Inventory Audit Checklist is extremely important before starting an inventory audit. Inventory auditing is the accounting procedure within a company that maintains a record of the products and merchandise being stored while keeping track of the Company's current supply count. The majority of businesses consider their inventories to be an asset and assign it a value. This is where auditors employ laborious procedures to determine whether or not this valuation is accurate. Generally, auditing has multiple advantages, each of which determines how a company will adapt to a changing industry without encountering problems such as overstock and shortages. Inventory auditing is essential for maintaining accurate stock levels, identifying causes of shrinkage, and ensuring that the proper stock is on hand. Understanding stock flow will facilitate the operation of your business and expedite the fulfilment of customer orders. In this article, we will discuss the about inventory audit, its importance & audit checklist.What is Inventory Audit An inventory audit compares the financial records of a company with its inventory records and verifies that these records correspond to the physical inventory count. To ensure inventory accuracy and identify discrepancies in stock counting or financial records is a crucial process. These audits can also help with inventory forecasting. Physical counting involves going through every item in a warehouse to record the quantity of available products, typically with the aid of technology. It is extremely important that you start with a inventory audit checklist of all the items that should be in the inventory before starting the count. Audits go a step further to confirm the correct quantity, quality, and condition of your inventory.Importance of Inventory Audit Stock audit is crucial in retail management due to multiple reasons: - Identify discrepancies. If there are discrepancies between the actual stock level and the accounting records, you can determine where further investigation is required to resolve the problem. - Identify situations of overstocking or understocking and assist with asset management and inventory forecasting. The results of a stock audit reveal which items have been on the shelves for too long and which items are running low.From there, you can take the appropriate actions, such as offering a discount to accelerate the sale of out-of-date products and purchasing additional items with a higher revenue and profit margin. - Recognize losses caused by theft, damage, and obsolescence. The root cause of the losses is frequently a deficient management procedure. For example, your high-value items are too close to an unmonitored exit, or fraudulent activity has occurred. - Assess the effectiveness of your logistics and warehouse processes. In the logistical process, inventory shortages can occur, such as missing items during the transfer from the container to the warehouse.Inventory Audit Checklist Inventory auditing is best done by using an inventory checklist. Before starting the inventory count, it is of the utmost importance to first compile a list of every item that should be present. If your results are inaccurate, the company's inventory may be overstated, leading to budget mismanagement, theft, and overall customer dissatisfaction. Below is a sample Inventory Audit Checklist that aims to cover all aspects of inventory planning and management for a company. - Evaluate which inventory items to audit: - Inventory items with a higher risk should be evaluated more frequently. Also known as the ABC Analysis. High-value products are categorized as A, mid-tier products as B, and low-value products as C. Additionally, ABC analysis can help improve stockroom management and save time. You can sort and priorities inventory by SKU (stock keeping unit) or bar code. Examine the Stock Valuation Process, Inventory Cost Components, and Method of Valuation. - Plan your company's audits: Plan an auditing schedule next to minimize the disruption to your business flow, you should schedule audits of high-value items at times that are not too busy but still have a sufficient frequency. Note that your shipping policies may also impact your audit schedule, particularly if you guarantee customers quick delivery. - Interview Key Warehouse Employees: This can include anyone from the warehouse manager's right-hand man to a temporary floor picker. After the analysis of hard data, open-minded, face-to-face conversations can be the most revealing step of the audit, regardless of position. The following questions should be addressed during the interview process: - Are you familiar with all safety compliance regulations? Do you feel consistently secure at work? - Have you observed any system flaws that you believe are impeding productivity? - Do you know of any extra inventory or unused supplies that may not have been counted in this audit's initial count? - How is damaged or lost inventory recorded in the inventory system? And do you believe you have sufficient access to the inventory system to perform your duties effectively? - Cutoff procedures: Auditors must scrutinize the company's cutoff procedures for physical inventory counts and inventory audits. As it is difficult to accurately count inventory when new goods are arriving from suppliers and old goods are being shipped out to fulfil customer orders. Companies should have clear procedures for temporarily suspending the receipt of new inventory and the shipment of customer orders. Auditors can also test inventory received and distributed near the end of the accounting period to confirm that they were counted in the correct period. - Identifying slow or non-moving Inventory items: Auditors should firstly identify the slow-moving items then apply other audit procedures. The slow-moving items increase the inventory carrying cost plus get obsolete over time. If it is not correctly identified, it can result in blockage of Working Capital. - Physical verification of Inventory: It is the procedure of counting every item in stock. First, we schedule this event in advance because it will likely disrupt normal business operations. Consider using technology, such as a bar code scanner, to physically count each item and reconcile the inventory count with the general ledger. - Gather the required documents: Collect all essential documents in advance and ensure that they can be evaluated quickly and safely. - Conduct the inventory audit: Depending on the nature of your business, different numbers of audits may be necessary. Inventory lying with third parties, i.e., for contract work, in a third-party warehouse should be inspected. - Record the findings: The purpose of audits is to identify deficiencies and look for ways to enhance operational processes. Consequently, you must document what occurs during audits and track the results from year to year or cycle to cycle. - Create an audit report: When the audit is complete, create a report highlighting the key findings and recommendations. In subsequent audits, you can re-examine the previous report to determine whether things have improved. - Reconciling items investigation: If there are discrepancies between inventory counts according to the company's records and the actual amounts on the warehouse shelves, determine why there are discrepancies and update the records to reflect this analysis. Reconciliation of inventory is a vital component of cycle counting. Also Read: Understanding Operational Audit: Types, Purpose, Process, Checklist, and Pros and Cons