How To Conduct An Inventory Audit

There are also many smaller procedures that may be a part of the inventory audit workflow. Additionally, warehouses will often have damaged, obsolete or returned inventory put to the side to be processed. Before your audit, deal with those items — whether it be writing them off, writing them down, repairing or reshelving them. Planning is key prior to an inventory audit, according to Durak. Without proper preparation, companies will face a disorganized, expensive and time-consuming audit.

  • For instance, if you do not have updated records, it can cost your company huge amounts of money.
  • At some companies, a full count may require an auditor to be present as part of preparing a year-end statement.
  • This can be time-consuming and tedious if your team has to sift through mountains of documents, and even worse if they’re stored in various places.
  • It also accounts for losses and damage incurred during transit.
  • For private companies, the requirements are situation-dependent.
  • This can help you quickly react to sudden demand changes and keep your processes running smoothly.

However, audits only get more challenging when your eCommerce business is more expansive. Regular inventory checks let you put good inventory management processes in place. An inventory audit compares your accounts to your actual inventory. Although this is an optional procedure, it’s still popular. Overhead costs include utilities like rent and electricity. Analyzing these costs helps you predict the indirect costs of doing business, which can assist you with budgeting for the upcoming year. Again, this procedure is optional and only useful if you count these costs as part of your inventory calculations.

Inventory Audit Software Vs Inventory Management System

A common question is, “Is it even permissible under the auditing standards to not physically count inventory in person? ” One aspect is that Paragraphs .11 and .14 of AU-C Section 501 reference the requirement to attend the physical inventory counting unless it is impracticable to do so.

In the days before electronic and smart devices, businesses had to audit their inventory with pencil and paper. Though tedious and time-consuming, it was the only way to keep track of how many products and goods were available on the premises. Now the standard method of conducting an inventory count for big and small businesses is to choose a selection of items, physically count them and compare your data with the records in your software.

inventory audit

With auditing, you can properly eliminate them from your business and business records. Furthermore, if an organization is equipped with automated inventory management software, then are the numbers actually matching with physical count or not. Regular inventory audits are a great way to improve your inventory processes. And software that allows you to track and manage your inventory will help you run your business more efficiently. An ABC analysis is a method for grouping products to simplify the inventory audit.

Planning For An Inventory Audit

The other alternative that we’re hearing some firms are considering is a situation where client personnel go out and make a video recording of the counting of inventory. Inventory audits are only as good as the standards applied to them.

It was eventually determined that about $20 million (about $369 million in 2020 dollars) of the $87 million in assets on the company’s balance sheet were phony. It helps in the reduction and elimination of gaps in the inventory management system. Inventory audits by confirming the correct status of the inventory in the organization help in budgeting and planning for the next steps. Cut-off analysis to check whether the count of inventory matches with records at each operation level. The audit also lets you know if an inventory shrinkage scenario occurring in the organization or not.

inventory audit

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.

It involves recording every item that is on the shelves. You can do a full physical count of the items in the warehouse. Or you might do partial counts, cycling through your SKUs a few at a time.

What Is The Importance Of Inventory Auditing?

Auditors may conduct matching to verify that the right amounts were charged at the right time. Freight cost analysis includes determining the shipping or freight costs for transporting inventory to different locations. Generally, freight costs are included in the value of inventory, so it is important to track the freight costs as well. For companies with those inventory control or sales systems, the inventory audit process can also provide valuable insight into whether the system is effective.

To save you the suspense, this is where you physically count your inventory so you know what you have onsite. Ideally, you’ll want to do this with a barcode scanner to record data electronically.


They will also employ other techniques like focusing on high-value items, error-prone items, overhead analysis, etc. to check whether the inventory is valued correctly and represented fairly in the books of accounts or not. The matching of financial records with the physical count of the inventory items. However, you can overcome this problem with asset & inventory auditing.

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. 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. Finished goods cost analysis applies to manufacturers and includes valuing finished inventory during an accounting period.

