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Inventory Audit | Audit Procedures for Inventory

By
Joshua
on
Wednesday, November 18, 2020
Table of Contents

Are you overwhelmed by the idea of performing an inventory audit?

You won’t be after reading this article.

Inventory auditing is one of the most important tools an inventory control manager can use to maintain inventory and uncover issues. Once you have the know-how and the right tools you can become an auditing master.

Here's how inventory audits work, the best practices, and additional procedures to ensure you make the most out of your audits.

What Is Inventory Audit?

An inventory audit is a process where a business cross-checks its financial records against its inventory records. It is a vital part of inventory management. It is done to ensure all records are accurate and uncover any discrepancies in inventory count or financial records. These audits can also help with inventory forecasting.

How to Conduct Inventory Audit

Conducting an inventory audit requires accurate and current data from a variety of sources. This may include inventory counts, sales records, shipping manifests, or other records. Inventory tracking is key in ensuring audits can be done with complete and accurate information.

Though there are many forms of inventory auditing, the workflow is mostly the same. You must acquire two records that should reflect the same inventory numbers. Then check them against each other to discover if they do match. If not, flag the areas with issues and look into any problems that arise like missing inventory, damaged product, or inaccurate sales figures.

There are also many smaller procedures that may be a part of the inventory audit workflow.

10 Audit Procedures for Inventory

Inventory audits can be completed by using a variety of audit procedures.

Here are ten of the most common audit procedures:

  1. Physical inventory counting. This is the most common way to perform an inventory audit. It involves physically counting every item in your inventory and comparing the numbers against the numbers in your system. This is easier for businesses that use a just in time inventory method or regularly calculate their economic order quantity.
  2. Cycle counting. Similar to physical counting, cycle counting involves manually counting a number of products and comparing them against your system. However, cycle counts are performed regularly on only a select number of products. This means you can audit your most valuable products much more often and avoid issues like inventory shrinkage.
  3. ABC inventory analysis. ABC analysis is a process where you group different items by their value. This allows you to store and audit only the particular groups you want.
  4. Cutoff analysis. With this analysis, you halt all operations at the time of the physical inventory count. This ensures there can be no mistakes of uncontrolled variables.
  5. Analytical procedures. Here, you compare your inventory turnover ratio, gross margins, or unit costs with the data from previous years. This lets you catch any sudden increases or volatility.
  6. Overhead analysis. An overhead analysis is an audit of all non-material expenses. This includes rent, utilities, salaries, and other "hidden" costs associated with inventory.
  7. Finished goods cost analysis. This method is ideal for manufacturers and producers. All products are accounted for and values upon completion to ensure financial statements are accurate.
  8. Freight cost analysis. This analysis evaluates the amount you spend on shipping costs and the lead time involved. It also accounts for losses and damage incurred during transit.
  9. Shipping invoice matching. Auditors often perform this inventory audit at random. It involves matching the cost of inventory shipped with the number of products shipped. It verifies that no products are shipped for the incorrect amount of money.
  10. Product reconciliation. If you discover issues during your inventory count, you need to investigate to reconcile products. This will let you track what SKUs are likely to have errors in the future.

Inventory Auditing Standards

Inventory audits are only as good as the standards applied to them. On the financial side, standards are set by the IRS and SEC. If you are not accurately reporting the value of your inventory or sales, you can be fined or worse.

On the warehouse side, standards must be established by the business itself. There is no legal punishment for failed inventory audits, but they can have a negative impact on your business. If you have no standards, you cannot expect to achieve the results you want.

There are two rules that make inventory audits easier and more accurate.

Here they are:

  • Pick the audit types you'll use and do them regularly. From the list of ten above, pick one or two and make them a part of your monthly or weekly workflow. This way you can discover problems sooner and avoid having to train employees on new audits as you perform them.
  • Practice proper inventory control. Inventory audits are useless if you're not actively tracking and recording the movement of your products. Make sure all warehouse activity is being tracked so that you can easily access and compare numbers.

Inventory Checklist

Inventory auditing is best done by using an inventory checklist. You can use the checklist as you take a full physical inventory count or for smaller cycle counts.

To help make things easier for you, we've put together a simple inventory checklist. Just download our inventory checklist excel sheet, change the sample data to your own, and start tracking your own products!

Physical Counts of Inventory

Physical counts of inventory are necessary to measure and adjust for inventory shrinkage. If you are using auditing measures that are focused on other data or have a perpetual inventory system, you may uncover some discrepancies. Physical inventory counts are the only way to guarantee to verify these numbers and ensure that shrinkage is accounted for.

Audit and a Bag of Chips

Now that you have a better grasp of the different ways you can audit your inventory, you can start working on limiting waste. Your audits can uncover shrinkage, issues with your reorder points, dead stock, and more.

One way to make inventory auditing easier for you is to invest in inventory management software. These programs can be integrated into your POS system and provide a perpetual inventory count. This way, you can perform audits whenever you want without needing to take a full physical inventory.