Audit results in the books: handling shortages and surpluses

The audit is finished, you hold a reconciliation statement and it shows lines of shortages and surpluses. Now the accountant's question: how should they be recorded in the books? There are many mistakes here too: surpluses are netted against shortages without a reason, adjustments are entered with a back date, write-offs are left without a document. A reminder: accounting and tax rules depend on current legislation and change over time, so the routine below is general; check the actual entries with your chief accountant or a tax adviser.

The chain of documents

An audit result is not one sheet of paper but a linked chain of documents. At every link an owner and a date are shown:

1. Count sheets: who counted, in which zone, when.
2. The reconciliation statement: for each item the system and actual balance, with the quantity and value of the difference.
3. The analysis of causes: the trail of each major difference.
4. The commission's conclusion: what each difference is recognised as.
5. The manager's decision or order: what to do in the books.
6. Adjustment documents in the system and accounting entries, each referring to a line of the statement.

If any link is missing, the adjustment stays unsupported and will raise questions at the next review. Separate the roles too: the auditor or internal control prepares the conclusion, management decides, the accountant enters the record. Whoever prepared the conclusion should not enter the entry.

Sorting differences by type

Not every difference is a shortage. For the accountant, identifying the type is decisive:

• Record error: a wrong unit of measure, a product split across two codes, a late document. This is not a real loss; the records are corrected with an adjustment document.
• Surplus: goods not yet booked in. First establish the source: did the supplier deliver extra, did a customer return goods, was there a receipt with no paperwork? After that the goods are booked in or sent back.
• Shortage: treated separately by cause, that is natural loss within norms (if norms are set), expired or damaged goods, a case with a specific responsible person, an unknown cause.
• Offsetting: if one item of the same kind shows a surplus and another a shortage, in some cases they may be set against each other. The conditions depend on the procedure in force, so confirm them with your accountant.

In which period to record

The count date affects the books of the period in which it falls. A count at year-end goes into the annual accounts. If there was movement in the warehouse between the count and the entry, the balance is rolled back to the count date, removing receipts and issues after that date. A difference found after the count belongs to the next period, and it cannot be pushed back into an earlier period with a back date.

A hypothetical example

The reconciliation statement shows a shortage of 22 million so'm and a surplus of 4 million (all figures hypothetical). After analysis:

• 6 million of the shortage is a record error: two delivery notes were entered late. It is corrected with an adjustment document; there is no loss.
• 9 million: expired and damaged goods were not documented. A commission certificate is drawn up and, by management's decision, the goods are written off.
• 7 million is unexplained. A separate investigation is run; until it concludes the amount stays open and is shown to management separately.
• The 4 million surplus: an extra shipment from a supplier. It is booked in with a receipt document or returned.

The simple approach would give 22 − 4 = 18 million of "net shortage" and close the matter. In fact the real loss is 9 + 7 = 16 million, and more than half of it has a known cause. Subtracting the surplus from the shortage without a reason would hide this picture.

Common mistakes

• Netting surpluses against shortages without establishing causes.
• Entering an adjustment with a back date.
• Writing off without a commission and a document.
• Booking the count result without a management decision.
• Valuing the shortage not at the amount the accounting rules call for (cost) but at selling price.

Conclusion

Recording audit results properly takes no less effort than the count, yet this is the part that protects against future questions. Each difference is closed when it has a type, a period and a basis. OmborAudit hands over the reconciliation statement, the certificate and the analysis of causes in a form ready for accounting, and your chief accountant confirms the actual entries.