Questions to consider?
Before you think about conducting an inventory audit, you need to have a clear understanding of what it is, especially since it’s one of the most integral parts of inventory management. An inventory audit is defined as the process of assessing the stock maintained in your company’s books and comparing it against your physical stock to ensure they match. This process may be conducted internally or at the request of an external auditor.
Here are some questions to consider as you prepare to assess your inventory:
- Is my inventory of raw materials, finished goods or other assets too much to count by hand?
- Is this the best time for me to conduct my inventory audit?
- Is my inventory stored at my company or a third-party logistics building?
These audits can interfere with normal business operations, so it’s important to conduct them during a time when business is typically slow or not heavily productive, like the end of the year after the holiday season.
Typical Procedures
There’s no one-size-fits-all approach for conducting an audit. It’s a matter of utilizing the procedure that most appropriately fits your business and inventory needs. Here are some common proceedings.
Cutoff Analysis
A cutoff analysis is when you cut off all receiving and shipping operations to ensure nothing is mistakenly handled or goes unaccounted for when you do the physical inventory count. If you don’t do this, it can throw off your data and lead to a reconciling items investigation.
Freight Cost Analysis
If your business ships products to different locations, this procedure will aid in determining shipping costs. It records when your items were sent and when they arrived at their proper destinations. This also serves as an excellent way to document items that are lost or damaged en route.
Physical Inventory Count
To save you the suspense, this is where you physically count your inventory so you know what you have onsite. Ideally, you’ll want to do this with a barcode scanner to record data electronically. If you’re doing this with a professional auditor, they will watch and reconcile your amount with a general ledger to ensure the numbers match.
High-Value Item Inventory/ABC Analysis
High-value item inventory, often referred to as ABC analysis, is one of the most common procedures for inventory assessments. High-value, rare items are categorized as A items. Medium or mid-value items are sorted as B items. C items are low-value items.
ABC analysis can be an effective method to manage stockrooms. Group C items should be placed by the entrance to quickly speed up trips to the sales floor. Group A items should be properly placed and secured in a safe place to minimize theft and costly losses.
Overhead Analysis
Although this is an optional procedure, it’s still popular. Overhead costs include utilities like rent and electricity. Analyzing these costs helps you predict the indirect costs of doing business, which can assist you with budgeting for the upcoming year. Again, this procedure is optional and only useful if you count these costs as part of your inventory calculations.
Investigate Discrepancies
If your physical stock doesn’t match the number set in your books after the audit, then you should perform a reconciling items investigation to find the cause of these discrepancies. Here are some common reasons why differences between physical stock and recorded values occur:
Miscounted Inventory
It’s highly plausible that someone miscounted the inventory. It happens. A recount is the first thing you should do for this investigation. When recounting the inventory, have a different person crunch the numbers, because the first person could miscount again. If the number is significantly different from what’s recorded in your ledgers, it could be there’s more inventory in a second, hidden location. Search for a potential second location and count again.
Misread Part Number
Misreading an item’s part number or guessing an item’s part number because it’s missing, faded or slightly torn can also be the culprit behind inventory discrepancies. Reach out to an experienced staff person for help or search for the item’s description in the master records.
Differences in Units of Measure
Do the units of measure match what’s recorded in your books? One of your products may be measured as an individual unit, but it could be marked in your ledger as pounds, boxes, inches, etc. If you already did a recount and there’s still a significant difference, it’s likely the units of measure aren’t the same.
Missing Paperwork
One of the most common incidents to result in a reconciling items investigation is missing paperwork. A discrepancy in your inventory may have occurred because a transaction has taken place, but hasn’t been logged in your records. Other examples of missing paperwork include issuances from your warehouse to a production area or receipts not entered into your system.
Customer Ownership
Another reason why there may be no record of your missing inventory is one of the products you’re counting is no longer yours. The item may have been purchased by one of your customers. This more likely happens when a business renovates its building or upgrades its products.
Final Thoughts
Although audits vary from company to company, there’s nothing to fear. You now have the right know-how and tools to prepare for your audit and take note of your inventory. Using the ideal inventory audit or inventory management software for your business increases your efficiency, alleviates stress and helps you successfully meet compliance requirements to ensure smooth sailing for your business or company.
