Accounting, Financial, Taxation

Are you the one who responsible for physical inventory count conduct? If yes, this General Physical Inventory Count Procedure may useful for you. This procedure is used to create a structured approach to a physical inventory count.

Physical inventory count is mainly a controller’s responsibility, but in small business, it could be fall into the business owner’s task or an accounting staff. For sure, this would not be done by one person. It would be by a team. Anyway, whoever should, here is a general procedure for effective physical inventory count:

Preparation For The Physical Inventory Count

Take the following steps one week before the physical count:

1. Contact the printing company and order a sufficient number of sequentially numbered count tags. The first tag number should always be “1000.” The tags should include fields for the product number, description, quantity count, location, and the counter’s signature.
2. Review the inventory and mark all items lacking a part number with a brightly colored piece of paper. Inform the warehouse manager that these items must be marked with a proper part number immediately.
3. Clearly mark the quantity on all sealed packages.
4. Count all partial packages, seal them, and mark the quantity on the tape.
5. Prepare “Do Not Inventory” tags and use them to mark all items that should not be included in the physical inventory count.
6. Issue a list of count team members, with a notice regarding where and when they should appear for the inventory count.

One Day before the Physical Inventory Count

1. Remind all participants that they are expected to be counting the next day.
2. Notify the warehouse manager that all items received during the two days of physical counts must be segregated and marked with “Do Not Inventory” tags.
3. Notify the manager that no shipments are allowed for the duration of the physical count.
4. Notify the warehouse manager that all shipments for which the paperwork has not been sent to accounting by that evening will be included in the inventory count on the following day.
5. Notify the warehouse manager that all shipping and receiving documentation from the day before the count must be forwarded to the accounting department that day, for immediate data entry. Likewise, any pick information must be forwarded at the same time.
6. Notify all outside storage locations to fax in their inventory counts.

Morning of the Physical Inventory Count

1. Enter all transactions from the previous day.
2. Assemble the count teams. Issue counting instructions to them, as well as blocks of tags, for which they must sign.
3. Give each team a map of the warehouse with a section highlighted on it that they are responsible for counting.
4. Those teams with forklift experience will be assigned to count the top racks; those without this experience will be assigned the lower racks.
5. Call all outside storage warehouses and ask them to fax in their counts of company-owned inventory.
6. The count supervisor assigns additional count areas to those teams that finish counting their areas first.
7. The tag coordinator assigns blocks of tags to those count teams that run out of tags, tracks the receipt of tags, and follows up on missing tags. All tags should be accounted for by the end of the day.
8. The data entry person enters the information on the tags into a spreadsheet, and then summarizes the quantities for each item and pencils the totals into the cycle count report that was run earlier in the day.
9. The count supervisor reviews any unusual variances with the count teams to ensure that the correct amounts were entered.
10. Review the test count with an auditor, if necessary. Give the auditor a complete printout of all tags, as well as the cycle counting spreadsheet, showing all variances.

Job Descriptions For The Count Team Member

The count supervisor is responsible for supervising the count, which includes assigning count teams to specific areas and ensuring that all areas have been counted and tagged. This person also waits until all count tags have been compared to the quantities listed in the computer, and then checks the counts on any items that appear to be incorrect.

The tog coordinator is responsible for tracking the blocks of count tags that have been issued, as well as for accounting for all tags that have been returned. When distributing tags, mark down the beginning and ending numbers of each block of tags on a tracking sheet, and obtain the signature of the person who receives the tags. When the tags are returned, put them in numerical order and verify that all tags are accounted for. Once the verification is completed, check off the tags on the tracking sheet as having been received. Once returned tags have been properly accounted for, forward them to the extension calculation clerk.

The extension calculation clerk is responsible for summarizing the amounts on the tags (if there are multiple quantities listed) to arrive at a total quantity count on each tag. This person also compares the part numbers and descriptions on each tag to see if there are any potential identification problems. This person forwards all completed tags to the data entry person.

