PHYSICAL INVENTORY OBSERVATION CHECKLIST

Name of Company Subsidiary or Division Location or Department Date(s) of Inventory Taking Date(s) of Observation Firm's Representative(s) Company representative in charge of inventory (or department)

The purposes of the physical inventory observation are to determine that (1) the inventory physically exists, (2) stated quantities fairly represent the actual quantities on hand at the date of the observation, and (3) the inventory is in a usable and saleable condition (e.g., not damaged or obsolete).

Instructions
This checklist covers information obtained and audit techniques usually employed during a physical inventory observation, including tests of perpetual inventory records. The checklist is not an exhaustive list of considerations for all observations. It is supplemented by additional procedures whenever appropriate. Some questions may be inappropriate for some observations. Questions that do not apply should be designated N/A (not applicable). A no answer is explained in the margin or in an attachment referenced to the related question. A checklist is prepared by each FRSH representative responsible for a location or department and is completed before leaving the inventory location. This checklist can be used in lieu of a physical inventory observation memorandum.

General Description of Inventory (indicate those that apply)

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Special Categories of Inventory (obtain particulars for audit follow-up): In-plant goods billed not shipped goods received not billed inventory held for others consignments in goods at outside location goods in transit to customers or from vendors consignments out

Off-plant

Special Classes of Inventory: Obsolete Overruns Excess supply Engineering models Damaged Special order

Give particulars for any classes listed above:

Yes

No

Explanation

Inventory Instructions
(1) Were adequate written instructions prepared covering each phase of the physical inventory procedures? (Describe deficiencies noted, if any.)

Obtain a copy of the instructions for the working papers and consider the following in evaluating their adequacy: (a) Names of persons drafting and approving instructions. (b) Dates and times of inventory taking. (c) Names of persons responsible for supervising inventory taking. (d) Plans for arranging and segregating inventory, including precautions taken to clear work-in-process to cutoff points. (e) Provisions for control of receiving and shipping during inventory taking period and, if plant is not shut down, provisions for handling inventory movements. (f) Instructions for recording description of items and how quantities are to be determined (e.g., count, weight, or other measurement). (g) Instructions for identifying obsolete, damaged, and slow-moving items. (h) Instructions for use of inventory tags or count sheets (including their distribution, collection, and control).
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(i) Plans for determining quantities at outside locations. (j) Instructions for review and approval of inventory by department heads or other supervisory personnel. (k) Method for transcribing original counts to final inventory sheets or summaries. Yes (2) Did the Companys personnel follow the inventory instructions? (3) Were inventory items arranged in an orderly manner prior to the inventory to facilitate the counting? (4) Were types, special categories, and special classes of inventory properly segregated to facilitate proper inclusion/exclusion from the physical count? (5) Were inventory crews adequately supervised? Company Counting Procedures (6) Were inventory crews assigned to count material for which they normally are responsible? If not, were the crews familiar with the inventory? (7) Did the counters proceed in a systematic and orderly manner? (8) Were inventory crews denied reference to perpetual records during the counting? Will someone subsequently compare counts to the perpetual records and investigate differences? (9) Were counts checked or inventory items recounted by persons other than those making original counts? Were they denied reference to the original counts? (10) Were all quantities determined by actual physical count? (If not, describe method used for estimating quantities.) (11) If work-in-process inventory is significant, indicate how the percentage of completion was determined and how labor and overhead will be applied. (12) If part of the inventory was precounted, were subsequent receipts and withdrawals indicated on the tags, or effectively controlled by other procedures? No Explanation

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Yes (13) Were prenumbered inventory tags used and accounted for? (If tags were not used, describe method used, including the procedures used to assure that all inventory items were counted.) (14) Are the counts, as recorded, the final quantities that are to be used in the inventory listings? (If not, explain the nature of anticipated changes for subsequent shipments, receipts, etc.) Cutoff Procedures (15) Did client procedures include accumulation of cut-off information? (16) Was production suspended during inventory taking? (If not, describe the procedures used to control the movement of materials.) (17) Were shipping and receiving operations suspended during the inventory taking? (If not, describe procedures employed to assure an accurate cut-off.) (18) Were the items in the shipping and receiving areas(s) properly segregated between items to be inventoried and those not to be inventoried? (19) If the Company has more than one inventory location, describe the procedures to account for interplant receiving and shipping during the inventory period. Obsolescence and Safeguarding (20) Briefly describe the Companys procedure for identifying obsolete and slow-moving items. (21) Briefly describe deficiencies noted (if any) in the Companys physical safeguards over inventory items. Test Count Procedures (22) Were counting and recording procedures actually observed? (23) Were independent test counts made and listed in the working papers (e.g., using FRSH 082/5/2003 Form (E&Y Form U209))? (24) Were test counts made other than those listed? Note: The primary purpose for making test counts is to verify the accuracy of client quantities and descriptions; the primary purposes of recording test counts are to control quantities used in pricing the physical inventory and to document exceptions. Thus it is not necessary to record all test counts made.
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No

