The inventory count is one of the few audit procedures that cannot be repeated later: what is not counted on the reporting date, or close to it, can hardly be reconstructed in February. That is why it is advisable to agree it with the auditor as soon as the auditor is appointed, as we explain in the guide to planning the 2026 audit and appointing the auditor. In this article we focus on the practical side: how to organise the physical inventory, what the auditor will do on the day and what the auditor will review afterwards regarding measurement.
Why does the auditor attend the physical inventory count?
NIA-ES 501, «Audit evidence. Specific considerations for selected items», sets the objective of obtaining sufficient appropriate evidence regarding the existence and condition of inventories. When they are material to the annual accounts, the auditor must obtain that evidence by attending the physical count, unless this is impracticable, for four purposes (paragraph 4.a):
- To evaluate management’s instructions and procedures for recording and controlling the results of the count.
- To observe how those procedures are performed.
- To inspect the inventory.
- To perform test counts.
In addition, the auditor must perform procedures on the final inventory records to determine whether they accurately reflect actual count results (paragraph 4.b). The list that is measured must be the same as the one that was counted.
The current version of NIA-ES 501 is the one published by the Resolution of 11/04/2024 of the Spanish Institute of Accounting and Auditing (ICAC), the national audit oversight authority, applicable to audits of financial years beginning on or after 01/01/2024 and, in any case, to engagements contracted from 01/01/2025. It is therefore the version that will apply to the 2026 year-end.
How to prepare the inventory count before year-end
The standard requires the auditor to evaluate whether management’s instructions cover, among other things, control over count sheets, identification of obsolete or damaged items, inventories owned by third parties and control over movements before and after cut-off (paragraph A4). In practice, that list is the best guide for the company. Before the count, it is advisable to have the following in writing:
- Date, time and scope: which warehouses, industrial units, shops or depots are counted and who does it.
- Count teams: preferably in pairs, including one person not responsible for custody of the warehouse, and with blind counting (without seeing the system quantity).
- Numbered sheets or devices: control of the sheets issued, used and cancelled, or a log of readings if scanners are used.
- Cut-off: last goods received note and last dispatch note before the count, and goods received or dispatched that day kept separate and labelled.
- Identification of special inventories: damaged, expired or slow-moving products; goods on consignment or owned by customers; inventories in transit or held by third parties.
- Work in progress: criteria for determining the stage of completion of semi-finished products.
- Physical estimates: for bulk goods, liquids or stockpiles, the measurement method (weighing, volume calculation, gauging).
- Count and reconciliation: who investigates differences with the perpetual inventory and who authorises adjustments.
Send these instructions to the auditor a few days in advance so that any gaps can be corrected before arriving at the warehouse.
What the auditor does on the day of the count
While present, the auditor observes whether the teams follow the instructions, inspects the goods to confirm that they exist and to assess their condition, and performs test counts in both directions: selecting items from management’s records and tracing them to the physical inventory, and selecting physical items and checking that they appear in the records (paragraph A7). This tests the completeness and accuracy of those records.
The auditor also usually obtains copies of the count sheets and the cut-off information, such as the last goods-in and goods-out movements, in order to check later that they were recorded in the correct financial year (paragraphs A5 and A8). Inspection helps the auditor to identify obsolete, damaged or ageing inventory (paragraph A6), which will later be reflected in the measurement. Bear in mind that inspection provides evidence that the goods exist, but not necessarily that the company owns them: that is why it is important to keep third-party goods separate.
What happens if the count is not on 31/12 or the auditor cannot attend?
| Situation | What NIA-ES 501 requires |
|---|---|
| Count on a date other than year-end | The auditor performs additional procedures on changes in inventory between the count date and year-end (paragraph 5). This is feasible if controls over movements are effective (paragraph A9). |
| Perpetual inventory with rotating counts | Management may count throughout the year; differences between the system and the count may indicate that controls are not working (paragraph A10). |
| The auditor cannot attend owing to unforeseen circumstances | The auditor performs or observes counts on an alternative date and tests the intervening transactions (paragraph 6). |
| Attendance is impracticable | The auditor performs alternative procedures, such as reviewing the subsequent sale of specific items (paragraph A13). If sufficient evidence is not obtained, the auditor must express a modified opinion (paragraph 7). |
| Inventories held by third parties | Confirmation with the third party, inspection or other procedures, such as attending its count or obtaining another auditor’s report (paragraphs 8 and A16). |
Difficulty, time or cost alone are not sufficient grounds for considering attendance impracticable (paragraph A12). An auditor appointed after the count has already taken place may have to resort to alternative procedures or, if these are not sufficient, to a scope limitation.
Measurement of inventories under the PGC: what the auditor will review afterwards
Counting properly is half the job; the other half is measuring properly. Recognition and measurement standard 10 of the Spanish General Accounting Plan sets out the criteria the auditor will compare with your priced inventory:
- Cost. Inventories are measured at purchase price or production cost. Indirect taxes are only included when they are not recoverable from the tax authorities.
- Purchase price. The invoiced amount less discounts and rebates, plus the costs incurred until the goods are in position for sale: transport, customs duties, insurance and other directly attributable costs.
- Production cost. Raw materials plus direct costs and a reasonable share of the indirect costs of the manufacturing period, calculated on the basis of the level of use of the normal capacity of the production facilities. A season with low activity should not inflate the unit cost.
- Cost formula. As a general rule, average price or weighted average cost; FIFO is acceptable. A single formula must be used for inventories of a similar nature and use; for non-interchangeable items, specific cost.
- Finance costs. These are only included in inventories that take more than one year to be ready for sale, as is the case with wineries ageing wine or property developments.
- Net realisable value. If it is lower than cost, a write-down is recognised as an expense. Raw materials are not written down if the finished products are expected to be sold above cost; nor are goods committed under firm sales contracts whose price covers the cost and the costs still to be incurred. The write-down is reversed if the circumstances that caused it no longer exist.
The notes must disclose, among other matters, the circumstances and amount of impairment write-downs, capitalised finance costs and restrictions on availability due to guarantees or pledges. An analysis of turnover and margins by product family is the best basis for supporting net realisable value.
Frequently asked questions
Is it mandatory for the auditor to attend the inventory count?
If inventories are material to the annual accounts, NIA-ES 501 requires the auditor to attend the physical count, unless this is impracticable. In that case the auditor must perform alternative procedures and, if sufficient evidence is not obtained, modify the opinion.
Can we carry out the count a few days before year-end?
Yes. The standard allows this, provided that the auditor can obtain evidence about movements between the count date and year-end. It works best when controls over receipts and dispatches are reliable.
What about inventories we hold in an external warehouse?
If they are material, the auditor may request confirmation from the third party of quantities and condition, inspect them or perform other procedures. Provide the custodian’s contact details in advance.
Legal basis
- NIA-ES 501, Audit evidence. Specific considerations for selected items (ICAC, Resolution of 11/04/2024)
- ICAC: current auditing regulations (Technical Auditing Standards)
- Royal Decree 1514/2007, Spanish General Accounting Plan, consolidated text (BOE): recognition and measurement standard 10
- Royal Decree 1/2021 amending the Spanish General Accounting Plan (BOE)
- Spanish Audit Act (Law 22/2015), consolidated text (BOE)
If your company holds significant inventories and you want to organise this year’s count in good time, our audit of annual accounts team can help you review the instructions and coordinate attendance, including at warehouses and packing centres in the Region of Murcia. Contact us before 31/12.
Article prepared by Controlaudit’s technical team. Regulations reviewed as at 13/10/2026. This content is for information only and is no substitute for professional advice on your specific case.