The data entry person is responsible for entering the information on all count tags into the computer spreadsheet. When doing so, enter all the information on each tag into a spread sheet. Once a group of tags has been entered, stamp them as having been entered, clip them together, and store them separately. Once all tags are entered in the spreadsheet, sort the data by part number. Print out the spreadsheet and summarize the quantities by part number. Transfer the total quantities by part number to the cycle count report. If there are any significant variances between the counted and cycle count quantities, bring them to the attention of the count supervisor for review.

Time and Place For Physical Inventory Count

The count begins at 7:30 am and ends at 4:30 pm on the first day of the count. If the count continues to a second day, it will begin at the same time, and count teams will be released whenever the counts have been completed. On both days, all count teams should meet at the warehouse gate.

Counting Responsibilities

1. Count the bin locations assigned to you. These will be marked on a map of the warehouse with a highlighter. When you have counted all of the items in your assigned area, return to the count supervisor, who will assign additional count areas to you.
2. For each item counted in a separate bin location, enter the product code and date on the part of the inventory tag that is labeled “Pallet” and tape it to the inventory item. Rip off the other part of the tag and mark on it the product code, description, location, and quantity counted. Also initial the tag or list the number of your count team. Keep this part of the tag and return it to the tag coordinator when you run out of tags. This person will ensure that all of the tags assigned to you have been returned. If some are missing, you must locate and return them to the tag coordinator.
3. If there are many boxes of the same item to count, list the individual amounts on a tag, and an extensions calculation person will add them up for you. For example, if there are 18 boxes of 300 and a partial box of 12, just enter (18 × 300) + 12 on the tag.

General Information

1. Do not count any item that has a “Do Not Inventory” tag on it.
2. Scales will be provided to all count teams. The warehouse supervisor is available for training in the use of scales.
3. Use a pen (not a pencil) to enter information on count tags. To make a quantity correction, put a line through the old quantity, write the new quantity next to it, and initial the change.
4. ALL tags must be accounted for! If you do not use some, return them to the tag coordinator.

The first thing that needs to be in place to ensure competent internal auditors is effective human resource policies and practices. Here we are concerned with the attributes of successful internal auditors. A formal Practice Advisory deals with proficiency and requires that each internal auditor should possess certain knowledge, skills, and other competencies:

1. Proficiencies in applying internal auditing standards and procedures
2. Proficiency in accounting principles and techniques
3. An understanding of management principles
4. Appreciation of accounting, economics, commercial law, taxation, finance, quantitative methods and IT.
5. Skilled at dealing with people and communicating
6. Skilled in oral and written communications

The organization of the future will be a conveyor of ideas with the sourcing of products and services a secondary issue. The customer says what they want, and the organization delivers. Meanwhile the organization also helps the customer raise their sights in envisioning what is available. In this way, the organization of the future is a collection of visions and intellects brought together by a dynamic information and communications network. The importance of getting the right competencies in staff has never been more crucial to business success, and internal auditing is no exception.

Some of the attributes that the competent internal auditor needs to demonstrate include the following (in no particular order):

