How to perform Audit for Inventory: An inventory audit can be described as the process of verification of company’s actual inventory with the inventory data recorded in the company’s financial records to have a clear understanding on the inventory count of the entity. Since, the inventory holds a major portion of an entity’s asset structure, it is very important to identify and value the inventories. And this becomes the primary reason for conducting the audit of inventory. This is considered mandatory since this helps in identifying the quantity and quality of goods remaining in stock.
Observation of inventory is generally accepted auditing procedure, where an independent auditor issues an opinion on whether the financial records of inventory accurately represent the physical inventory being carried. Auditing inventory is an important aspect of gathering evidence, especially for manufacturing or retail-based businesses. It can represent a large balance of assets or capital. Auditing inventory must verify not only the amount of inventory but also its quality and condition to see whether the value of inventory is fairly represented in financial records and statements.
How to perform Audit for Inventory
Common Techniques used for Inventory Audit:
1.Cut off Analysis
This is the situation to halt operations at the time of receiving and shipping in order to ensure that no goods shall come in and go out from the business without accounting and improper channels.
2.Physical Inventory Count:
This is the manual counting of inventory available in the business and ensure that it matches with the numbers in the system
3.Analytical Procedures:
This involves comparison of profit margins, analysis of ratios etc with the previous years. Analytical procedures include analyzing inventory based on financial metrics such as gross margins, days inventory on hand, inventory turnover ratio, and costs of inventory historically.
4.ABC Analysis:
An ABC analysis includes grouping different value and volume inventory. For example, high value inventory, mid value and low value products can be grouped separately. The items can be tracked and stored in their separate value groups as well.
5.Freight cost Analysis:
In this analysis, the audit keeps a check on the freight cost that incur for transportation of goods and track the time between the date of shipment and date of receipt of goods in the plant. It helps to get an idea of units that are in transit and the value of goods that are lost or damaged in transit.
6.Overhead analysis:
It helps to identify hidden expenses such as rent, and other expenses such as rent etc that are necessary for the running the business. All these costs shall be analysed and derive profits accordingly.
Advantages of Inventory Audit:
- Inventory Audit helps in calculating the profit of the entity. An audit helps to identify the weaknesses in the accounting systems and enables auditors to provide suggestions for improvements.
- Inventory Audit helps in getting an accurate information about the exact inventory count through which we run the business and the amount of safety stock maintained by the business. This can cover anything from the tightening of internal controls to tax planning or reducing the risk of fraud.
- An audit will enhance the reliability of the figures being submitted to prospective investors.
- Inventory audit is required to reduce unnecessary investment on stocks and to ensure that you have a proper line balancing in the process. High levels of stock generally result in unnecessary overstocking resulting in poor cash flows & financial loss
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