If you run a business, you will almost definitely complete inventory audits as part of your tasks. An inventory audit is an essential element of any business and allows the company to keep track of its goods in a more thorough way that doesn’t disrupt the workflow.

In this guide, we will take you through the definition of an inventory audit and how you can carry out audit procedures to improve your company’s inventory tracking and monitoring.

What is inventory auditing?

In simple terms, inventory auditing refers to the various ways you can monitor, track and record a business’s stock or goods. Having a sound inventory audit system in place helps companies have a more accurate overview of their stock, ensuring they can find any inaccuracies or issues more efficiently.

Inventory audits also allow businesses to pursue more analytical procedures regarding their inventory. For example, if their records stated that they had 500 tubs of moisturisers in the stock cupboard, but the inventory check counted 450. An analytical procedure should be taken out to determine which number is accurate and how to overcome this issue.

How To Conduct Inventory Audits

The first step to conducting an inventory audit is having accurate data surrounding the inventory you currently stock. For example, you will need precise physical inventory count, purchase records and invoices.

Accurate data should be checked against physical inventory and financial records to prove its legitimacy. Records should all indicate the same or similar costs and figures, but if they don’t, you will need to flag this up and further delve into your inventory to see why this area isn’t adding up the way it should.

Another part of inventory auditing is looking for losses and damages. For example, if a supermarket were pursuing an inventory audit, they may expect to find some losses regarding items that weren’t sold by their expiry date. If this were the case, the supermarket would have to eliminate these out-of-date products, resulting in a loss for the business.

Once you have accurate information surrounding your stock, your audit will be completed. This should give you an overhead analysis of areas that need work or any areas that are going well, helping you anticipate product demand and keep a steady workflow. Businesses should complete inventory audits at least every three months to ensure they remain on top of all business aspects.

Types Of Inventory Audits

To pursue the above inventory procedures, you must carry out a professional method that can accurately collate your data to provide minimal slip-ups and errors. Businesses choose different approaches based on the type of company they run, with factors such as size, amount of stock, profits and business operations determining their decision.

Here are some standard inventory audits you can consider using to successfully and accurately carry out inventory audit procedures.

Physical Inventory Count

This inventory procedure is similar to the main outline we gave above, in which a company must determine if its physical inventory matches its records. To complete this procedure, every single item of stock/inventory must be recorded. This may sound like a long process, but using electronic items such as barcode scanners is a great way to do this efficiently while keeping an electronic inventory record.

Cutoff Analysis

As the name suggests, you must cut off all other business procedures and activities to successfully carry out this procedure. This includes receiving and shipping any new inventory, as you need to focus on the inventory already housed on your premises. From here, the business will conduct a physical count for the existing stock, operating as a tight inventory management system.

Once the onsite inventory data has been collected accurately, you will have an overview of what is on-premise. This will be beneficial when new inventory is shipped. In addition, you can add these exact new figures to your accurate existing inventory counts for an overall precise physical inventory counting procedure.

Freight Cost Analysis

This inventory auditing procedure is one of the best analytical procedures, helping to determine inventory moving costs and freight shipping costs. In addition, it increases awareness of both time and money being consumed over moving inventory, providing businesses with a more accurate way to track when new inventory has been ordered and when it will arrive.

Finished Goods Cost Analysis

This analytical inventory audit procedure is another excellent way to have more efficient inventory management, as companies can see precisely when stock has been produced and is suitable to sell to customers. This form of inventory audit is perfect for manufacturing companies and any business that handles the production of their own stock, helping them with everything from having more accurate and up-to-date financial records to determining inventory costs and value.

Overhead Analysis

Indirect costs are a large section of running a business. They must be considered at every step of the inventory process, with elements such as rent, security and other business operations that weren’t directly included in the manufacturing process. So, in simple terms, an indirect cost refers to any inventory auditing outside factor that didn’t involve manual labour or raw materials.

Doing overhead analysis ensures financial statements are more precise whilst allowing businesses to pursue budgeting more efficiently.

ABC Analysis

This procedure revolves around sorting your physical inventory in accordance with value. For example, low-value items will be grouped together, as will high-value inventory items. Grouping inventory of different values together can help to maintain inventory accuracy and help businesses to store high-value items in other locations if necessary.

Cycle Count

This is another auditing procedure centred around pursuing physical inventory counts, in which businesses will manually go through all physical stock and count inventory precisely. But, for cycle counting, this method applies to high-value items. Therefore, this can be a suitable procedure for companies that don’t have the time to do a full physical inventory count often. Instead, they can conduct cycle counts to focus on high-value items that can generate the most profit.

The Modern Type of Inventory Management Software

As you can imagine, keeping tabs on inventory by going through stock manually can make accounting records harder to produce and monitor. So, to efficiently perform inventory auditing, there should be a good inventory management system and software used to help.

Cloud-based Inventory Audit

The majority of businesses that carry out audit procedures will use a cloud-based system. A cloud-based inventory audit system simply refers to a website that can be used to monitor and keeps track of a business’s inventory levels. This makes for better management and maintenance of inventory, as companies can seamlessly keep track of inventory records in one space.

Tips To Organise Your Inventory In the Best Ways to Audit

For audit procedures to work best, you will need to always keep your inventory organised throughout all moments. Doing this will ensure that you have a smooth and cohesive workflow that doesn’t require stressful auditing. Here are some tips for achieving this;

Audit More Frequently

The more you do something, the easier it will become. For example, suppose you only conduct an inventory audit once a year instead of every few months. In that case, you run the risk of not keeping accurate inventory records and having to take more time going through backlogs.

A way to overcome this is by prioritising your high value items and conducting inventory audits as soon as you receive the shipment, using an electronic barcode scanner to complete an accurate physical count.

Keep Your Inventory Organised

When it comes to conducting a physical inventory count, there is nothing worse than a messy inventory stock that makes it so much more challenging to grasp inventory numbers and quality. Therefore, as part of an inventory management process, items should be scanned and stored accordingly as soon as inventory is shipped and received. Then, stock them in categories regarding the quality or alphabetical order.

Implement an Inventory Audit Routine

To carry out inventory audits more frequently, it is best to implement a structure so that your inventory audit software is continuously up to date, diminishing the risks of extended and unorganised backlogs. Therefore, we recommend having a routine in place that ensures the business conducts an inventory audit every three months.

Final Thoughts

Inventory auditing is an essential element of the inventory management system. Without efficient audits, businesses will increase their chances of losing inventory and missing inventory. Inventory audits can also help companies to increase their profits and reduce expenditure as they can review accurate and up-to-date purchase records regarding inventory, giving them more insight into their gross margins at the same time as physical counts.

Having all the data surrounding inventory audits in a cloud-based system will ensure that companies can access inventory records more easily and efficiently, giving an overall more transparent view of their auditing history and records.

Frequently Asked Questions

What are the audit procedures for inventory?

There are several audit procedures regarding inventory that businesses can choose. Whether they would like to do an overhead analysis that looks into costs that don’t include direct labor of stock or an ABC analysis that separates your physical inventory according to value.

How do you audit inventory checklist?

An inventory audit checklist should include cycle counts, testing of high value items, freight cost analysis that concentrates more time on transit timings and shipping information, and review purchase records and other financial records.

What are the difficulties faced by auditors in the audit of inventory?

When auditing inventory, it is to be expected that businesses may encounter a few difficulties. For example, item quality can significantly drop if damages have occurred, which has a domino effect on company plans and inventory methods.

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