What Is Inventory Auditing: Definition and Best Practices

What Is Inventory Auditing?

The inventory audit process combines a business’s financial records and its inventory records and cross-checks them in order to reflect the physical counts of inventory. Inventory auditing helps businesses maintain their inventory accuracy and minimize discrepancies.

Most Common Inventory Audit Procedures

There are 6 common inventory auditing procedures:

1. Physical Inventory Count

This procedure includes taking physical inventory from a warehouse to ensure that the numbers shown in your inventory management report are accurate. Physical inventory count is ideal for companies that follow JIT inventory.

2. Finished Goods Inventory Analysis

After fulfilling the production process, a business calculates the value of the finished goods. The finished goods inventory analysis includes the process of calculating the value of inventory and identifying if the financial statement is correct.

3. Cutoff Analysis

The cutoff analysis includes stopping all the inventory operations when counting physical inventory. In order to minimize mistakes and uncontrolled inventory, transactions, and shipments of products are stopped to verify that the recorded inventory movements are accurate.

4. Inventory In Transit Analysis

The in-transit analysis tracks the lead time for the product’s arrival. Companies select this inventory auditing procedure in order to ensure stock safety during transportation.

5. Freight Cost Analysis

This analysis calculates the shipping costs of inventory and measures the instances of damaged or lost stock.

6. Overhead Analysis

The company expenditures known as overheads, such as rent, power, or other costs related to inventories, are those that do not directly involve the primary goods and labor needed for manufacturing. In order to correctly manage your budget, you need to consider how overhead charges impact the entire cost of inventory.

Best Practices of Inventory Audit

Select Audit Types: According to your company’s needs and priorities, you can select the audit types that would help you to fulfill accurate inventory counts.
Practice Proper Inventory Control: Select the right tool to control and organize your business’s stock. The most useful features that will help you with properly controlling inventory are labeling items, tracking stock, and inventory forecasting.
Audit Regularly: By auditing inventory regularly, you will monitor your stock which will help you with ordering new stock when it is needed. It will also help you decrease the chances of understocking or overstocking errors.