Inventory Audit Process: Definition and Best Practices

1. ABC analysis. …
2. Analytical procedures. …
3. Cut-off analysis. …
4. Finished goods cost analysis. …
5. Freight cost analysis. …
6. Matching. …
7. Overhead analysis. …
8. Reconciliation.

An accurate inventory audit process is essential for any business in order to maintain successful operations. It provides the opportunity to review a business’s stock, update records, and identify any discrepancies between the actual and expected inventory. This process not only keeps the inventory information accurate and up to date, but it can also help reduce shrinkage and the risk of theft. When done properly, an inventory audit can lead to cost savings and improved customer service.
An inventory audit process can be a complicated and lengthy process, and it involves several steps. The process starts with the collection of necessary information, such as the inventory records, stock levels, and other related data. Once all of the data is available, the auditor can begin comparing the actual inventory data to the records and make any necessary adjustments. The auditor will then review the accounts and confirm that the inventory records are correct. Finally, the auditor will provide a detailed report outlining their findings and any areas of concern.
By following a proper

Auditing INVENTORY – substantive procedures

What is the importance of auditing inventory?

Inventory auditing is crucial because it enables you to monitor your stock levels. This can assist you in placing new supply orders or making impending shipment plans. Inventory audits can also be used to evaluate damage to your stock or identify sources of loss.

What is the inventory audit process?

Any procedure you employ to examine the items in your inventory is referred to as an inventory audit process. You can frequently determine how much of a specific item you still have in stock at your location through auditing. This can also reveal additional details, such as the price, the state of the item, or its quality.

Common inventory audit procedures

The following are 10 typical techniques you can employ to audit your inventory:

1. Physical inventory count

A physical inventory count entails manually counting each item in the inventory. Then, using the company’s database or inventory system, you can compare your inventory level to the anticipated values. This technique is one of the more popular ways to keep track of inventory because it makes it easy to determine when to place an order for new supplies.

2. Inventory cycle count

Because someone must physically record how much inventory you still have, an inventory cycle count is similar to a physical inventory count. An inventory cycle count only takes a small portion of your entire inventory into account, unlike a physical inventory count, which records every item. This is a model technique that enables you to validate the veracity of your system records.

3. ABC inventory analysis

Using the inventory management technique ABC inventory analysis, your inventory is divided into three categories based on its value and significance. You can audit every set separately after grouping your inventory into categories based on importance. The categories are:

4. Cutoff analysis

A physical inventory analysis’s subtype is a cutoff analysis. You conduct the count during a typical physical inventory analysis while the rest of the business runs normally. If you use cutoff analysis to audit the inventory, you can halt operations while you manually count all of your items. This may lead to a smaller number of uncontrolled variables and a more precise count.

5. Analytical procedures

You can view any unexpected increases or changes in your inventory using analytical procedures. This method relies on item data instead of physically counting inventory, such as unit costs, profit margins, or how frequently you replenish your inventory over a specific time period. Any of these data points can be compared to the same statistic from earlier years to see if there has been any change or growth.

6. Overhead analysis

The audit of all overhead, on non-material costs related to inventory, is known as overhead analysis. Any expenses that aren’t directly related to the goods that the business sells are considered overhead. Rent for a warehouse, for instance, where the business keeps its inventory, is an example of an overhead expense.

7. Finished goods cost analysis

An inventory audit technique called finished goods cost analysis is frequently used in production or manufacturing. When you complete a product, you count your inventory rather than taking an inventory of the individual parts. Instead of counting individual car parts, a toy company might conduct a finished goods cost analysis of its toy cars.

8. Freight cost analysis

You can estimate the cost of transporting your inventory using freight cost analysis. It examines shipping expenses and lead times, or the amount of time it takes to complete a specific process, for moving goods. Any inventory losses or damage sustained while traveling may also be calculated using this inventory audit procedure.

9. Shipping invoice matching

The process of shipping invoice matching compares the quantity shipped with the total cost of shipping your inventory. This enables you to check that your inventory is being shipped for the appropriate price. This audit can be carried out at random to help keep your costs constant.

10. Product reconciliation

Product reconciliation resolves any discrepancies between the two sources by comparing the outcomes of your physical inventory counts to your inventory records. This enables you to verify the accuracy of your estimates and identify the cause of any discrepancies. For instance, if you count 20 plastic cup packages but your system indicates that you have 30, you can look into what happened to the other 10 packages.

Inventory audit process best practices

You can use the following techniques to assist you with your inventory audit process:

Pick your audit types

Choosing the audit types that work best for your inventory can assist you in maintaining accurate item and cost counts. Think about asking your manager what kinds of audits the business typically conducts. Try to list the company’s requirements and compare them to standard audit procedures if they ask you to choose the types of audits to use.

Audit regularly

Inventory audits assist you in keeping track of the goods you possess at any given time. You can compare your inventory at various times by consistently completing audits, which may help you order supplies or identify the items you use the most. It also enables you to keep an eye on your items and detect any unforeseen circumstances that might affect your inventory.

Practice proper inventory control

The act of managing and arranging a company’s physical assets is known as inventory control. This may entail maintaining an accurate inventory count, labeling products, and determining when to restock and order supplies. Maintaining a constant level of inventory can facilitate audits and may improve your ability to pinpoint the root of an atypical audit.

Create a checklist

A list of all of your inventory items along with important details like condition, quantity, price, and ABC grouping can be found in an inventory checklist. Use this checklist to make it simpler for you to count your products. You can organize other information with checklists as well, making it simple to find information about your items.

Consider inventory management software

Any type of software that enables you to manage and keep track of your inventory is known as inventory management software. These programs can be used to carry out lengthy audits, like analytical procedures or freight cost analyses. Some software can also connect to your point-of-sale systems automatically and track items as they are sold, which could lessen the frequency of your physical audits.

FAQ

What are audit procedures for inventory?

• Observe Cycle Counts. …
• Reconcile the Inventory Count to the General Ledger. …
• Test High-Value Items. …
• Test Error-Prone Items. …
• Test Inventory in Transit. …
• Test Item Costs. …
• Review Freight Costs. …
• Test for Lower of Cost or Market.

What are the 7 steps in the audit process?

1. Step 1: Planning. The auditor will examine previous audits conducted in your area and specialized literature.
2. Step 2: Notification. …
3. Step 3: Opening Meeting. …
4. Step 4: Fieldwork. …
5. Step 5: Report Drafting. …
6. Step 6: Management Response. …
7. Step 7: Closing Meeting. …
8. Step 8: Final Audit Report Distribution.

What are the 5 stages of an audit?

A five-phase process that includes selection, planning, conducting fieldwork, reporting results, and monitoring corrective action plans is used by internal audit to carry out assurance audits.

What are the steps for the inventory verification procedure?

1. Cutoff analysis. …
2. Physical inventory count. …
3. Analytical procedures. …
4. ABC analysis. …
5. Freight cost analysis. …
6. Finished goods cost analysis. …
7. Overhead analysis. …
8. Reconciling items.