time. Additionally, those conducting the count can refer to video footage after the fact to verify the amounts they document during the process.
We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this may impact you.