What it is
Inventory carries existence, valuation and cutoff risk. When inventory is material, AU-C 501 requires the auditor to attend the physical count, or to perform alternative procedures where attendance is impracticable, and to evaluate management’s count instructions.
This program covers count planning and observation, rollforward or roll-back, costing, overhead absorption, obsolescence and the lower of cost and net realizable value test under ASC 330.
When to use it
- Planning inventory work for a manufacturer, distributor or retailer.
- When the count is on a date other than year end and a rollforward is needed.
- Alongside the test count sheet to document observation.
What’s inside
- Understanding the inventory system, locations and costing method
- Count planning, observation procedures and test counts
- Rollforward to year end, cutoff, consignment, in-transit and third-party held stock
- Costing tests, standard cost variances and overhead capitalization
- Net realizable value, obsolescence reserves and presentation
Standard cited
This template follows AU-C 330 / AU-C 501 / ASC 330. It is written in our own words, except for phrases the standard requires the document to contain, with [bracketed placeholders] for client details, amounts in USD and dates as MM/DD/YYYY. Check it against the current standard and your firm’s methodology before use. See AU-C 330 explained, AU-C 501 explained.
Questions
What if I cannot attend the count?
If attendance is impracticable, AU-C 501 requires alternative procedures to get sufficient appropriate evidence of existence and condition. If that is not possible, a scope limitation arises and the report must be modified.
What valuation rule applies to inventory?
Inventory measured under FIFO or average cost is carried at the lower of cost and net realizable value (ASC 330). Inventory measured under LIFO or the retail inventory method uses the lower of cost or market. Confirm which applies to the entity.
Does the test count sheet replace this program?
No. The count sheet records what you observed on the day. The program shows the full response to the inventory risks, including costing, cutoff and valuation.
Related templates
- Inventory Observation Memo and Test Count Sheet (AU-C 501)
- Audit Program: Accounts Receivable and Revenue
- Audit Program: Accounts Payable and Accrued Liabilities
Last updated 11/04/2026. All free templates.