1. Ability to apply innovative and creative thinking.
2. Ability to work to agreed timescales and account for time.
3. Able to add value to the organization.
4. Able to appreciate concerns of stakeholders and focus on needs of the customer.
5. Able to appreciate new ideas and embrace and encourage change.
6. Able to establish credibility with senior management and at grassroots.
7. Able to function within flexible working arrangements.
8. Able to plan work and have a sense of urgency in performing the audits.
9. Able to quickly build relationships but retain professional stance.
10. Able to work under pressure and set priorities.
11. Ambitious and confident without being overbearing.
12. Appreciation of business environment and new ventures.
13. Appreciative enquiry—looking for the positive in human undertakings based on the great energies that come from success and accomplishments.
14. Balance and common sense with an overall sense of fairness and diplomacy.
15. Basic technical skill—financial, legal, economics, accounting, auditing, computing, statistics, other analytical techniques, database and spreadsheet use, data interrogations and so on.
16. Can cope with travel requirements and overnight stays.
17. Commercial awareness.
18. Committed to continuous learning and open to training and development.
19. Committed to working within set corporate policies and section procedures.
20. Communications skills, oral, public speaking, writing, report writing, effective listening, written and interpersonal skills at all levels.
21. Diplomatic but persistent where required.
22. Emotional intelligence and good balance of emotions such as anger, sadness, fear, enjoyment, love, surprise, disgust, shame—and humility. The ability to apply social skills such as trustworthiness, empathy, adaptability.
23. Enthusiastic, task-oriented person, able to focus on the job in hand.
24. Facilitation skills with an emphasis on challenge and co-ordination.
25. Formal report writing.
26. General management skills and able to provide direction, delegate and monitor results through performance review.
27. Global perspective and interest in international developments.
28. Good balance of consulting and assurance approaches and able to reconcile possible conflicts between helping people and reviewing systems.
29. Good decision making and judgment with no special bias to self-interests.
30. Good interviewing technique and able to empathize with the client.
    Good problem solver and able to weigh up pros and cons of different options and to see around the problem through to solutions.
31. Intellectual capacity and able to see things for what they are and ascertain causal relationships between problem, cause and effect.
32. Interpersonal skills recognizing group dynamics and people behavior.
33. Leadership and drive with a clear sense of direction.
34. Mature and professional enough to deal with different types of people and operate across different cultures.
35. Negotiation skills and some tenacity in sticking to crucial points.
36. Objectivity and independence with an ability to remain impartial.
37. Practical edge in applying policy and an understanding of any limitations.
38. Presentation skills.
39. Project management skills.
40. Self-motivated with good initiative, and enthusiastic even when performing mundane tasks.
41. Some commitment to developing a career in internal audit.
42. Task-focused and good at applying energies to delivering results.
43. Team player—able to buy into team working and team tasks with an understanding of the importance of being friendly, participative and helpful, and having fun where possible.
44. Track record of achievement and completion of tasks.
45. Understanding of internal audit procedures and quality requirements.
46. Understanding of modern audit techniques including corporate governance, risk management and control.
47. Understands big picture but can respond to detail when required, notwithstanding apparent ambiguity.

The new look creates a very demanding role. It includes all those aspects that make a good traditional auditor with a hard nose and deep concern with getting to the truth, and the new approach of being a top-flight consultant on risk and control issues.

Audit Training and Development

Training is an important aspect of developing internal auditors, and has to be carefully planned in line with a career developmental program. A professional level builds on and extends the subjects that are covered at practitioner stage. As well as internal auditing topics, there is coverage of financial and general management, information systems and a new module dedicated to the topic of corporate governance and risk management. The advanced internal auditing paper is based around a case study that is available before the examination date, so reflecting the growing trend towards more practical work.

There is an entire spectrum of developing people at work that includes:

1. Training—program for getting people to learn to do things differently.
2. Development—untaught activity to increase/improve performance.
3. Education—formal courses to develop knowledge and qualifications.
4. Learning—acquiring better skills, knowledge and attitudes.

There are various ways that audit staff may be trained and developed:

1. Specialist skills training via internal or external skills workshops - These can be extremely efficient in terms of auditor development.
2. Professional training - This may be based on passing examinations of a defined professional body such as the Institute of Internal Auditors, which is a completely different form of training from skills-based courses.
3. The training coordinator - Appointing a training co-ordinator is a positive way of promoting various training program, particularly where the co-ordinator can undertake some of the actual training.
4. Directed reading - This is one way of encouraging auditors to research aspects of internal audit. The department should subscribe to all relevant journals and publications.
5. Training through work - Programmed audits enable audit management to ensure auditors are rotated and exposed to a variety of audits and experiences. It is possible to designate smaller audits as ‘training audits’ where they form part of the auditors’ personal development program.
6. The audit review - The audit review process enables audit managers and team leaders to direct the work of junior staff and also provides experience in staff management.
7. Professional affiliations - These can be part of continuing professional development (CPD) and stimulate group discussions.
8. The audit manual - This sets out the defined methods and procedures required to discharge the audit mission.

Training is part of the managerial process and as such forms only one constituent of the overall system of human resource management. It cannot be seen in isolation from the other techniques for developing audit staff. Not all auditors remain in the audit shop for long periods of time. This ‘short-stay syndrome’ results because organizations view internal audit as an ideal place to train managers. There are many who do not view internal audit as a career in its own right and, for example, trainee accountants may wish to return to main line accountancy after a spell in audit.

