Inventory Audit: Existence Is Not Valuation

Finding an item in the warehouse does not establish that its recorded value is recoverable. Inventory assurance needs evidence about quantities and evidence about measurement. One does not replace the other.

Two questions about the same stock

The existence question asks whether recorded inventory is physically present at the relevant date. The valuation question asks whether its carrying amount is appropriate under the applicable accounting framework.

In an illustrative warehouse, a carton can be present, correctly identified and counted, while its contents are damaged or its market has changed. The count may support quantity; the condition raises a separate question about value.

Follow the records in both directions

Tracing selected recorded items to physical stock can help assess existence. Selecting physical items and tracing them to the records can help assess completeness. The selection, locations and procedures should respond to the risks; neither direction alone answers every inventory assertion.

Verify item identity, unit of measure and location. Investigate count differences and determine whether final inventory records reflect the actual results. A spreadsheet that balances after adjustments is not a substitute for explaining those adjustments.

For material inventory in Australian financial-report audits, ASA 501, paragraphs 4–5 addresses count attendance and final records, as well as intervening movements when count and reporting dates differ.

Use condition as evidence, not a final valuation

Look for damage, deterioration, expiry exposure and obsolete specifications. Link observations to identifiable items and record their condition.

These indicators guide further work. They do not justify an automatic write-off or a universal percentage allowance. Slow movement may reflect a seasonal product, a deliberate spare holding or a genuine loss of demand. Assess the circumstances rather than treating age as the conclusion.

Test the measurement separately

For inventories within IAS 2's relevant measurement requirements, IAS 2 uses the lower of cost and net realisable value. Net realisable value reflects expected selling proceeds less estimated completion and necessary selling costs; it is not simply the latest shelf price.

The IFRS Interpretations Committee's June 2021 decision clarifies that necessary selling costs are not restricted automatically to incremental costs. Assess the facts and nature of the inventory.

Evaluate the cost basis and information supporting recoverability. Illustrative evidence might include purchase records, costing calculations, sales terms, subsequent transactions and estimated costs still needed to sell. Consider whether those records relate to the same items and condition at the reporting date.

A subsequent sale can inform an assessment, but its timing, quantity, terms and relation to reporting-date conditions still matter.

Connect the two lenses

An original practical review map keeps quantity and value visible together:

• Record to stock: test whether recorded items are present.
• Cost basis: assess the recorded cost and its support.
• Stock to record: investigate physical items missing from records.
• Recoverability: evaluate expected proceeds and remaining costs.
• Condition and date: link physical observations and movements to the period.
• Supported conclusion: distinguish quantity findings from valuation effects.

The two-lens map is a learning aid, not a complete inventory audit programme. Rights, cut-off, classification and disclosure may also require evidence. Goods in a warehouse can belong to another party.

Make the conclusion useful

Management owns inventory records and accounting estimates. The auditor evaluates the evidence against engagement objectives and applicable requirements.

Explain whether an issue affects quantities, cost, recoverability or more than one of these. Keep unresolved differences visible and assess their consequences. That gives management a clearer response than a single label such as "stock checked."

The count supports quantity. Valuation asks what amount is supported.