By: Sylvester Ofori
End-of-year stocktaking is one of those business rituals that looks simple—until you do it properly. Someone says, “Let’s count everything,” and suddenly the warehouse becomes a courtroom: people arguing over quantities, labels, damaged goods, missing bins, and why “Stores” has items that “Production” insists it never received.
Yet stocktaking is not a ceremonial headcount. It is the practical foundation for credible financial statements, tax reporting, and management decisions. Under IFRS, inventory accounting is anchored on IAS 2 Inventories, which sets the measurement principle (inventory is measured at the lower of cost and net realisable value) and explains how cost is determined (purchase costs, conversion costs, and other costs to bring inventory to its present location and condition, using FIFO/weighted average/specific identification where appropriate). IFRS Foundation
For SMEs using IFRS for SMEs, the same core logic applies: inventories are measured at the lower of cost and estimated selling price less costs to complete and sell. IFRS Foundation+1
So the stock count is not only operational. It is a financial reporting event.
And because inventory is often material, auditors are also involved—because ISA 501 requires auditors (where inventory is material) to obtain sufficient appropriate audit evidence about the existence and condition of inventory, ordinarily through attendance at the physical count unless impracticable.
This article gives you a practical, step-by-step playbook to count inventory without shutting down your business, while meeting best practice and the standards’ intent. It also explains what auditors are required to do during this season.
1. Why stocktaking matters more than people admit
Inventory sits at the intersection of profit and cash. Get it wrong and you distort:
- Cost of sales and gross profit (the biggest “silent error” in many SMEs)
- Working capital (banks and investors care deeply)
- Tax positions (especially where cost of sales and valuation drive taxable profit)
- Operational decisions (reorder levels, production plans, shrinkage controls)
IAS 2’s emphasis on measurement at lower of cost and net realisable value is also a reminder: stock is not automatically valuable because it exists; it is valuable only to the extent it is recoverable through sale or use. IFRS Foundation
2. The governing “standard logic” you are trying to satisfy
Stocktaking procedures should produce evidence that supports two big conclusions:
- Existence and condition: the items physically exist and are in the condition recorded (saleable, obsolete, damaged, expired, slow-moving).
- Correct valuation basis: the inventory is valued consistently with IAS 2 (or IFRS for SMEs Section 13), including cost build-up and NRV/impairment logic. IFRS Foundation+2IFRS Foundation+2
Auditors focus heavily on the first part (existence/condition) and on whether your records and controls produce reliable results. ISA 501 explains that attendance at the physical count involves observing procedures, inspecting inventory, and performing test counts, because the auditor needs evidence about the reliability of management’s counting process.
3. The core principle for “counting without shutting down”: control the movement
Most stock counts fail for one reason: transactions continue without being controlled. Goods come in, goods go out, goods move between locations, and everyone pretends the count is still “as at year-end.”
The solution is not necessarily to shut down. The solution is to implement a movement-control plan.
You have three workable models:
Model A: Hard freeze (short shutdown window)
- Best for: small warehouses, low-transaction businesses, manageable year-end rush.
- Technique: stop receipts and dispatch for a defined window; count everything; reopen.
Model B: Soft freeze (controlled operations)
- Best for: supermarkets, distribution, pharma, high-volume retail.
- Technique: allow limited operations but use strict rules: separate “counted” zones, controlled picking, documented exceptions, and a dedicated “movement desk.”
Model C: Rolling count + cut-off reconciliation
- Best for: manufacturers with perpetual systems, large warehouses, multi-branch retail.
- Technique: do cycle counts in advance by zone; then do a year-end cut-off and reconcile the roll-forward/roll-back.
From an audit standpoint, if the count is not on year-end, auditors typically perform additional procedures over intervening movements to bridge to the reporting date; ISA 501 explicitly contemplates counts at dates other than year-end and the need for additional procedures. icjce.es+1
4. Step-by-step: best-practice stocktaking procedures
Step 1: Plan like it’s an operation, not an event
Create a short stocktake plan that covers:
- count date(s) and time windows
- locations and zones
- inventory categories (raw materials, WIP, finished goods, consumables, spares)
- what will be counted by weight/volume vs. by units
- responsibilities (count teams, supervisors, reconciliation team)
- movement-control rules (freeze/soft freeze/rolling)
- documentation templates (count sheets, variance logs, damage/expiry logs)
Step 2: Clean the warehouse before you count
A good count starts with a warehouse that is not lying to you:
- label racks and bins clearly
- isolate damaged/expired/obsolete stock into a separate “quarantine” area
- separate customer-owned/consignment stock (do not mix it into your inventory)
- identify third-party held stock (at external warehouses, distributors)
This step directly supports the “condition” part of inventory evidence and the valuation discipline behind IAS 2 and IFRS for SMEs. IFRS Foundation+1
Step 3: Lock your master data
Before counting:
- lock item codes and units of measure
- confirm whether you count in cartons, pieces, kilos, liters, or meters—then standardize
- agree on the valuation method used (FIFO, weighted average, specific identification as applicable) under IAS 2’s permitted cost formulas. IFRS Foundation
If one team counts “boxes” and another team counts “pieces,” your inventory will multiply like a miracle—and auditors do not accept miracles.
