Roll Back: Inventory Wrong on Balance Sheets, Three-Years-Ago

Inventory Wrong on Balance Sheet Three Years Ago!!

Is it time for an Inventory Rollback?

Let’s think about a scenario. One day, you, the CFO of a Company, are sitting in your office and reviewing the drafted year end financial statements. After several-months of hard work, you are nodding and smiling because the yearend financial statements appear good to go. Suddenly, the phone on the table rings and disrupts the quiet. The partner of the external auditors is calling. After a short greeting, he delivers the bad news that the new information system implemented two years ago and the new methodology for inventory after the implementation unfortunately are proven unreliable.

You start to frown and your smile disappears while listening to the call. You discuss the options with the partner and then ask for suggestions. The partner of the external auditor suggests that the Company revert to the original inventory valuation method and recalculate the inventory on the balance sheets back to three years ago.

After hanging up the phone, you sit back in the chair and start to think about what just happened. The inventory on the balance sheets on December 31, 2011 and December 31, 2012 were wrong! How could this happen?

Background

The Company is being audited for 2012 and 2013 by a big external audit firm. The Company went live with a new information system on November 1, 2013 and attempted the implementation of a standard costing methodology for inventory at that time rather than using average cost valuation. Since the new information system and the new methodology for inventory were unreliable, the partner of the external auditor just suggested that the Company revert to the average cost valuation method for inventory, in part because of the concerns over the standard costing procedures. The objective is to develop a method for establishing accurate quantities of inventory at the balance sheet dates (December 31) for 2012 and 2011 using the average cost method.

You call the Controller and the Accounting Director into your office and inform them what just happened. They are shocked and feel panic because it won’t be easy considering the timing, the busy schedules and the skills required. After a discussion, you decided to ask for help. You call Carrtegra, a consulting firm based in Houston, Texas with years of consulting experience providing solutions.

Quickly, the call is connected. You speak of your purpose and wonder if Carrtegra can help this situation. You get a firm answer and soon set up a meeting with Carrtegra.

You hang up the phone and feel relieved a little bit. Before you can recall the conversation you just had with Carrtegra to think about what information you might have missed, your assistant knocks at the office door and reminds you that a meeting is waiting for you. You stand up and walk out to the meeting room. On the way to the meeting room, you continue thinking that the next step is to have a meeting with Carrtegra and see what approach Carrtegra will take to fix the inventory on the balance sheet back to three years ago…

The next day, you, the Controller and the Accounting Director meet with Carrtegra as scheduled and you provide more details of the story.

After a long discussion, Carrtegra confirms the following information:

  1. The transactional data regarding 2011, 2012 and 2013 is reliable in the new system as well as the legacy system. The transactional data include purchases, receipts, sales, debit memos, credit memos, item output, item consumed and quantity adjustments.
  2. You and your team believe that to develop average costs for year-end valuation purposes, that data can be extracted from the system(s) to identify each purchase of inventory at actual costs throughout these periods.
  3. You and your team feel the physical counts of inventory at December 31, 2013 and at March 31, 2013 are accurate.

Carrtegra is going to roll inventory back to December 31, 2012 and December 31, 2011 using reliable transactional data.

The idea sounds simple enough, but what tools are they going to use considering the huge amount of data collected in three years? How are they going to perform the roll back? How will they make the calculations?

With these questions in mind, a couple of days later you receive an approach memo and a data request list from Carrtegra. After reviewing the approach memo, you feel much more relieved than a couple of days ago. You forward the approach memo to the external auditor partner for opinions. Fortunately, the external auditor partner agrees with the approach.

You smile and reply to Carrtegra’s email with “Please Proceed”.

If you would like to know what tools Carrtegra used and how Carrtegra rolled back the inventory, please click on the button below to get the document – “Approach Memo - Recalculate Three-Year-Ago Inventory on Balance Sheets”.

Free Download - Approach Memo: Recalculate Three-Year-Ago Inventory on Balance Sheets


Emma Zhang is an experienced audit professional, with more than six years of internal audit & Sarbanes Oxley (SOX) compliance focusing on operations, accounting, internal controls and process improvement. Competencies include operational auditing, accounting, management consulting, Sarbanes Oxley (SOX) compliance, audit planning and risk assessments, operational/financial planning and analysis, and data analysis. Emma is a resourceful, creative thinker and analytical problem solver with demonstrated ability to independently manage tasks from planning through execution in dynamic, fast-paced, and time-sensitive environments. Emma is a CPA with a CFE certificate. Emma is also a Blackline Certified Implementation Professional and helps clients to implement Blackline system.