What are inventory audit procedures, and why are they important?

Manufacturing businesses and firms mostly depend on their inventory to operate. These inventories are their assets, and it is very important to have them in the right amount and right quality at the right time.

Organizations hire internal or external audits to perform inventory audits and check if the financial records are matching the actual goods count. These audit procedures ensure that the firms are not spending too much on overheads and there is no wastage of goods and products. The audit reports enable you to know the high-value goods and low-value goods and determine each item’s significance for your business development.

Keep scrolling this article till the very last point and understand what inventory audit procedures are a must to perform.

Top 7 inventory audit procedures that you must perform and follow

Along with other audit activities, accounts audit is also very important for organizations to track various factors. The inventory audit reports are very helpful in cross-checking the previously developed records for their authentication and preciseness. Inventory audits are very time-consuming and involve several procedures to complete.

Below are some inventory audit procedures that are a must to perform.

1. ABC analysis

In inventories, ABC analysis is all about the grouping of the merchandise. The audit team groups the stock based on their value and volume. Inventories with the higher value is stored independently from the stock with lower volumes and values. For different types of businesses, this classification of inventory will vary depending upon its consumption.  It does not define any specific guidelines to perform the ABC analysis, making enterprises feel the need of top audit firms in Dubai to perform these audit procedures without them indulging in the complexities of audit procedures.

The three categories of stock based on their volume and value are as follows.

  • A(High-value goods)
  • B(mid-value goods)
  • C(low-value goods)

2. Inventory in hand

The manufacturing companies and enterprises need to know the amount of inventory they have in hand and what amount of stock is used. This information helps the higher management to deals with stock shortages and make quick decisions about restocks. Another reason to identify the days of inventory in hand is to measure business performance. If the days of inventory in hand are low and a business is finishing the merchandise quickly, it means the business operations are on track. But make sure the stock your people are utilizing is not for their personal use.

3. Cut-off analysis

Transactions records are a must to record in their specified time; if not, then they will bring many deviations in the account records for the accountants.  For example, if you place an order for a stock from the manufacturers, but you receive it after the end of the accounting period, then you must list the cost of inventory for the new accounting period, not for the previous one. The cut-off analysis’s basic objective is to identify the periodicity of the accounts and focus on recording transactions of the current year in the existing records, not in the previous or next records.

4. Freight cost analysis

Freight cost analysis deals with the calculation of the amount for the shipment of goods and products from one place to another. Auditors make sure that businesses are not paying too much for the shipment of their products and goods. They do this by considering various factors such as the place and distance the inventory is traveling, fuel costs, accommodation space in single cargo and what amount of goods and stock you are shipping.

5. Match inventory counts with records

It includes the physical inspection of the goods and inventory. In the matching process, the auditors ensure that the amount of goods shipped is recorded correctly in the accounting records. They may also perform quality checks in this stage of inventory audit, and depending upon the quality of goods; they measure the costs of goods shipped and purchased.

6. Reconciliation of records

Auditors match the previous and current financial and inventory records to look for any errors and mistakes. They compare these records and find out which documents are incorrect and have wrong transactional information. Reconciliation records mostly include the entry of the transactions in the right accounting period because the discrepancies in accounting occur primarily because of entering transactions for wrong account cycles. So, hire the top audit firms in Dubai to conduct audit activities and make the correct records free of mistakes and discrepancies and track your business activities and transactions well.

7. Overhead cost analysis

Overhead cost analysis includes the cost of shipping the inventory, storing the stock and maintenance of the stock. Auditors also make sure that other overhead costs such as utility bills and rental prices are not recorded in inventory costs as they are the expense for a business and become a part of inventory cost in some cases; else, they are expenses in the sheets.

Keep a check of your inventory for accurate records and timely completion of orders

Inventory and stock keep a business running and without these things performing business activities is very difficult. Organizations and enterprises feel the need for inventory audits, and they perform these audits to cross-check the financial records with physical counts of the inventory and their records. Make sure you are hiring the right people to perform this crucial task for your business growth and fairness.

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