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​Inventory Audit Checklist

Inventory Audit Checklist

Inventory is a crucial area for any manufacturing or trading entity. We often hear following questions regarding stock controls and audit which we will try to address in this section.

1. What are stock audit objectives?

2. What does an inventory auditor do ?

3. What are substantive audit procedures for stock audit?

4. What are inventory count procedures?
5. What are cut off procedures in audit?
6. What data analytics processes we can use for better stock management?
7. How to do inventory audit?

We have given various list of audit procedures below to address above queries.
inventory audit
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Inventory is one of the important area for any business where chances of fraud are more as its a department where thefts and damages occur. Having strong controls, proper processes, checklist and regular stock audit is essential for this function. Following is the checklist for internal audit of Inventory.

1) Stock Audit of the software being used for keeping records of inventory, preferably it should be integrated with accounts
2) Stock valuation process, components of cost of inventory, method of valuation
3) Frequency of matching of stock record with physical stock
4) Stock related MIS format and contents 
5) Physical security of Stock, CCTV, Fire fighting equipment
6) Insurance of stock
7) Categorization of inventory in Hugh, Medium and Low value stock
8) Inventory lying with third parties, i.e. for jobwork, in third party godowns
9) Old inventory, expired inventory, inventory nearing expiry dates, perishable inventory
10) Inventory levels, inventory age analysis
11) Inventories having duplicate codes in software

Objective of Stock Audit

Following are the main objectives of stock audit

1. Reduce wastage

2. Reduce Risks associated with Stock

3. Achieve financial audit objectives

4. Cost Control

5. Helping in decision regarding stock order, purchases

6. Evaluate the existing internal controls on stock

7. Control Sales returns

8. Reduce holding costs of inventory

​Risks associated with Inventory

Inventories are prone to following risks:

1. Theft

2. Damage

3. Expiry

4. End of life cycle of the product

​Internal Controls for Inventory

1. Periodical Physical verification

2. Review of items nearing expiry - Age analysis of inventory

3. Registers of inventory

4. ABC Analysis of Inventory

5. Audit of Documentation of inventory

​Physical Inventory Counting

physical inventory counting

Lets now learn how to stock audit physically. Following is the checklist for physical stock audit.

1. Every item should be counted at least once every quarter.

2. Planning of Inventory Physical counting is very crucial. 

3. Cut off Procedure should be observed strictly during physical verification. 

4. Equipment required for physical counting should be made available.

5.  Staff should be well trained for the process.

6. Proper working papers should be maintained.

7. Employee in charge of stock and auditor should put signature, date on working papers. 

8. Employees handling stock should be available at the time of physical verification to handle queries raised. 

​Age Analysis of Inventory

Age of any inventory item is decided based on its receipt date. Its a very important report for finance heads, production heads, store managers. One should always closely watch the old items of inventory and try to clear them out at earliest. Old items not only occupy space and rent expenses are increased and also block funds and thus result in interest expenses. Most of the accounting softwares can generate Age Analysis Report for inventory.

inventory age

​ABC Analysis of Stock

ABC analysis refers to stock categorization method. ABC analysis categorizes an inventory into three categories—"A items" which need very tight control and perfect documentation and records, "B items" need relatively less tight controls and records, and "C items" need the simplest controls and records. Such analysis helps to focus on most important items and saves efforts, time and costs.

inventory ABC analysis

​Inventory Cut off Process

Cut off process is very important in Inventory valuation. When inventory is physically counted, if inwards (receipts) and outwards (issues) movement of inventory is not stopped, it can cause lot of problems in the counts. This is why, near of the date of inventory counting day, movement of stock is stopped. If during this period stock is moved for some reason, it is given effect to in inventory count. Auditor needs to study the cut off process of management and make sure it is adequate. 

​Top 5 Software for Inventory Control

1. EZOfficeInventory

2. UpKeep

3. Enterprise Retail Suite

4. InventoryTrack

5. VendSoft

​Inventory KPIs

inventory KPIs

1. Stock Turnover Ratio - How many times stock has been sold and replaced in a given time period.

2. Average Inventory - Amount of stock your company has on hand during a particular time period.

3. Holding Costs - cost to maintain / store the unsold stock.

4. Stock-out - Number of times demand for a particular item was not fulfilled. 

5. Rate of Returns - How many times stock was returned for various reasons. 

​How to Control Inventory Costs

inventory cost control

1. Never fall for Minimum order quantity even if they are very attractive deals

2. Have a close watch on reorder point of inventory

3. Always clear out obsolete stock

4. Maintain inventory with help of good software

5. Have a strong Just in time system

6. Monitor Inventory KPIs

Methods of Inventory Valuation

Goods in Transit

Goods in transit means goods which have left the premises of the seller but have not reached the premises of Buyer on the specified date. Financial treatment of such goods depend upon the contractual terms between seller and buyer. This treatment is very important and it affects financial position of both buyer and seller. 

Barcode system of Inventory

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