Audit and Assurance · The audit of specific items

Audit of Inventory and Inventory Counting for ACCA AA

Updated 11 October 2026 · Fact-checked

Auditing inventory means gaining evidence that it exists, is complete, is owned, is correctly valued at the lower of cost and net realisable value, and is recorded in the right period. You do this by attending the count, testing cut-off, testing cost and NRV, and tracing count records to the final inventory listing.

Understand Audit of Inventory and Inventory Counting

Inventory is often the most risky balance for a trading or manufacturing client. It is large, it is physically spread across sites, it moves constantly, and valuation needs judgement. That is why the auditor cannot rely on the client's records alone.

Start with the assertions. Existence: the inventory is really there. Completeness: all inventory is included. Rights and obligations: the client owns it, so consignment stock held for others is out and goods held on sale or return need thought. Valuation: IAS 2 requires the lower of cost and net realisable value (NRV). Cut-off: purchases, sales and movements are in the correct period.

The main source of evidence for existence and completeness is the inventory count. Under ISA 501, if inventory is material, the auditor must attend the count unless it is impracticable. Management is responsible for the count. The auditor observes and tests. The auditor does not run it.

The auditor's work falls into three stages: before the count (planning), during the count (observation and test counts), and after the count (follow-up, cut-off and valuation). Exam answers score best when they are organised this way and linked to the scenario.

Valuation is tested separately. Cost is checked to supplier invoices, and labour and overheads are checked in manufacturing. NRV is checked to selling prices after the year end, less costs to complete and sell. Slow-moving, damaged or obsolete items are the main risk of overvaluation.

Key rules to remember

IAS 2 valuation rule: Inventory = lower of (cost, NRV); Apply item by item or by group of similar items, not to the total in one go.
Net realisable value: NRV = estimated selling price − estimated costs to complete − estimated costs to sell; Use the best evidence of selling price, such as post year-end sales.
Direction of test counts (during the count): Floor to sheet = completeness; sheet to floor = existence; Select items on the floor and trace them to the count sheets to test completeness. Select items on the count sheets and trace them to the floor to test existence.
Cut-off check (sales): Goods despatched up to the year end = sales of the year and not inventory; goods despatched after the year end = inventory and not sales of the year; Goods despatched on or before the year end must be included in that year's sales (even if not yet invoiced) and excluded from inventory. Goods despatched after the year end must be excluded from that year's sales and included in inventory. Compare the last goods despatched note (GDN) number before the year end, recorded at the count, with the sales records to confirm this.
Cut-off check (purchases): Last goods received note (GRN) number before the year end must agree with the purchases and payables recorded in the year; Goods received after the year end must be excluded from inventory, purchases and payables for the year. The same cut-off applies to payables and inventory.

How to solve Audit of Inventory and Inventory Counting questions

Use this method for any question on inventory audit procedures, whether it asks about the count, cut-off or valuation.

1Read the requirement. Decide whether it asks for procedures before, during or after the count, or for a specific assertion such as valuation.
2Pick out the scenario facts: types of inventory, number of sites, high-value items, perishable or obsolete goods, and whether the count is at year end.
3Match each fact to an assertion and a risk. For example, many sites point to existence and completeness, and old stock points to valuation.
4Write procedures as actions: observe, inspect, test count, agree, trace, compare, enquire. Avoid vague words such as check or review.
5State what each procedure proves, such as existence, completeness or cut-off, if the requirement asks for the purpose.
6Include a procedure that follows count records through to the final inventory listing.
7Link at least some points to the scenario instead of giving a generic list.
8End with a quick check that you have covered existence, completeness, valuation and cut-off if the question is general.

Quickest way: Before, during, after

When to use it: Use it when the question simply asks for audit procedures at an inventory count and you have little time.

Write three headings in your plan: before, during, after.
Before: review the count instructions, discuss them with management, understand the inventory and where it is held, and decide the sites and items to visit.
During: observe staff following instructions, perform test counts both ways (floor to sheet and sheet to floor), note damaged or obsolete items, record cut-off details and the last document numbers.
After: trace test counts to the final listing, test cut-off, test cost and NRV, and follow up any differences or uncounted items.
Add one scenario-specific point for each heading to earn the application marks.

