Inventory Audit

Inventory Audit

Inventory audit or stock audit refers to physical verification of a company or institution’s inventory assets. There are several types of stock audits depending upon the purpose and every stock audit will require a different approach. Every business institution at least needs to perform a stock audit once in a year to update and assure that the physical stock and the computed stock is properly matched. A stock audit helps to correct discrepancies between the physical stock and the book stock. The stock audit helps to track the amount of physical assets remaining and make necessary arrangements to order new stock. If the company is dealing with different suppliers and vendors, a stock audit will make the inventory management process easier. 

Why Stock Audit? 

• Records accurate level of inventory and help to avoid shortage or overstocking of materials.
• It helps to detect inventory losses caused due to wastage, damage or theft;
• It disclose obsolete raw materials and incorrect orders supplied to customers;
• Analyze the actual quantity of stock against that noted on the accounting records;
• Avoid unnecessary investment on raw materials and can help to save money;
• Enable the business owners to understand the true financial status of the company; and
• Helps to find out discrepancies in the packaging and warehouse procedures.

It is very essential to conduct inventory audits to maintain inventory accuracy, spot causes of shrinkage, and ensure that one always have the right quantity of stock at the right time. A good understanding of stock flow will also help ensure the business runs smoothly. 

Inventories are prone to following risks: 

• Theft
• Damage
• Expiry
• End of life cycle of the product

Inventory audit checklist
The inventory audits have three phases: planning, execution, and analysis. Inventory is one of the important areas for any business where chances of fraud are more as it’s a department where thefts and damages occur. Having effective controls, appropriate processes, proper checklist and regular stock audit is essential for this function. Following is the checklist for Inventory audit:

• Evaluate which items to audit: Higher-risk inventory items should be assessed more frequently. It is also known as ABC Analysis. High-value items are given the grouping of products A, mid-tier are B, and low values are C. ABC analysis can also help to manage a stockroom better and save time. You can sort inventory out by SKU (Stock keeping units) or bar code, and then prioritize. Check Stock valuation process, components of cost of inventory, method of valuation.

• Create an audit schedule: Map out an auditing schedule. Unfortunately, conducting an inventory audit can disturb the regular business flow. We want to choose times that are least effective for the business, but also happen at a good frequency to ensure those high-value items will be accounted for. The policies and procedures of buying and shipping items can also affect the schedule of your audit.
• Physical verification of Inventory:It is the process of counting each item of inventory. Firstly, we schedule this ahead of time because it will likely be an inconvenience to normal business flow. Also, consider using technology, like a bar code scanner, to help physically count each item and reconcile the counted inventory with general ledger.
• Collect the necessary documentation: Get out any important documents ahead of time and make sure they are easily accessible, but secure. Categorized inventory in High, Medium and Low value stock.
• Conduct the inventory audit: There are different numbers of audit that can be essential, depending on the nature of your business. Check Inventory lying with third parties, i.e. for job work, in third party warehouse.
• Record the findings: Stock related MIS format and contents. The main purpose of an audit is to discover gaps in compliance and look at opportunities to fix the deficit and improve operational processes.
• Reconciling items investigation:If there are inconsistency between inventory counts as per company’s records and the actual amounts on the warehouse shelves then figure out why there are differences between these two amounts and make adjustments to the records to reflect this analysis. Inventory reconciliation is very important part of cycle counting.

Inventory Cut off Process
Cut off process is an essential process in Inventory valuation. When inventory is physically counted and inwards (receipts) and outwards (issues) movement of inventory is not stopped, it may cause many difficulties in the counts. This is why near of the date of inventory counting day, stop the movement of stock. If during this period stock is moved for any reason, it is likely to affect the inventory count. Auditor requires studying the cut off process of management and making sure it is adequate.

Although the inventory audit of essential physical inventories is generally conducted at or near the end of the year, it is better to carry out the audit in specified time intervals to ensure continuity of business operations. It is a mandatory audit which should be conducted during the end of every financial year. Various assets management software’s are available for managing & recording the inventory levels. These programs can be used to conduct efficient stock audit procedures. Inventory audit is important to reduce unnecessary investment on stocks and to assure that a proper line balancing in the process. Huge levels of stock mostly result in unnecessary overstocking thus resulting in poor cash flows and financial loss.

Here at AJSH, we assist our clients in compliance with Inventory audit, statutory audits, internal audits and various other compliances. If you want to know more about compliances or have any query regarding the audit compliances, kindly contact us.