What Is an Inventory Audit?

Inventory audit refers to the auditing of different methods you have employed to track, monitor, and record the inventory of your business. Furthermore, inventory auditing also involves the analysis of other procedures involved, ensuring the proper inventory records have been recorded and maintained in the books of accounts of your company. The inventory records should match the physical numbers of your counted inventory.

Your Complete Guide to Inventory Auditing

How to Conduct an Inventory Audit?

You will need current and accurate data from multiple sources to conduct an inventory audit. The required data can include sales records, inventory counts, shipping invoices, and other records. Furthermore, you can ensure inventory audits are conducted with complete accuracy and information with timely automated inventory tracking.

You must understand that the workflow for most inventory auditing types remains the same. For inventory auditing, you must have a couple of records reflecting the same inventory counts. Furthermore, you can compare these records to check whether they match. You can mark areas that don’t match, identify issues, and look for problems arising due to missing inventory numbers. Lastly, you should check for damaged products, inaccurate sales records, and so on.

Your Complete Guide to Inventory Auditing

Ten Common Inventory Audit Procedures

There are multiple inventory auditing procedures. To conduct an inventory audit for your business, you must choose the most appropriate and relevant method based on your business requirements and operations.

Here are some of the most common inventory audit procedures businesses use.

Cutoff analysis

When you opt for cutoff analysis, you pause other business activities, including receiving and shipping goods at the time of the physical count of inventory. Eventually, this inventory audit method ensures no item remains unaccounted for. Furthermore, auditors analyze the documents of receiving and shipping items to ensure the accuracy of recorded inventory movement.

Physical inventory count

This inventory audit process ensures that the numbers recorded by the system match your physical count of stock. Furthermore, it involves the counting of each unit. You can use devices like inventory barcode scanners or product barcodes to keep an accurate record of your inventory electronically.

Analytical procedures

In this inventory audit method, you compare the inventory turnover ratio, gross margins, and/or stock unit costs with previous years’ records.

ABC analysis

In this inventory audit procedure, you group items of different value, such as high-value products, mid-tier items, and low-level goods. Furthermore, you can even choose to store these products accordingly.

Freight cost analysis

This inventory audit method determines the cost of moving goods from one place to another. It includes freight shipping costs. Furthermore, it helps you determine the time between the date when goods were shipped and when goods will be received. This method allows you to account for items currently in transit and when an item is damaged or lost in transit.

Finished goods cost analysis

This inventory audit method when businesses produce their goods. Furthermore, this method illustrates when a product is ready to be sold to customers. Thus, the auditor can quickly determine the inventory value for the current period. Furthermore, auditors can use this inventory auditing method to ensure a company’s financial statements are accurate.

Overhead analysis

When you clearly understand the indirect costs involved in carrying out different business activities, you can do budgeting more accurately and effectively. Moreover, this method of inventory auditing refers to expenses other than the cost related to raw materials and labor. Overhead analysis audits hidden costs such as utilities, rent, and additional fees of business operations. This method only applies when you record overhead costs as part of your inventory costs.

Reconciling items

You can use the reconciling items method to account for any errors you might have found during the inventory audit and narrow down the primary reason. Moreover, you will want to keep an eye on SKUs prone to errors to prevent similar situations in the future.

Match your invoices and shipping log

You can use this method of inventory auditing to verify whether your invoices match the cost and number of inventory items you have shipped from the e-commerce warehouse. Furthermore, an auditor can do it at random to verify whether you have charged the right amount for a product from your customers at any given time.

Inventory cycle count

This method of inventory auditing is similar to the physical count method since it involves the physical counting of inventory manually and then matching or comparing the numbers to what your system recorded. However, you must remember that the inventory cycle count method applies to only some products, particularly those with high value. Thus, you can audit your high-value products more often for more accuracy.

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An Inventory Audit Checklist

When you conduct regular inventory audits, you can increase the visibility of how your goods move through the supply chain. Furthermore, it can help your business to evaluate the cost and prepare for external audits. Most ideal inventory audits are conducted in three phases: planning, execution, and analysis.

We have compiled a list of all points you should remember conducting an inventory audit:

Assess the time for inventory audits

You should assess high-risk inventory more frequently. Furthermore, you can use SKU or barcode for sorting and prioritizing inventory.

Organize your inventory

You should organize your inventory before auditing since it’ll take much longer and higher cost to sort through and account for inventory scattered across your warehouse.

Minimize work-in-process inventory

You might find work in process inventory most challenging to account for as it requires you to determine the percentage of the inventory completion and assign a value to it. To avoid complexities, you can try minimizing the amount of work in process (WIP) inventory before an inventory audit.

Create an inventory audit schedule

Since inventory audits hamper everyday business activities, you must plan the inventory audit schedule beforehand. Furthermore, you must choose a time for an inventory audit that has the most negligible impact on your business. However, you should also ensure the inventory audit is performed at a decent frequency. It confirms that you have accounted for products with a high value.

Collect the required documents

You should prepare and prepare all required documents for the inventory auditing procedure beforehand. Collecting the required documents for inventory audits ensures the easy accessibility of the same.

