Cycle counts are an essential inventory management tool, but for steel distributors, they’re not nearly enough to pass a rigorous year-end audit. In a sector where inventory moves in tons, fluctuates in cost per pound, and often changes shape or grade midstream, cycle counts provide only a sliver of the full picture.
Audit managers know this. And they come equipped with a battery of procedures that go well beyond checking a few coils on the floor.
The Problem with Relying on Cycle Counts
Cycle counts are designed for operational accuracy, not financial assurance. Their purpose is to identify inventory discrepancies throughout the year without the disruption of a full physical inventory. But their limitations are especially exposed during an audit:
Sampling bias: Teams often count the same SKUs repeatedly, especially faster-moving ones, leaving high-value or slow-moving coils untouched for months.
Weight vs. quantity mismatch: In steel, 10 coils might be the same product ID but vary by weight, grade, or coating. A cycle count might confirm quantity but miss a 3,000‑lb variance in net inventory.
Cost complexity: A coil’s book value might not reflect current market rates or processing costs. Cycle counts do nothing to confirm the correctness of unit cost applied.
Timing gaps: If material is in-transit or under process, it may not be reflected accurately in either the cycle count or the ledger.
When year-end approaches, auditors can’t rely solely on cycle counts. They need to see how inventory was valued, what controls were in place to prevent misstatements, and how exceptions were resolved.
What Audit Managers Expect at Year-End
Full Physical Inventory (or Auditable Equivalents)
Even if a company does rolling cycle counts, auditors often require a full physical count near year-end or a statistically valid extrapolation that can be tested.
For steel yards, this often involves tag counts, barcoded coil IDs, and verified weighbridge data to confirm net weight per item.
Audit teams will test a sample of locations and SKUs, matching the count back to ERP and the general ledger.
Valuation Reconciliation
Audit managers want assurance that inventory is stated at the lower of cost or market. This means:
Comparing book unit cost to spot scrap or steel pricing indices
Ensuring write-downs were recorded for slow-moving, obsolete, or downgraded stock
Verifying that freight, processing, and surcharges were correctly included in unit cost
Cutoff Testing
Auditors review a sample of shipments received or invoiced near year-end to ensure they were recorded in the correct period.
A shipment received on December 30 but booked January 2, for example, creates a misstatement unless accrued properly.
This often involves checking receiving logs, GRNs, and vendor invoices.
WIP and Processing Inventory Review
Steel that’s mid-processing—at a tolling partner or internally—must be reviewed for proper costing and classification.
Audit teams assess whether labor, overhead, and shrinkage have been applied accurately, and whether the material is appropriately included in inventory or accrued.
Review of Adjustments and Write-offs
Auditors closely examine any manual adjustments made in the final weeks of the year. Frequent or large adjustments can signal weak controls or rushed corrections to reconcile books.
Key Audit Challenges Unique to Steel Inventory
No standard unit of measure: Coils, sheets, billets, and rebar may be tracked in pounds, tons, feet, or pieces. Discrepancies arise when conversions or roll-ups to financial reports aren’t reconciled.
Freight blur: Steel often arrives with complex freight terms. If not capitalized accurately, this can overstate SG&A and understate inventory.
Scrap and downgrade tracking: Damaged or out-of-spec steel must be reclassified, often at a significant markdown. Failure to downgrade properly results in overvalued inventory.
Holding third-party inventory: Some distributors store or process steel owned by customers. This non-owned inventory must be excluded from the books, even though it’s physically on site.
How to Prepare for an Audit—Beyond the Cycle Count
Freeze and Tag Protocol
If a full physical is conducted, enforce a hard inventory freeze. Count tags should be pre-numbered and assigned by location. Only trained staff should be allowed to count, and independent verifiers must recheck high-value items.
Avoid “blind” counting where staff know expected values—it invites confirmation bias.
Strengthen Inventory Aging and Reserves
Segment inventory by age and apply markdown reserves to stock older than 90 or 120 days. Maintain backup to support why certain items were not impaired.
Cross-check aging with sales velocity to flag obsolete stock that may still appear “active.”
Reconcile Unit Cost Changes Monthly
Don’t wait for auditors to ask. Track cost fluctuations for key SKUs monthly and reconcile differences between standard cost and actual cost.
Update cost layers regularly, especially if using weighted average or FIFO valuation.
Audit WIP Routinely
Use WIP aging reports to identify inventory stuck in process for more than 30 days. Confirm whether costs have been applied and whether material is truly in progress.
Document, Document, Document
Keep detailed logs of all count procedures, valuation changes, and manual adjustments. Auditors don’t just test numbers—they test the process.
Final Thoughts: Don’t Let the Count Fool You
Cycle counts are a vital part of operational discipline. But they can’t substitute for the rigor and documentation required in a steel audit. Whether it’s reconciling valuation to volatile markets or verifying inventory stuck in processing, auditors need a holistic picture—backed by documentation, data, and discipline.
For steel distributors, the audit isn’t just a compliance hurdle. It’s an opportunity to strengthen controls, clarify costing, and ensure the numbers on the books reflect the true state of the yard. The difference between a clean audit and a year-end scramble? It starts with going beyond the cycle count.
