Even if you have the best inventory management software, from time to time you still need to count your inventory manually to make sure what you actually have in stock matches what the inventory reports show. Do you know how to create counting procedures to audit your inventory efficiently and accurately? This articles will provide you with the basics of an inventory audit ahead of time so you can prepare better for the next inventory audit.
Overview
What is an Inventory Audit?
An inventory audit is using analytical procedure to check a company’s inventory methods and confirm that the financial records and actual count of goods match.
Inventory audit is essential to maintain inventory accuracy, identify causes of shrinkage, and make sure that you have the right amount of stock at the right time, right place. The better you understand your stock flow, the smoother you can run your business, because you know what products you have on hand.
Inventory Audit Procedures
During inventory audit, an internal or external auditor will conduct a series of procedures to validate your records, including: inspection, observation, confirmation, recalculation, performance, or analytical analysis of inventory during any stage of operations.
Here’s a list of some inventory auditing procedures that could occur.
Physical inventory counting: This is the process of counting each piece of inventory so you can account for all items. You should schedule this ahead of time because it can disrupt your normal business flow. To speed up the process and ensure accuracy, you should applying technology such as barcode scanning to help count items.
Inventory layers: If you do inventory using the FIFO (first-in, first-out) or LIFO (last-in, first-out), you should look at the layers of inventory you’ve recorded to make sure they’re valid.
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High-value item inventory analysis (aka ABC Analysis): High-value items are group A, mid-tier are B, and low value are C. ABC analysis can also help you manage a stockroom better and save time. Group C items should be displayed near the entrance to be sold faster, while low-volume, high-value items in Group A should be kept safely to reduce costly theft. You can read more about ABC Inventory in Manage Inventory Effectively for Small Businesses.
Inventory in transit analysis: When stocks are transferred between two or more locations, you need to track the time between the date of shipment or shift, and the date of receipt. These inventory audits will help ensure nothing is lost or damaged in transit. Auditors will review transfer records to check this.
Freight cost analysis: This analysis will determine shipping costs, or how much it costs to get products from one place to another.
Reconciling items investigation: If there are any gaps between the inventory counts in the reports and the actual amounts, you’ll need to figure out the reasons why they are different and adjust the records to reflect this analysis. Inventory reconciliation is an extremely important part of cycle counting.
Test invoices listed in receivable report: Auditors will select random invoices from the accounts receivable aging report and compare them to supporting documentation to see if they were billed in the correct amounts, to correct customers, on the correct dates. This is a test of the entire system to see how things line up.
Match invoices to shipping log: Auditors will verify that invoices for products match the amount and cost of items shipped from your warehouse.
Cash receipts review: An auditor will count and balance all receipts of items paid for by cash.
Depending on the nature of businesses, auditors may also conduct finished-goods cost analysis (if you create your own products, direct labor analysis or overhead analysis (if these are included in your inventory costs.)
Inventory Audit Checklist
Conducting your own audit periodically increases the visibility of your stock flow, helps you evaluate costs and prepare for any external audit procedures better.
A typical inventory audit has three phases: planning, execution, and analysis:
Planning
Select items to audit: You can sort products out by SKU or barcode, then prioritize which items need auditing. Higher-risk inventory items should be assessed more frequently.
Create an audit schedule: Conducting an inventory audit is likely to be an inconvenience to normal business flow so you will need to create an audit schedule. You’ll want to choose times that have least effects on the business, but happen frequently enough to ensure you can assess the high-value items in time. Take your policies and procedures of purchase and shipping may into consideration as they may affect the schedule of your audit, too.
Gather necessary documentation: Prepare important documents in advance and make sure you keep them in a secure but accessible place.
Execution
As mentioned above, you may need to conduct a number of different audit procedures, depending on your business. An internal auditor who is unbiased but knows how to conduct the inventory audit will be very helpful.
Report and analysis
The main goal of an audit is to look for gaps in compliance and opportunities to fix the deficit and improve operational processes. When the inventory audit is finished, you need to create an audit report to serve as evidence if an external audit is ever conducted. It’s also very important to keep track of audit results, not only the current cycle but also the previous ones.
Inventory Management and Inventory Audit
An efficient inventory management process can keep your business operating efficiently, track your inventory with precision and reduce the effort spent on audits. For example, if your system can scan items to track when they arrive to or leave the store, there will be time stamps associated with each action that can be easily tracked. When inventory audit requests arise you can quickly respond with accurate data and take the necessary steps to complete an audit.
ConnectPOS is integrated with Embedded ERP that can help you manage inventory across multiple stores, update stock instantly and track items anywhere at any time. You can scan barcodes to help audit stock quicker and more precisely.