This poses a problem in that extensive training is lost on audit staff who will not remain with the department for long. All staff should be developed and those who may wish eventually to leave auditing will simply be replaced by other auditors. Vacancies create scope for internal promotions for auditors who excel via their development programmes. The only concern is that short-stay staff should not be placed on professional qualification programs as these last several years and require a major commitment to a career in internal auditing.

Corporations whose debt and stock securities are traded on a stock exchange are required by its national securities law (where the entitity based in) to have their annual financial reports audited by an independent CPA firm. Beyond the large public companies, relatively few businesses are legally required to have their financial statements audited by independent CPAs.

A study by the international CPA firm Coopers & Lybrand (since merged with Price Waterhouse) analyzed US federal income tax data and found that there are more than 8.5 million business corporations, partnerships, and limited liability companies, as well as several million sole proprietorships (one-owner business ventures). Not very many of these business entities are required to have audits. Nevertheless, a business may decide to have its financial reports audited even though federal or state securities laws do not apply.

Lawyers should be consulted regarding national corporation and securities laws; an audit may be required in certain situations. A business may sign a contract or agree informally to have its annual financial reports audited as a condition of borrowing money or when issuing capital stock to new investors in the business.

As just mentioned, public corporations have no choice; they are legally required to have audits of their annual financial reports by independent CPA firms. But, if not required should a business hire a CPA firm to audit its annual financial report? What’s the payoff? Basically, an audit adds credibility to the financial report of a business. Audited financial reports have a higher credibility index than un-audited statements.

Audits by CPAs provide insurance against misleading financial statements. Auditors are expert accounting system detectives, and they thoroughly understand accounting principles and financial reporting standards. Being independent of a business, the CPA auditor will not tolerate fraud in the financial report.

Audits don’t come cheap. CPAs are professionals who command high fees. A business cannot ask for a “once-over lightly” audit at a cut rate. An audit is an audit. CPAs are bound by generally accepted auditing standards (GAAS)—the authoritative guidelines in doing audits. There is no such thing as a bargain–basement audit, or a quick-and-dirty audit that only skims over a company’s accounting records. Violations of GAAS can result in lawsuits against the CPA and may damage the CPA’s professional reputation.

An audit takes a lot of time because the CPA has to examine a great deal of evidence and make many tests of the accounting records of the business before the CPA is able to express an opinion on the company’s financial statements. This time requirement causes the relatively high cost of an audit. A business manager, assuming an audit is not legally required, has to ask whether the gain in credibility is worth the cost of an audit.

A bank may insist on audits as a condition of making loans to a business. Or, the outside (non-management) stockholders of a business may insist on annual audits to protect their investments in the business. In these situations the audit fee is a cost of using outside capital. In many situations, however, outside investors and creditors do not insist on audits. Even so, a business may choose to have an audit as a checkup on its accounting system. A business may decide it needs to have a security check—an independent examination focusing on whether the business is vulnerable to fraud and embezzlement schemes.

There is always a chance of embezzlement and fraud by employees or managers who take advantage of their positions—for example, accepting kickbacks or other under-the-table payments from customers and vendors. Employee theft and dishonesty are, unfortunately, rather prevalent. A financial report audit may uncover theft and fraud. However, the detection of fraud is not the main purpose for auditing financial reports, even though many people are under the false impression that this is the primary purpose of an audit. It is not!.

CPA auditors are required to plan their audit procedures to search for possible fraud and to identify weak internal controls that would allow fraud to go undetected. This is a side benefit of audits; but the main purpose of an audit is to express an opinion on the fairness of financial statements (including footnotes), and whether the financial statements adhere to generally accepted accounting principles.

Fraud would undermine the integrity of the financial statements, of course, so the CPA auditor has to be on the lookout for fraud of all types (as well as for accounting errors). But the CPA says nothing at all about fraud in the audit report. There is no statement such as “we looked for fraud but didn’t find any”.

For further reading about auditing, you may want to read the following entries as well: