Continuous (perpetual)inventory count

1) All counts – whether made regularly during the year or at the end of the year are management’s responsibility. Any business with inventory can have a full inventory count at the year end – regardless of the inventory records it keeps.
Continuous inventory counting is a regular check of physical quantities against records (and vice versa) that requires the business to have perpetual inventory records – it is an internal control procedure. If controls are good – i.e. records are accurate – management does not need to conduct a full inventory count at the year end – but can rely on the inventory records instead. It is likely that there will still be some counting/inspection at the year end – e.g. of highest value items – but not a full count of all inventory.

Like any internal control procedure ….

… 2) If the auditor wants to rely on it – he has to perform tests of controls on it – i.e. observe counts during the year, etc on a sample basis. If the auditor expects not to be able to rely on the control – chances are that management is in any case planning a full physical count at the year end.

One of the most important things in perpetual inventory systems is how differences are accounted for. They cannot simply be adjusted – without any investigation into how they arose. For example, if every month there are shortfalls in physical count quantities compared with recorded quantities – this means, for example, over-recording goods inwards (GRNs), omission or under-recording of goods out (GDNs) or theft. All of these indicate deficiencies in internal control. Until management rectifies the deficiency, it cannot rely on the accuracy of the inventory records – and would therefore have to conduct a full physical count at the year end.