Common mistakes in Audit of Inventory and Inventory Counting

Saying the auditor performs or controls the count.
Students confuse attending a count with organising it.
Fix: State that management is responsible for the count and that the auditor observes and performs test counts.
Testing only from count sheet to floor.
It feels natural to check what is written down.
Fix: Do both directions. Sheet to floor supports existence. Floor to sheet supports completeness.
Writing vague procedures such as 'check the inventory is valued properly'.
Students know the objective but not the action.
Fix: Name the evidence, for example agree cost to supplier invoices or compare NRV with post year-end selling prices.
Forgetting cut-off.
Cut-off is a separate step after the count, so it is easily forgotten.
Fix: Record the last GRN and GDN numbers at the count, then test later that movements are in the right period.
Treating NRV as selling price only.
Students forget costs to complete and sell.
Fix: Always deduct the costs to complete and the costs to sell, and compare the result with cost.
Giving a generic list that ignores the scenario.
Students rush to recall a memorised list.
Fix: Tie each procedure to a scenario fact, such as seasonal goods, multiple warehouses or third-party storage.

Worked examples

Example 1

A wholesaler has a year end of 31 December and holds high-value electronic goods in three warehouses. The count is on 31 December. Describe the audit procedures the auditor should perform during the count.

Show the solution

Identify the risks: high value and many sites point to existence and completeness errors, and electronics point to obsolescence.
Observe whether staff follow the count instructions, for example that items are counted by teams and that count sheets are controlled.
Perform test counts: select items from the floor and agree them to the count sheets (completeness), and select items from the count sheets and agree them to the floor (existence).
Inspect items for damage, obsolescence or slow movement and note them for the NRV review.
Obtain cut-off information, including the last GRN and GDN numbers, and note any goods in transit or awaiting despatch.
Check that goods held for third parties are separated and identified, and that count sheets are numbered and signed.
Prioritise the highest-value items and the larger warehouses given the risk.

Answer: During the count the auditor observes that the instructions are followed, performs test counts in both directions, notes damaged or obsolete items, records cut-off details, and checks that third-party inventory is identified and excluded, focusing on high-value electronics and the three sites.

Example 2

The same wholesaler holds inventory at cost of ₹12,00,000 for a product line. After the year end it sold the line at ₹10,00,000, with selling costs of ₹60,000. Explain how the auditor tests valuation and state the amount at which the line should be carried.

Show the solution

Test cost by agreeing a sample of purchase prices to supplier invoices.
Estimate NRV from post year-end sales evidence: selling price ₹10,00,000.
Deduct costs to sell: ₹10,00,000 − ₹60,000 = ₹9,40,000. There are no costs to complete.
Compare with cost: cost is ₹12,00,000 and NRV is ₹9,40,000. The lower figure is NRV.
Write-down required = ₹12,00,000 − ₹9,40,000 = ₹2,60,000.
Check that management has recorded the write-down and consider whether similar lines also need testing.

Answer: The line should be carried at its NRV of ₹9,40,000, which means a write-down of ₹2,60,000. The auditor agrees cost to invoices, tests NRV to post year-end sales less selling costs, and checks that the write-down is recorded.

Exam tips

Structure count answers as before, during and after. It keeps you organised and shows the marker the breadth.
Use action verbs and name the document, for example GRN, GDN, count sheet or supplier invoice.
In OT cases, read carefully for the direction of the test: floor to sheet tests completeness, sheet to floor tests existence.
For valuation, name both cost testing and NRV testing, and mention post year-end sales as evidence.
If a question mentions inventory held at third-party locations or a count at a different date, think confirmation from the third party and roll-forward or roll-back procedures.

Audit of Inventory and Inventory Counting in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Audit of Inventory and Inventory Counting: frequently asked questions

Must the auditor always attend the inventory count?

If inventory is material, ISA 501 requires attendance unless it is impracticable. If attendance is impracticable, the auditor must perform alternative procedures to obtain sufficient appropriate evidence of existence and condition. If that is not possible, a modified opinion may result.

What is the difference between existence and completeness tests on inventory?

Existence tests that recorded inventory is really there, so you select from the count sheets and find it on the floor. Completeness tests that all inventory is recorded, so you select from the floor and find it on the count sheets.

How do you test inventory cut-off?

At the count, record the last GRN and GDN numbers. Afterwards, agree goods received and despatched around the year end to the records to confirm they are in the correct period. Check that invoices and inventory movements match.

How does an auditor test NRV?

Compare cost with expected selling price less costs to complete and sell. Use post year-end sales, price lists and information on damaged or slow-moving items. Where cost exceeds NRV, check a write-down has been made.