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Inventory Observation Simulator

An Interactive Guide to Auditing the Physical Inventory Count

Internal Controls & Segregation of Duties

A strong inventory system relies on separating key duties to prevent fraud and error. Follow the flow of inventory from purchase to shipment.

1. Purchasing

Approves and issues serially numbered purchase orders.

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2. Receiving

Counts and inspects goods, prepares receiving report.

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3. Warehouse

Acts as custodian, safeguarding the inventory.

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4. Shipping

Ships goods only after receiving an approved sales order.

The Auditor's Observation Plan

Observing the client's physical inventory count is a required audit procedure. The auditor doesn't count the inventory, but observes the client's process and performs tests. Complete the checklist to simulate the planning phase.

Pre-Observation Checklist:

Evaluate management's instructions and procedures for the count.

Ascertain that the count will be well-organized.

Ensure proper control over count sheets and prenumbered inventory tags.

Identify any inventory held off-site (e.g., at public warehouses or on consignment).

Planning complete! You are ready to observe the count.

Executing the Observation: Test Counts

During the observation, the auditor performs test counts on a sample basis. This involves two key procedures: tracing from the inventory tags on the floor to the client's count sheets (testing for completeness), and vouching from the count sheets back to the physical inventory (testing for existence). Click the button to perform the test counts and identify discrepancies.

Tag #	Item Description	Location	Client's Count	Auditor's Test Count	Status
A-001	1/2" Steel Bolts	Bin 12A	500	500
A-002	3/4" PVC Elbows	Bin 08C	250	245
B-113	Copper Tubing (ft)	Rack 03	100	100
C-045	Model X Pumps	Pallet 01	75	75
D-210	Filter Cartridges	Shelf 15B	300	310
E-501	Large Gaskets	Bin 02A	15	15	Note: Some items appear dusty/obsolete.