Consider other locations

You should also provide the auditor with complete records of your business’s inventory at different locations or with third-party logistics (3PL).

Perform the inventory audit

Multiple inventory audits might be essential based on your business’s nature and operations scale. You must ensure that you have an internal auditor who performs the inventory audit, keeping aside all biases.

Make a record of your findings

You must keep track of inventory audits, either yearly or cycle to cycle. The primary goal of an inventory audit is to identify gaps and discrepancies in inventory management compliance. Moreover, inventory auditing helps take advantage of opportunities to fix the deficit in inventory and improve overall business operations.

Report your findings

When the inventory audit is complete, you must create an easy-to-read and comprehend audit report. The inventory audit report serves as the evidence for if and when an external inventory audit is conducted.

Your Complete Guide to Inventory Auditing

Why Is Inventory Auditing Important for E-commerce Businesses?

You can reduce inventory audits’ complexities, frequency, and length with an efficient inventory management process. There shouldn’t be any reason for your inventory records not to match in the digital world of automation, where solutions give you a real-time, synced inventory record.

Calculation of profits

Inventory auditing can help you accurately calculate your profits and losses. You will also see a drastic impact on your inventory accounting records by regularly tracking and recording the changes in inventory valuation over time. Furthermore, inventory auditing can help you avoid inventory shrinkage and identify expensive, slow-moving products.

Prepare your budget with accuracy

You can’t effectively budget your next purchase of inventory batch if you don’t use an accurate inventory tracking method. You can better budget your business operations when you know how much inventory you currently have and how much more you need to meet customer demands in the future.

Find discrepancies and inefficiencies

Inventory audits can help you spot anomalies and inefficiencies in your business operations. It includes items either not selling at all or selling too quickly. Furthermore, you can also analyze inventory that is selling fast and leading to stockouts. Inventory auditing also enables you to identify discrepancies in inventory storage, tracking and recording methods, and other significant operational errors.

You can also use the information gained from inventory auditing to improve the overall financial health of your business. Lastly, you can optimize multiple aspects of your supply chain and discontinue slow-moving inventory.

Optimize your inventory holding costs

You pay holding costs for carrying inventory, including labor, warehouse, rent, and insurance charges, along with the cost of expired, damaged, and outdated inventory. The longer your business holds any slow-moving and unusable inventory, the higher you pay in holding costs. Inventory audits can help your business identify areas squeezing more money out of your budget.

Your Complete Guide to Inventory Auditing

What Challenges Might You Face During Inventory Audits?

The bigger the scale of your business, the more challenging it gets to perform inventory auditing. Here are some of the primary challenges you might face while conducting an inventory audit:

Inventory auditing is time-consuming

The auditing of physical inventory is a tedious task. For example, consider your business is selling 500 SKUs and when you check the inventory levels against the amount of inventory you currently have listed on hand, either on software or an inventory sheet. It can probably take days or even weeks to complete the process.

Furthermore, even if your business has one SKU and 3000 units, you will have to spend considerable time on a rigorous manual task. You can save an ample amount of time by opting for an automated system for inventory tracking, recording, and reporting. You can also access the most updated inventory information across all your business and warehouse locations.

Hampers business operations

Often businesses pause major operations to complete their inventory audit process, including fulfillment and shipping of orders to customers. In the age of ‘delivery within 24 hours,’ halting order fulfillment and your inability to meet your customers’ expectations can significantly influence your brand impression.

Difficult to scale

The larger your business gets, the more you will have to strategize your inventory management, tracking, control, recording, and more. You can use the instant spot-checking method more efficiently to keep your inventory audits under check between physical inventory audits.

Furthermore, it implies that you will have to choose a particular product, count the number of inventory units you currently have on hand, and compare it to the number of inventory units presently listed on the system.

An automated inventory management system can help your business simplify its inventory management process, including inventory tracking, control, recording, reporting, and more. Most inventory management systems give you a prompt for a spot check when the system reaches the product stock as zero to confirm whether you have more units on hand.

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If you plan on conducting an inventory audition, an external auditor or internal employee will perform a series of procedures to check and validate your inventory records. These procedures include observation, inspection, recalculation, confirmation, performance check, and analysis of your inventory during all stages of production.

When you conduct an inventory audit, you ensure the accuracy between your inventory records and actual physical stock quantity. Furthermore, conducting regular inventory audits can help you understand your company’s stock flows. It can also help you accurately calculate profits and losses and maintain smooth business operations without any significant obstacles.

An external auditor will determine whether the amount of inventory your company has recorded, either as an allowance for scrap or obsolete inventory, is accurate and up-to-date. The audits are done based on the procedures employed for tracking and recording inventory, historical patterns, and reports of stock you have used.

Auditors can verify your inventory by examining the records and referring to essential relevant documents, including inspection reports and more.

Inventory auditing can be complex for multiple reasons because it’s time-consuming. Furthermore, the challenges of conducting an inventory audit are directly correlated with the scale of your business operations.

  • Analyze sales trends
  • Forecast customer demand
  • Store inventory in the right locations
  • Stay accurate and reorder stock on time

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