The auditor decides whether the physical count can be taken before year-end primarily on the basis of the accuracy of the perpetual inventory master files.
When the perpetual records are accurate and related controls operate effectively, it may be unnecessary for the client to count all the inventory at year-end.
The number of inventory items auditors should count is difficult to specify because auditors concentrate on observing the client's procedures rather than on selecting items for testing.
The key determinants of the amount of time needed to test inventory are the adequacy of internal controls over the count, accuracy of the perpetual records, total dollar amount and type of inventory, number of different significant inventory locations, and other inherent risks.
When auditors observe the client counting inventory, they should be careful to observe the counting of the most significant items and a representative sample of typical inventory items, inquire about items that are likely to be obsolete, and discuss with management the reasons for excluding any material items.