How COVID-19 Is Affecting Inventory Observations

March 30, 2020 | Article

The impact of COVID-19 is being felt in seemingly otherwise normal business circumstances. One area being disrupted for several organizations is their annual audit. From CPAs being unable to conduct onsite field work to components of the audit being affected, it’s hard to tell the best way to progress forward with this annual requirement.

One of the key affected areas is inventory observation. Below are some of the common questions we’ve been getting in relation to inventory observation and the coronavirus pandemic.

We recently broke down financial reporting items to consider in the wake of COVID-19.

Our facilities are currently closed or have limited operations. Do we have to complete an inventory observation this year for our audit?

If inventory is a significant balance in your financial statements, an inventory observation still needs to be completed in order to receive an unmodified audit opinion. If an inventory observation cannot be completed, there could be a scope limitation on the completion of the audit resulting in an opinion modification.

But the good news is, the use of video or other virtual technology may be acceptable in completing a remote inventory observation. This comes in lieu of an onsite visit, with some parameters of course, and won’t be an effective means to perform a count for certain types of inventory.

Here are a few things your auditors will need to do to complete a remote inventory observation:

  1. The auditors need to observe inventory in a real-time feed, as opposed to a pre-recorded count that the auditor later views.
  2. The auditors must be able to verify that the streaming is taking place at the specified location.
  3. The inventory needs to be in good condition, organized, and of a nature that is practical to count remotely (for example – boxes or pallets) rather than something that requires measurement, like a pile of sand or gravel.

There are several things to consider when it comes to COVID-19’s impact. We’ve developed resources to help you make sense of it all.

Can we delay the date of our inventory observation to after our organization’s year-end?
Yes. You can delay your inventory observation if you do not anticipate a significant delay from year-end to when auditors are able to come onsite for inventory observation. However, there are certain additional procedures that need to be completed to roll-back the observed inventory balances from the observation counts to the year-end balance. Your auditor will then test the roll-back transactions. While this sounds simple, the nature of your inventory and the volume of purchases and sales that occur subsequent to year-end, coupled with the length of time between your year-end and the onsite inventory observation, could make these procedures extensive.

How do I know what I can and can’t complete in relation to my audit?
COVID-19 is impacting much of the way we do business and life. While some items can be delayed, there are others that will continue to move forward, often using a remote environment when possible. The best way to keep on top of everything is to stay in contact with your audit team on a regular basis. They will be able to help you sort through what can be done now and what can be delayed for your upcoming audit.

Have questions about the impact to your annual audit?

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