Explanation

Yes (25) Were errors located as a result of such tests corrected? If numerous errors were noted, did the Companys personnel recount the area(s) involved? Did we subsequently review the area(s) recounted for final clearance? (26) Were tests made to assure proper recording of inventory description, stage of completion, and unit of measure? (27) Was a review made to ascertain that all items had been tagged or otherwise accounted for? (Briefly describe our procedures if the Company did not use tags.) (28) If inventory count sheets were used, have we selected some of our test counts from the floor and some from the count sheets? (29) If sizable quantities of sealed packaged materials were on hand, were they vendor packaged? If the Company packaged, did we test some packages (at least for the more valuable items)? (30) If all or part of our observation represents a test of the Companys perpetual records, briefly describe the procedures and controls that assure the reliability of these records and complete the following: (a) Have we selected some of our test counts from the floor and some from the perpetual records? (b) Were all of our test counts reconciled to the perpetual records? If not, is there sufficient information in our working papers to enable this to be done at a later date? (c) Have we reviewed the perpetual records and investigated large quantity adjustments?

No

Explanation

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Yes (d) Has the cut-off information listed herein been traced to proper recording in the perpetual records? (31) Has our observation covered all inventory for which this location is responsible? (If not, comment on items held at outside locations and estimated amounts thereof, including consignments.) (32) Describe our procedures to assure that inventory items are not added subsequent to our observation procedures (e.g., obtain a list of the inventory tag numbers used, obtain a copy of the inventory count sheets, or list the number of line items on each count sheet). (33) Have we discussed obsolescence, slow-moving, and unsaleable items with the Companys production employees? (34) Have we listed all significant items of obsolete or slowmoving inventory noted during our observation (including name(s) or employee(s) with whom the items were discussed)? Compilation Information (35) If quantities counted will be converted to a different unit of measure on the final inventory listing, have we obtained sufficient information to test the conversion? (36) Will details of Company count combinations be available when our test counts are traced to the final inventory listing? (If not, describe how we can reconcile our counts to the final listing.) Other (37) Indicate ways in which future physical inventories might be improved with regard to Company procedures. (38) Indicate how FRSH procedures regarding future physical inventories might be made more efficient.

No

Explanation

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Comments

Conclusion Based on the results of my tests and observations, it is my opinion that the Companys inventory documentation fairly represents the actual quantities on hand, except as noted below. Further, based on my observations and inquiries, it is my opinion that the inventory is usable and saleable, except as noted below. Exceptions:

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Cutoff Data Has Material Been Included in the Inventory? Note B Transaction for Goods Recorded in Proper Period? Note C

Vendor or Customer Name

Date

Reference No. or Description Note A

Amount of Invoice (if available)

Receipts-Note D Note A Note B

Shipments-Note D

Describe reference source. For receipts, attempt to locate the material listed herein and ascertain that it has been properly tagged (or properly segregated if it is not to be inventoried) in order to answer this question. Your answer should not be based solely on the dates of receipt as shown by receiving reports.

For shipments, examine shipping documents, e.g., bills of lading.

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Note C -

Subsequent to the inventory observation, obtain the vendors invoice (receipts) or copy of the Companys invoice (shipments) and trace the documents to the Companys records in order to answer this question. When prenumbered receiving or shipping tickets are used, note the last number and any unused prior numbers. When prenumbered tickets are not used, obtain information about several shipments and receipts immediately prior to the inventory date.

Note D -

Trucks on premises and freight cars on sidings containing either in-bound materials or outbound products should be listed showing number of truck or car, whether full or empty, and whether or not contents are included in inventory.

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Tag or Sheet Control

Note A Note B Note C -

List individual(s) or area(s) for which tags or sheets were issued.

Indicate the range of numbers applicable for each category. The numbers indicated for used, unused, and voided should account for all those indicated as issued. Provide explanation for any tags or sheets unaccounted for or any information presented requiring further explanation.

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