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. In order to prevent confusion during the inventory audit, operations are frozen, eliminating transportation in and out of the facility and halting product movement. Inventory can’t be transferred between retail shops or manufacturing facilities — it needs to stay put. Companies will need to work with auditors to ensure the physical inventory count won’t obstruct a company’s ability to fulfill orders. For some businesses, having employees run the full physical inventory count is ideal. But for others — for example, a department store like Saks Fifth Avenue — having salespeople go through their massive inventory might not be efficient.

Eliminating Long & Complex Audit

While the percentage variance that is “acceptable” is dependent on the industry and company, many aim for an inventory variance between 1-2% of sales. Anything over 10% should be setting off alarms — your inventory management system may need some investigating.

Is inventory an asset?

Inventory is an asset because a company invests money in it that it then converts into revenue when it sells the stock. Inventory that does not sell as quickly as expected may become a liability.

Generally, businesses perform a cycle count on a monthly or quarterly cadence depending on the nature of an industry. An inventory audit may also be requested separate from the year-end process. For instance, some banks request an inventory appraisal as part of lending due diligence. The audit will ensure that the inventory still has the value as collateral that the bank needs for a loan. The SEC opened an investigation and Musica was arrested.

The final piece of the plot involved documenting a huge amount of nonexistent crude drugs to bolster the shell company’s inventory. McKesson & Robbins’s auditors never questioned the documentation presented to them. They didn’t perform any sort of check of that physical inventory, either — it just wasn’t common practice at the time.

Here’s how inventory audits work, the best practices, and additional procedures to ensure you make the most out of your audits. Overhead analysis includes analyzing the indirect costs of the business and overhead costs that may be included in the costs of inventory. Rent, utilities, and other costs can be recorded as part of inventory costs in some cases. Your technology must have the capabilities to clearly record the inventory, and auditors have to verify the video feed’s authenticity, date and scope. The personnel recording this video need to have familiarity with the inventory, the counting process and the technology itself. Ensure the proper documentation is ready for auditors to review.

An inventory audit is a process where a business cross-checks its financial records against its inventory records. It is done to ensure all records are accurate and uncover any discrepancies in inventory count or financial records. As opposed to cycle counts, full counts are wall-to-wall inventory checks that account for all items.

Inventory Checklist

The item may have been purchased by one of your customers. This more likely happens when a business renovates its building or upgrades its products.

inventory audit

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. 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. Required of public companies and many private companies, the process checks to ensure a business’s financial records match their inventory records and physical count. The purpose of the inventory audit is to check and match the financial records of the inventories to its physical count.

As a result, production work halts, time wastage, production is not completed on time, customer disappointment, productivity loss. Overall, the business loss is the consequence of phantom inventory. If the concerned person has a good understanding of the stock-flow in the company, then it helps in ensuring that the work of the company runs smoothly, as one knows the availability of the stock and its requirement in the future. Scanning each item automatically records and stores data into the software. If there’s no built-in scanning feature, ponder how easy or difficult it would be to integrate this function into the software. Misreading an item’s part number or guessing an item’s part number because it’s missing, faded or slightly torn can also be the culprit behind inventory discrepancies. Reach out to an experienced staff person for help or search for the item’s description in the master records.

One of the most common incidents to result in a reconciling items investigation is missing paperwork. A discrepancy in your inventory may have occurred because a transaction has taken place, but hasn’t been logged in your records. Other examples of missing paperwork include issuances from your warehouse to a production area or receipts not entered into your system. ABC analysis can be an effective method to manage stockrooms.

Inventory Audit

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 and continue to sell products on a DTC or online marketplace with confidence. There are some points that the company should keep in mind while performing inventory audits internally or getting it done through external auditors. These considerations include whether the company’s inventory is physically countable by hand, are the inventory stored in the company’s warehouse or third-party facility, and if the time is appropriate for conducting the audit. These points will help in deciding the audit procedure and its timing. Mr. B, after getting appointed for conducting the inventory audit in the company A LTD. follows the different procedures to complete the audit.