Performing physical inventories in the coronavirus era

The COVID-19 pandemic does not limit us only in our personal lives but can also cause complications when performing work tasks.

For most companies, the end of the year is associated with the performance of a physical inventory of fixed assets and inventories. Unfortunately, the present period is not an exceptional situation in which the planned deadline for carrying out the inventory cannot be met. Usually, this consists of an unexpected quarantine of the entire workplace or individual employees who are to participate in the inventory.

In this article, I would like to point out some ways to deal with the situation.

It should be emphasised at the outset that Act No. 563/1991 Coll., on Accounting, which in paragraph 30 describes the whole process of carrying out inventories, has not been amended in connection with the pandemic and the obligation for entities to make physical inventories of assets whose existence can be visually ascertained persists.

As the number of people infected slowly decreases, we can hope that the situation will settle down and restrictions on the movement of people will decrease. Therefore, for some companies it might be worthwhile to apply at least for the current accounting period the variant specified in Section 30 (6) (b) of the Account Act, according to which it is possible to close the inventory no later than two months after the balance sheet date. For companies with a balance sheet date of 31 December, this means completing the inventory by the end of February of the following year.

However, as in the case of an inventory before the balance sheet date (it can be up to four months in advance), it is necessary to recapitulate the gains and losses that occurred between the inventory date and the balance sheet date and account for any inventory differences to prove the balance at the balance sheet date.

Although we all hope that the current situation around the pandemic will soon pass and we will return to a normal way of life, I would point out one more way of dealing with organisational problems in conducting a physical inventory: ongoing inventory. This option would be usable for those who do not apply it until the next period and is regulated in Section 29 of the Accounting Act.

Interim inventories may be carried out only on inventories accounted by type or by location or by materially responsible persons, and on tangible fixed assets which, due to the function they perform in the entity, are on a continuously on the move and have no permanent place to which they belong. The date of this inventory is set by the entity itself. Each type of inventory and the stated tangible assets must be inventoried in this way at least once per accounting period.

Regardless of whether a continuous or periodic inventory is carried out, it is always necessary to ensure that the output is an inventory that contains all the mandatory requirements listed in Section 30 (7) of the Act.

One more important obligation related to the inventory process itself needs to be highlighted: In order for an inventory to fulfil its control function, it cannot be carried out correctly and responsibly without an inventory committee. Therefore, inventories cannot be compiled based on an inventory performed only by the person who manages the property that is the subject of the inventory during the entire accounting period and who, for example, has signed material responsibility. A physical inventory should always be entrusted to a person who is independent of the inventory.

A separate question is the presence of the auditor at the client's physical inventories. As most of you certainly know, as auditors we are obliged to rely on our own audit procedures to determine how the physical inventory is performed at the client.

The simplest option in this case is our presence when physical inventories actually take place. If, due to the above-mentioned quarantine reasons, our presence at physical inventories is not possible, it is still possible to verify the balances of individual inventory items using additional procedures.

For these purposes, we will request inventory evidence and perform audit procedures for transactions that took place between the date of the inventory and the time the additional procedures were performed to obtain sufficient appropriate audit evidence about the existence and condition of inventories.

Another option for obtaining sufficient audit evidence as an auditor is to perform an audit of the auditor using video equipment. This option is the most technically complicated of the three, so I mention it only as a last resort, but in certain cases it may be used.

If none of the above procedures can be performed by the date of the report, we, as auditors, are required to modify the opinion in the auditor's report in accordance with applicable auditing standards. We are required to communicate this fact in advance to the entity's management.

As follows from the whole article, it is possible to manage the process of physical inventory even in the current complicated times. If you have specific questions regarding the course of inventories in your company, do not hesitate to contact the manager or BDO auditor who performs the audit for you, so that together we can find the ideal solution and complete the audit without any problems.