The lawyer and inspector general Robert Cobb said, “If you can’t show through an audit trail how you arrived at the numbers in your balance sheet, that is a significant internal control failure.”
Your goods for sale are a central part of your business. Keeping track of them regularly lets you maintain a flow in your sales and purchases. That’s where audit procedures come in. Through them, you’ll check that your records match each other and the items in storage.
In this blog, you’ll discover how to conduct audits and what you’ll benefit from them.
Inventory Audit Explained
This is a procedure that allows you to inspect, confirm, recalculate, or cross-check information. At this stage, you’ll note whether stock exists and in which condition. Then, you’ll produce an analysis from the data you’ve gathered.
Of course, your findings might have some discrepancies due to human error and industries have different standards for what’s permissible. However, anything beyond 10% is a cause for concern.
You might need to do this because it’s required by law. Specifically, some governments require public companies with material inventory to have regular audits.
As for who does the procedure, it’s either you or an internal/external auditor. In particular, you might need an external investigation if you’re looking for an impartial analysis. After all, it’s easy to manipulate data if you’re an employee. Additionally, a third-party auditor might be necessary in some cases such as legal proceedings.
Benefits of an Inventory Audit
When you verify your records and physical storage, you’ll gain the following benefits:
- Identification of Causes of Shrinkage: This audit can find out why your business is losing stock. For instance, a physical count could prove that the shrinkage comes from goods damaged in storage.
- Guaranteed Optimum Stock Quantity: Once you’ve checked your warehouse, you’ll know how many goods you have. And so, you’ll be able to better estimate when and how much to purchase without wasting capital.
- Stock Flow Knowledge: Through the analysis of your goods throughout different periods, you’ll understand how these figures fluctuate.
The Inventory Audit Procedures
In inventory management, there are specific methods to investigate the accuracy of your records and storage. To correctly conduct them, it’s crucial that you understand how and why businesses use them.
Here are the methods to verify your records and goods:
1. Physical Inventory Counting
This is the simplest way to check that your logs match what’s in your warehouse. To do this, you’ll count each item in the storage facility. Since this takes time and can disrupt your operations, you should be careful when you schedule it. Moreover, this method is prone to human error. Therefore, you should employ digital means such as a barcode scanner.
2. Matching
With this method, you’ll ensure that invoices correspond to your shipment logs. In particular, you should confirm that the costs, dates, and quantities match. This will uncover any fraud or mistakes in between requesting for payments and goods leaving your warehouse.
3. ABC Analysis
One way to audit your storage is to first separate your goods. For instance, you could separate them by value and then track their flow. This procedure’s other name is high-value item inventory analysis.
So, if you split your goods by value you could have A as the most expensive, B as the mid-range, and C as the cheapest items. This is especially useful if an external auditor is evaluating your products since they can focus on the high-value products.
4. Cut-off Analysis
This is a subdivision of a physical count. However, it sets itself apart in the way that it handles the flow of goods as you undertake this auditing technique.
In the physical method, you simply count the items regardless of how staff take goods out or in during normal operations. Conversely, cut-off analysis requires that you pause all operations. Therefore, you get a more accurate data set since none of the stock has moved. Nevertheless, its very nature disrupts your warehouse’s operations.
How to Audit Inventory Valuation
If you want to verify your records and warehouse, you’ll need to apply the above procedures to the steps below:
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Plan the Audit
To begin assessing your stored goods, you should consider your goal and gather the relevant documentation to get started. If you have a main worry such as fraud, you could opt to match logs and invoices.
Alternatively, if you want an in-depth confirmation of your tied capital you should do either a physical count or cut-off analysis. In general, you should prioritize the more expensive and at-risk goods.
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Schedule the Procedure
After you’ve decided which method best fits your aim, you should decide when to do it. While you could include it as part of your year-end process, you could also do it more often. For instance, you could do it at the end of each quarter. And if your inventory is small, expensive, or highly perishable, you should even do it weekly or daily.
Moreover, you should consider when to do it during the day. You should conduct the investigation while staff are on break, or after work, or during a low-intensity operation period. Alternatively, you could use the cut-off analysis which pauses all operations as you do the audit. What’s most important is not inconveniencing your workforce and keeping in mind your goal. You should also keep in mind that an external auditor may decide for you when it’ll happen.
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Arrange Your Warehouse
Once you’ve scheduled your inventory audit, you should organize the items and ensure your staff is ready for the procedure. This will minimize errors from misplaced goods or mixed pallets.
In addition, you should mark obsolete, spoiled, or damaged inventory. Like that, you won’t mistake unsaleable items as future revenue sources.
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Execute the Audit
Now that your warehouse is ready, you’ll put in place your plan. You should consider how you’ll divide your auditors to make the counts. Generally, it is a best practice to give this task to employees who don’t normally work together. If it’s an external investigation, you should pair the auditor with someone familiar with the warehouse.
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Analyze the Results
Finally, you should create a report of your findings after you’ve collected them. This report will summarize the data and simplify trends. And so, you’ll easily understand the results and use the report for future decisions.
Conclusion
Now that you’re confident in audit procedures for inventory, you can easily verify your records in many ways, from the physical count to the ABC analysis. The one you’ll pick depends on the goal you have. However, the process of checking your inventory is simple each time.
To start with, you’ll decide which method you’ll use, pick a time, get your warehouse in order, and then you can do the audit. From the data you gather, you should do a report. So, do this audit and benefit from this new understanding of your stock flow.
