The Stock Figure the Auditor Rebuilds

The email arrives in the second week of January, and it is short. The audit senior would like the inventory listing at 31 December, with quantity, unit cost and value for every item; the reconciliation of that total to the inventory account in the trial balance; the count sheets from the year-end count, with the variances and who approved them; and, from the attached list, twenty-five stock adjustments over a certain value, each with its reason, its approver, the quantity before and after, and the cost used. The finance manager forwards it to the storekeeper with one line: “Can we get this by Friday?” Whether that is a morning’s work or a fortnight’s depends almost entirely on what happened on the last day of December.

What the auditor is going to do with your number

Stock is one of the largest figures on most balance sheets and one of the easiest to get wrong, so audit plans usually give it four separate tests, each asking something different of the system.

• Recompute the valuation. Take the listing, multiply quantity by unit cost for a sample of lines, add it up, and check the total. Then trace the unit cost for a few items back to purchase evidence.
• Tie it to the ledger. The listing total should agree with the inventory account balance at the same date, or the difference should be explained line by line.
• Attend or review the count. Either someone from the audit firm watches the count and test-counts a few items, or they review the count records afterwards: who counted, what was expected, what was found, who approved the difference.
• Sample the adjustments. Every write-off, write-on and correction during the year changed the figure without a purchase or a sale behind it, so the auditor picks some and asks for the reason, the approval, the quantities and the cost.

We covered what an adjustment is, and why it is where inventory fraud tends to hide, in What Is a Stock Adjustment?. This post is about the evidence each of those four tests needs, and where it lives.

Quantity: a count that becomes a movement, not an overwrite

A count session in AWRA OpsHub is scoped to a warehouse, a location, a category or a list of items, and gets its own number. When it opens, it takes a snapshot of every line it covers: the quantity the books expect and the unit cost at that moment. From then on, the count is measured against that snapshot.

1. Decide whether to freeze

   A session can freeze stock. While it is open, any movement on the items and locations it covers is refused, so nothing is received or issued between the snapshot and the count. It is off by default; for a year-end count it should be on, because it is your cut-off control.

2. Count blind

   Sessions are blind by default: counters see the item and the shelf, not the quantity the system expects. How far the hiding goes is the subject of The Number the Counter Is Not Shown.

3. Submit each line

   The counted figure is recorded with the person, the time, the device and any reason they gave. The variance and its value, at the snapshot cost, are worked out on the spot.

4. Review the variances

   Small variances can pass automatically under rules you set by quantity, value or percentage, per warehouse or category. Everything else waits for a reviewer, who approves it or asks for a recount with a reason. An approved line cannot be overwritten; a recount reopens it on the record.

5. Sign twice

   The counter signs that the sheet is complete, and the reviewer signs the variance approval. Each signature is an event on the session with the signer’s name.

6. Raise the movements

   Approved variances become stock adjustments: one for stock found, one for stock missing. Both start as pending, carry the count’s number in their notes, and move nothing until somebody approves them.

Cost: which number the quantity is multiplied by

Each item carries a moving average cost. Every receipt blends what was on hand at the old average with what arrived at its own cost, so the average moves with every delivery rather than sitting at a price somebody typed once. Stock held for customers or on consignment is counted and never valued, which is what you want: it is on your shelf and not on your balance sheet. How the average is built is set out in What the Stock on the Shelf Actually Cost, and why a past cost is never restated in The Cost You Cannot Go Back and Change.

What matters for the audit is that each receipt line keeps the cost it was received at, and records where that cost came from. In order of preference:

• Typed on the receipt, in the currency it names, converted at the rate recorded with it.
• From the purchase order, at the agreed price net of any inclusive tax, converted at the order’s own rate where it has one.
• Found in a count, at what the item already cost at the moment the gain was approved.
• The current average, where none of the above applies, and the item’s buying price only as a last resort.

Issues work the other way round. When stock is issued, the line is stamped with the unit cost at the moment it was raised, and that stamp is what the ledger uses, even if the average moves before somebody approves it. A count shortage uses the cost from the count’s own snapshot, so the write-off in the ledger is exactly the variance value the reviewer approved.

The ledger: the same cost, dated when it posted

When an adjustment is approved and posted, each line writes a journal at that line’s cost. A receipt debits inventory and credits payables where a supplier document says someone is owed, or a receiving clearing account where nobody is, such as stock found in a count. An issue or write-off credits inventory and debits an expense account, or work in progress where the stock was charged to a job. Every entry carries the adjustment’s reference, so the auditor can go from a line in the ledger to the document behind it and back.

Two rules on the journal side matter at year-end. A posted journal entry cannot be deleted, in any month. And once a month is closed, nothing dated in it can be added, changed or removed. A system posting made after the close does not slip into the closed month; it is dated on the first open day instead. Plan for the consequence: if the year-end count’s write-off is approved on 6 January after December is closed, the stock moves and the journal posts in January. The auditor will see a December count and a January write-off. Either approve the count’s movements before you close the month, or have the explanation ready.

For the tie itself, the accounting reconciliation screen sets the inventory account balance beside the value of what is on hand at each item’s cost, using the same cost basis the ledger uses, so a difference is a real difference rather than two methods disagreeing. It shows the position now. On the closing day, after the last movement, “now” is the year-end, which is one more reason to do the work then.

The sample: twenty-five adjustments, five questions each

For each adjustment on the auditor’s list, open its record. The detail page shows the lines, the reason, the notes and attachments, and a timeline of who raised it, who approved it, who posted it and who rejected it. Here is how each of the auditor’s questions is answered.

The control the auditor will look at hardest is approval of large write-offs. Under inventory settings you can set an approval threshold in your base currency. An adjustment valued at or above it, quantity moved times the item’s average cost, counted in both directions so stock moved out and back does not net to zero, needs an approver who holds a separate high-value permission. And by default the person who raised it cannot approve it, whatever they hold. That rule applies to count shortages too. If you have a single administrator, leave the threshold blank rather than switch the second-person rule off, and tell the auditor that is what you did.

What nobody can quietly change afterwards

Underneath all of this sits the workspace audit log. Write actions across the product, meaning creates, updates, approvals and deletions, are recorded with the person, the time, the address they came from and the record it touched. So is every export, download and print, which means the auditor’s own evidence pull is on the record too. Each entry is chained to the one before it with a keyed hash, so an edited or deleted row breaks the chain, and the audit log screen has a verify action that says whether it is intact. There is no delete action for audit entries; they leave only through the retention schedule, and that purge records itself. The log can be exported for the audit file. The trust side of that export is covered in The Audit Trail That Leaves the Building.

Around it, the records themselves hold their ground. An approved count line refuses a new figure. A count-raised adjustment cannot be edited. Posted journals cannot be deleted, and a closed month cannot be changed. The adjustment record also keeps a history of changes to its own fields: reason, status, notes and the people on it.

Where the year-end figure is rebuilt rather than recorded

The inventory valuation report takes an “as of” date. Pick 31 December in February and it rolls each item’s quantity back by undoing the check-in and check-out lines raised after that date. It is useful, and it is a reconstruction, for three reasons worth knowing before you hand it to an auditor.

• The cost is today’s. The rolled-back quantity is multiplied by each item’s current moving average, not the average on 31 December. If January receipts moved the average, the February listing for December is priced at January’s cost.
• It reads adjustment lines only. Till sales, assembly builds and supplier returns move stock through their own records, so a rollback past a busy January of till sales will not undo them.
• It dates by when a line was raised. A movement raised in December and approved in January is treated as December’s.

Frequently asked questions