What is an inventory audit?
An inventory audit is when either you or an auditor uses analytical procedure to check a company’s inventory methods and confirm that the financial records and actual count of goods match.
It’s important to conduct inventory audits to maintain inventory accuracy, spot causes of shrinkage, and ensure that you always have the right amount of stock at the right time. A better understanding of stock flow will also help ensure the business runs smoothly, because you’ll know what products you have on hand.
How to Conduct Inventory Audit
Conducting an inventory audit requires accurate and current data from a variety of sources. This may include inventory counts, backorders, 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.
Inventory Audit Procedure
Here are ten of the most common audit procedures:
Here are ten of the most common audit procedures:
- Physical inventory count. 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.
- Inventory cycle count. 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.
- 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.
- 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.
- Analytical procedures. Here, you compare your inventory turnover ratio using the inventory turnover formula, gross margins, or unit costs with the data from previous years. This lets you catch any sudden increases or volatility.
- 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.
- 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.
- Freight cost analysis. This analysis evaluates the amount you spend on shipping costs and the lead time (lead time definition) involved. It also accounts for losses and damage incurred during transit.
- 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.
- Product reconciliation. If you discover issues during your inventory count, you need to investigate to reconcile products. This will let you track any SKU number that’s likely to have errors in the future.
- Lets Start doing best practice in Retail with respect to inventory management