Step 4: Use “two-person integrity” in the count teams
Best-practice count teams:
- one person counts
- the second person records
- both sign the sheet/tag
- supervisors do spot checks
This reduces both error and opportunistic manipulation.
Step 5: Use blind counts where possible
Where you can, the counting team should not see the system quantity in advance. Blind counts reduce confirmation bias (“the system says 120, so it must be 120”).
Step 6: Control the cut-off (this is where profit is won or lost)
Cut-off means ensuring:
- goods received just before year-end are recorded as purchases/inventory appropriately
- goods dispatched just before year-end are recorded as sales/COGS appropriately
- GRNs, delivery notes, and dispatch notes are sequenced and accounted for
A simple cut-off pack should include:
- last GRN number before year-end and first after
- last delivery note/waybill before year-end and first after
- list of goods in transit
- list of returns not processed
Step 7: Count, tag, and protect “counted” zones
During the count:
- tag counted pallets/racks (or system-mark zones as “count complete”)
- restrict movement in counted zones unless authorized and logged
- document any “count interruptions” (emergency dispatch, urgent receipt)
Step 8: Record condition issues in real time
Do not postpone “condition” assessment. During the count, capture:
- damaged goods
- expired items (especially in pharma/food)
- slow-moving and obsolete items
- incomplete WIP or scrap
This links directly to IAS 2/IFRS for SMEs requirements about carrying inventory at recoverable amounts (lower of cost and NRV / selling price less costs to complete and sell). IFRS Foundation+2IFRS Foundation+2
Step 9: Reconcile variances with discipline
After counting:
- compare physical counts to system counts
- investigate variances above a threshold
- document root causes (shrinkage, pricing/unit errors, posting timing, theft, breakage, mislabeling)
Then approve adjustments formally—no casual “plugging.”
Step 10: Final reporting pack (what your accountant should produce)
A strong year-end inventory file includes:
- final count sheets/tags signed and dated
- variance summary and approvals
- cut-off testing evidence (GRNs/dispatch sequence)
- inventory valuation method and cost build-up explanation
- NRV/obsolescence/expiry provisions with rationale
- reconciliation of inventory subledger to general ledger
This is “documentation that survives questions,” not documentation that merely fills a folder.
5. Industry-specific twists
Retail / Distribution
- Focus: shrinkage, returns, unit-of-measure, fast movement.
- Best model: soft freeze + zone counting; heavy reliance on variance thresholds and exception logs.
Manufacturing
- Focus: raw materials, WIP measurement, yield and scrap, overhead allocation discipline.
- Best model: rolling counts + year-end cut-off; ensure WIP is measured consistently and obsolescence captured.
Construction
- Focus: materials at site, tools/spares, project-issued stock, and custody risk.
- Best model: project site counts + reconciliation to issues logs; strong documentation of custody and cut-off.
Pharma / Food
- Focus: expiry, batch tracking, storage condition, quarantined goods.
- Best model: strict segregation (saleable vs. quarantine) and batch-level counts; condition evidence is critical.
6. What auditors are required to do during year-end stock counts
If inventory is material, ISA 501 requires auditors to obtain sufficient appropriate evidence about inventory’s existence and condition, ordinarily by attending the physical inventory count unless impracticable.
In practical terms, auditors will typically:
- Evaluate management’s instructions and procedures for counting and controlling results.
- Observe the count to see whether the procedures are actually followed.
- Inspect inventory to confirm existence and assess condition (damage, obsolescence, expiry).
- Perform test counts (count selected items themselves and compare to client counts; and/or select from floor-to-sheet and sheet-to-floor).
- Test the final inventory records to ensure they accurately reflect actual count results. Abcdocz+1
- If the count is held on a different date, perform additional procedures over intervening movements (roll-forward/roll-back). icjce.es+1
- If attendance is impracticable, perform alternative procedures; if sufficient evidence still cannot be obtained, this can lead to a modified audit opinion (as reflected in auditing requirements). standards.auasb.gov.au+1
- If inventory is held by third parties, obtain evidence via confirmations and/or inspection/other procedures. standards.auasb.gov.au
Where physical attendance is difficult, professional guidance notes that auditors may use technology (e.g., live video feeds) or alternative procedures to obtain evidence, depending on circumstances. ifac.org
7. Practical close: the “minimum viable” stocktake you can trust
If you do nothing else, do these five things:
- Control movement (freeze/soft freeze/rolling with cut-off controls).
- Use two-person count teams and signed evidence.
- Separate quarantine/obsolete/expired stock and document condition.
- Reconcile variances with approvals—no plug adjustments.
- Produce a final inventory pack that ties physical count → inventory records → general ledger.
Because at year-end, inventory is not just what you have in the warehouse. Inventory is what you can prove you have and what you can justify as recoverable under the standard.
Author: Sylvester Ofori is a Chartered Accountant and Manager in Financial Assurance and Advisory, with experience spanning audit, forensic accounting, financial reporting, and advisory services across multiple sectors. He currently serves as a Subject Matter Expert on an accounting software solution, providing technical guidance on the development and application of standards-compliant financial systems.
His professional interests lie at the intersection of accounting, technology, and governance, with a strong focus on practical implementation of international financial reporting standards. Through his writing, Sylvester shares insights aimed at strengthening financial integrity, enhancing decision-making, and supporting sustainable organizational growth.