What happens during an inventory observation

When inventory is material to the financial statements, auditors do not simply accept the perpetual ledger. They observe the count — standing on the floor while your team tags bins, watching cutoffs at the shipping dock, and testing a sample of counted quantities.

Before count day

Share a floor plan, list of SKUs by location, and the count instructions your staff will follow. Freeze movements or document them carefully; goods moving between bins mid-count create reconciling items that look like shortages.

What auditors watch for

We look for unused tags, dual counting of the same pallet, and goods that belong to customers on consignment. We also note the last shipping document before the count and the first afterward so sales cutoffs can be tested against the ledger.

After the floor work

Observed counts are compared to the perpetual records. Differences above agreed thresholds become write-down or correction discussions before the financial statements are finalized. The observation is evidence, not a substitute for your own count discipline.