For any industry, organization, and business where inventory is material to the overall financial statements, the existence of that inventory is going to be a relevant assertion for auditing purposes. To get coverage over this assertion an auditor should obtain sufficient appropriate audit evidence regarding the existence and condition of the inventory.
Historically, the generally accepted way an auditor can obtain evidence of the existence of the inventory is by physically going to the location(s) of where the inventory is kept and physically observing an inventory count with the employee(s) of the entity being audited.
With COVID19 impacting all industries and businesses in myriad ways, inventory observation was one item on the list for auditors and businesses with material inventory levels. There are multiple businesses, especially within the food agriculture sector, that do not allow even their own employees on premise, let alone an external party.
The solution? Virtual observation. The first question that comes to mind is, “is this methodology/idea even permissible under auditing standards?”
According to the AICPA, AU-C §501.A34:
In some cases, attendance at physical inventory counting may be impracticable. This may be due to factors such as the nature and location of the inventory (for example, when inventory is held in a location that may pose threats to the safety of the auditor).
It is reasonable to assume that COVID19 has created a threat to the safety of the auditor, and therefore a physical inventory count may be impractical. This does not imply that no inventory count should be done.
Herbein is committed to serving the food agriculture sector. This industry operates under heavy regulations and requirements on a “normal” day-to-day time, let alone during a pandemic.
My specific experience was with a cheese processing plant.
Every year in April, a team of two Herbein team members go down to the plant and physically count various inventory on hand. This process typical takes approximately 4 hours and is spent in a refrigerated warehouse – we are dealing with cheese, after all.
In 2019, the plant changed from a full inventory count to cycle counts. This meant the plant, instead of counting inventory on hand once a year, now randomly selects various rows or sections of the inventory on hand to be counted weekly.
With this process, for auditing purposes an auditor must observe individual cycle counts throughout the entity’s fiscal year. Of course, April was approaching, and it was nearing time to go out of state and observe an inventory count.
With the stay at home orders in place, we were unable to physically go the cheese plant. Herbein contacted the cheese plant and discussed various other options, including a virtual inventory count. Due to the size of the plant and inventory counts requiring physical labor, various technologies were immediately eliminated due to warehouse employees not being able to utilize a stationary PC. It was determined that FaceTime via cell phone would be the best option.
Prior to the day of the count, Herbein tested the cell phone connection to make sure the quality of the FaceTime video was adequate. Herbein met with the shipping manager, via FaceTime and went over the various reports that would be needed prior to the inventory count. We also explained what we need to validate to get audit coverage. It was simply a case of, “we need to see what you are seeing.”
The day of the inventory count arrived. The warehouse sent the inventory selection over to Herbein on the morning of the count. Our firm FaceTimed the shipping manager, (the man on the ground) while two warehouse workers used manufacturing lifts to bring down the inventory being counted off high shelves. One by one, we went through the list and the shipping manager ensured I could see what they were seeing.
All in all, it was a positive, enlightening experience. We were able to get the audit coverage needed, did not have to drive a substantial distance, and did not have to spend an afternoon in a refrigerated warehouse. In pre-pandemic times, we would not have explored or discovered other auditing techniques. This experience allowed us to be innovative, identify new opportunities, and to define new ways of working.
Article submitted by Kara Gallen. For additional information contact us at email@example.com.
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