Inventory Audit Process: Definition and Best Practices

By Indeed Editorial Team

Published March 25, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Maintaining an accurate count of a company's inventory can help you manage supplies and predict when you may need to restock. Performing an inventory audit is a method many companies use to keep track of inventory and inventory costs at their locations. Understanding the inventory audit process can help you manage your stock and may allow you to identify potential challenges. In this article, we explore what an inventory audit process is, the importance of auditing inventory and some common audit procedures.

What is the inventory audit process?

An inventory audit process is any procedure that you use to check the items of your inventory. Auditing often allows you to determine how much of a particular item you still have in stock at your location. This can also provide other information, such as the cost, the condition or the item's quality.

Related: Inventory: Definition and Methods for Management

What is the importance of auditing inventory?

Auditing inventory is important because it allows you to keep track of what you have in stock. This can help you order new supplies or schedule shipments in advance. You can also use inventory audits to assess damage of your inventory or discover sources of loss.

Common inventory audit procedures

Here are 10 common procedures you can use to audit your inventory:

1. Physical inventory count

A physical inventory count is when you count every item in the inventory manually. You can then compare your amount of inventory to the expected numbers in the company's database or inventory system. This method is one of the more common ways to track inventory because it allows you to quickly identify when to order new supplies.

2. Inventory cycle count

An inventory cycle count is similar to a physical inventory count because it involves someone physically recording the amount of inventory you have left. While a physical inventory count records every item, an inventory cycle count only considers a small amount of your total inventory. This is a sample method that allows you to check the accuracy of your system records.

3. ABC inventory analysis

ABC inventory analysis is an inventory management technique that groups your inventory into three categories, determined by their value and importance. When you sort your inventory into groups based on importance, you can audit each set individually. The categories are:

  • A category: Items in this category are the most important and high-priced.

  • B category: This includes moderate cost items.

  • C category: These are items that cost the lowest amount.

Read more: What Is ABC Inventory? (With Benefits, Steps and an Example)

4. Cutoff analysis

A cutoff analysis is a subtype of a physical inventory analysis. During a standard physical inventory analysis, you perform the count while the rest of the business functions normally. If you audit the inventory using cutoff analysis, you can stop operations temporarily while you physically count all of your items. This can help reduce uncontrolled variables and may result in a more accurate count.

5. Analytical procedures

Analytical procedures allow you to view any sudden increases or changes in your inventory. This method doesn't require physically counting inventory and instead relies on item data, such as unit costs, profit margins or how often you restock your items in a given time period. You can compare any of these data points to the same statistic in previous years to determine if there's any change or growth.

6. Overhead analysis

Overhead analysis is the audit of all overhead, on nonmaterial costs associated with inventory. Overhead includes any costs that aren't directly related to the product the company sells. For example, if the company stores its inventory in a warehouse, the rent for that warehouse is an overhead cost.

Related: What Is Applied Overhead? Definition and Examples

7. Finished goods cost analysis

Finished goods cost analysis is an inventory audit procedure commonly used in production or manufacturing. It counts your inventory when you finish a product rather than taking an inventory of the individual parts. For example, a toy company may take a finished goods cost analysis of toy cars instead of counting individual car parts.

8. Freight cost analysis

Freight cost analysis allows you to measure the cost of transporting your inventory. It analyzes shipping costs and the lead time, which is the time a particular process takes, of transporting items. This inventory audit procedure may also calculate any inventory losses or damage that occurs during travel.

9. Shipping invoice matching

Shipping invoice matching compares the overall cost of shipping your inventory with the number of items shipped. This helps you determine that you're shipping your inventory for the correct amount of money. You can perform this audit at random to help ensure that your costs stay consistent.

10. Product reconciliation

Product reconciliation compares the results of your physical inventory counts to your inventory records and addresses any conflict between the two sources. This helps you check that your estimates are accurate and allows you to find the source of any discrepancies. For example, if you count 20 packages of plastic cups but your system says you have 30, you can investigate what happened to the missing 10 packages.

Inventory audit process best practices

These are a few practices you can perform to help you during your inventory audit process:

Pick your audit types

Selecting the audit types that work best for your inventory can help you keep accurate counts of items and costs. Consider asking your supervisor what types of audits the company traditionally uses. If they ask you to choose audit types, try to list the needs of the company and compare them with the common audit procedures to determine which types you can use.

Audit regularly

Inventory audits help you keep track of what items you have at a particular moment. Completing audits consistently allows you to compare your inventory at different time periods, which may help with ordering supplies or determining which items you use the most. It also allows you to monitor your items and notice if any unexpected situations affect your inventory.

Practice proper inventory control

Inventory control is the act of controlling and organizing a company's physical items. This can include tracking inventory, labeling items and accurately predicting when you need to restock and reorder supplies. Maintaining a consistent level of inventory can help make your audits easier and may help you better determine the cause of an irregular audit.

Read more: Understanding Inventory Control: Definition and Advantages

Create a checklist

An inventory checklist is a document that lists all of your inventory items and valuable information, such as condition, quantity, price and ABC grouping. You can use this checklist to help you count your products easier. Checklists also allow you to organize other information so that you can easily find data about your items.

Consider inventory management software

Inventory management software is any type of software program that allows you to organize and track your inventory. You can use these programs to perform long-term audits, such as analytical procedures or freight cost analysis. Some software can also automatically link itself to your point of sales machines and track items as they're sold, which may reduce how often you need to perform physical audits.

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