Inventory Count Observation (2026): Floor to Sheet or Sheet to Floor?
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Count night is where the auditor actually sees the inventory, and most exam questions about it come down to one thing: which direction you trace. Get the direction right and the answer follows.
Picture it at Coffee Co., the example client from my Auditing 101 videos. It is December 31, Year 2, and Coffee Co. is counting every bag of coffee in its warehouse.
Quick answer: floor to sheet tests completeness: is everything that is here actually recorded? Sheet to floor tests existence: is everything that is recorded actually here? The rule is simple. Start where the error would hide. If bags are missing from the records, you will never find them by starting with the records.
This is the count night chapter of my Auditing 101 video on what auditors actually do in the field. The page below covers the same count in writing.
On this page
Last updated October 2026. Coffee Co. and every figure in it are the example from my Auditing 101 video, not a real client. Standards referenced: AICPA AU-C 501.
What happens at an inventory count?
First, receiving and shipping stop. Nothing comes into or goes out of the warehouse while the count is going on. Coffee Co. counts in teams of two: one person counts, the other writes it down, and neither of them works in the warehouse.
Now, we do not do the count. Coffee Co. counts. We watch, and we make our own test counts. Our test counts go in two directions.
Which direction do you trace?
| Direction | You start with | You end at | It tests | The question |
|---|---|---|---|---|
| Floor to sheet | Bags sitting on the floor | The count sheet | Completeness | Is everything that is here actually recorded? |
| Sheet to floor | A line on the count sheet | The bags on the floor | Existence | Is everything that is recorded actually here? |
Why start where the error would hide? Because an error of omission leaves no trail. If bags are missing from the records, starting with the records can never find them. You have to start with the bags.
What does the test count work paper look like?
Floor to sheet first. I count what is on the floor and trace it to the count sheet.
| Item | Counted on the floor | On the count sheet | Result |
|---|---|---|---|
| Colombia house roast | 60 | 60 | Agrees |
| Espresso blend | 48 | 48 | Agrees |
| Kenya | 12 | Not on the sheet | Completeness problem |
On a back shelf, we find 12 bags of Kenya coffee. Those bags were about to be left out of inventory. That is a completeness problem, and only starting on the floor could have found it.
Now sheet to floor. I take a line from the count sheet and go find those bags.
| Item | On the count sheet | Found on the floor | Result |
|---|---|---|---|
| Guatemala | 25 | 25 | Agrees |
| Sumatra | 40 | 36 | Existence problem: 4 bags missing |
We find all 25 bags of Guatemala. We only find 36 of the 40 bags of Sumatra. Four bags on the sheet are not there. That is an existence problem.
Two directions, two different problems. The Kenya bags were on the floor but not on the sheet. The Sumatra bags were on the sheet but not on the floor. You only find each one by starting in the right place.
What is cutoff, and what about inventory the client does not own?
Cutoff. I write down the last receiving report, R-214, and the last bill of lading, 4431, both dated December 31. Later, I make sure everything received through R-214 is in inventory, and everything shipped through 4431 is out of inventory and recorded as a sale. That keeps goods from landing in the wrong year.
Consignment. One more thing on the floor. In the corner are 50 bags of Highland Roasters coffee. Coffee Co. holds them on consignment. It sells them for Highland, but it does not own them. So they are on the floor, but they stay off the count. I check that they are set apart and agree them to the consignment agreement.
This is why seeing the inventory is not the same as proving the client owns it. Inspection shows the bags exist. It does not show whose they are.
How does the AUD exam test this?
The question asks: to make sure every item in the client's inventory listing is valid, what would the auditor trace? Valid means the item on the listing really exists. That is existence, so we start with the listing and trace those items to our own test count sheet. That is answer D.
- Answer C is the trap. It is the same documents in the other direction, and that tests completeness, like the Kenya bags.
- Answers A and B are built on receiving reports and invoices. Those tell us what Coffee Co. bought, not whether a bag on the listing is still on the floor.
Remember: existence starts with the records and goes to the floor. Completeness starts with the floor and goes to the records. Valid means existence.
For the rest of the inventory audit, see auditing inventory and substantive procedures. Count night is one of four stories in my Auditing 101 video; the others are the walkthrough, tests of controls versus substantive tests and the confirmation round trip.
Sources: AICPA AU-C 501, Audit Evidence: Specific Considerations for Selected Items (inventory observation and test counts). Standards checked October 2026. Coffee Co. figures are illustrative.
Frequently asked questions
Does the auditor count the inventory?
No. The client counts. The auditor watches the count and makes test counts of their own to check that the client's count is reliable.
What is the difference between floor to sheet and sheet to floor?
Floor to sheet starts with items on the floor and traces them to the count sheet, which tests completeness. Sheet to floor starts with a line on the count sheet and finds the items on the floor, which tests existence.
Which direction tests existence?
Starting with the recorded items and finding them physically tests existence. If the exam asks how to make sure items on a listing are valid, trace from the listing toward the physical items.
What is cutoff testing at an inventory count?
The auditor records the last receiving report and last bill of lading used at the count, then later confirms that goods received through the last receiving report are in inventory and goods shipped through the last bill of lading are out of inventory and recorded as a sale.
What do you do with consigned inventory found at the count?
Keep it off the count. The client holds consigned goods but does not own them. The auditor checks that they are set apart and agrees them to the consignment agreement.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 90 on AUD. He is the founder and sole instructor of Maxwell CPA Review, where he creates every lecture, textbook and study outline himself.
Reach him at MaxwellCPAreview@gmail.com.
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