Inventory Audit

What is an Inventory Audit?

Inventory Audit refers to the process of checking the inventory methods used by the company to record the inventory using the different analytical procedures to ensure that the proper record of the inventory is maintained in the book of accounts of the company and the same matches with the physical inventory count available.

Inventory Audit Example

For example company, A ltd purchases the raw material from the vendor processes it and converts it into the finished goods. It appoints Mr. B to conduct the inventory audit.

Mr. B, after getting appointed for conducting the inventory audit in the company A LTD. follows the different procedures to complete the audit. He performs the counting of the physical inventory where every piece of the inventory is counted. It is then matched and reconciled with the inventory count available in the books of accounts of the company, cut off analysis.

Consistency of charging the freight cost in all the periods, either as the expense or include in the inventory cost. Conducting the direct labor costDirect Labor CostDirect labor costs refer to the total cost incurred by the company for paying the wages and other benefits to its employees against the task performed by them, which are straight away related to the manufacturing of the products or provision of the services.read more analysis, conducting the overhead cost analysis, testing of the work in progress, conducting the analysis of the cost of the finished goods; inventory allowances in case of the obsolete inventory, testing that the inventory is valued as per the method required by the law, etc. It is an example of the inventory audit conducted in the company by the auditor appointed for that purpose.

Inventory-Audit

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  1. Auditing I: Conceptual Foundations of Auditing
  2. Auditing II: The Practice of Auditing

Advantages of Inventory Audit

The different advantages related to the Inventory Audit are as follows:

  1. In the inventory audit, different analytical procedures are used by the auditorAuditorAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws.read more appointed for such purpose to check the inventory methods used in the company for recording the inventory. It helps in maintain the accuracy of the inventory.
  2. With the help of the inventory audit, the company may be able to find the spot causes of the shrinkage in the inventoryShrinkage In The InventoryInventory Shrinkage refers to the excess stock of goods shown in the accounts' books, although actual inventory is short of it. The reason behind this difference in real and recorded stock can be damage, theft, counting error, etc.read more if any exists. After identifying the reasons, the company may take corrective actions and can avoid the same in the future.
  3. Along with the checking of the inventory methods used by the company, inventory audit helps in ensuring that there is the availability of the right amount of the stock in the company at the right time. Because if there is extra stock then needed, then it will lead to loss of opportunity costOpportunity CostThe difference between the chosen plan of action and the next best plan is known as the opportunity cost. It's essentially the cost of the next best alternative that has been forgiven.read more, and on the other side, if there is a lack of availability of stock, later it would hamper the production of the goods. So any business needs to ensure that there is the availability of the right amount of the stock in the company at the right time.

Disadvantages of Inventory Audit

The disadvantages related to the Inventory Audit are as follows:

  1. In the big concerns, inventory audits take place very frequently. Such a detailed audit will increase the cost. Many times, to reduce the cost, the auditor of the company has to limit his auditing scope and has to resort to techniques like test checking, etc.
  2. As there is the involvement of humans, there are chances of manipulation. Sometimes auditors are forced to manipulate the data and show a different position. In those cases, the inventory audit will not give fruitful results.

Important Points

The different vital points related to the Inventory Audit are as follows:

Conclusion

  • Thus, in the case of the Inventory Audit, different types of analytical procedures are adopted by the auditor as appointed for such purpose by the company to verify the inventory methods used in the company for recording the inventory.
  • Also, using the inventory audit the auditor conducts the counting of the physical inventory where all the type of the inventory available in the company is counted and are then matched and reconciled with the inventory count available in the books of accounts of the company.
  • It helps in maintain the accuracy of the inventory, helps in finding the spot causes of the shrinkage in the inventory if any exists, and helps in ensuring that there is the availability of the right amount of the stock in the company at the right time. However, in the big concerns, inventory audits take place very frequently, and such a detailed audit will increase the cost of the company.

This article has been a guide to What is Inventory Audit and it’s Definition. Here we discuss the example of inventory audit along with advantages and disadvantages. You can learn more about excel modeling from the following articles –

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