July 14, 2020

Companies that stock and sell products and count inventory as an asset, whether raw materials or finished goods, may need a year-end inventory audit. An inventory audit is a physical count of goods in possession or transit. It’s used by the company for internal audit purposes to gain better visibility into their current physical inventory and to ensure the inventory records are accurate. A company’s CPA may require inventory auditing at year-end or another time of year, to confirm an accurate balance sheet or general ledger, so the financial records match the inventory levels.

Inventory accuracy not only allows investors to have faith in the company’s accounting records, but a clean audit report shows the supply chain is operating efficiently. Inventory accounting is a cross-check system on SKUs in stock compared to SKUs on the books.

A physical inventory can be performed by in-house staff, official auditors, or outsourced to a 3PL company. Those conducting the inventory process can use barcode scanners or a different system to count inventory, whether the counting procedure is tallying each item or spot-checking.

Companies have varied inventory methods, and there is no one correct way for every company to conduct a physical inventory. Here are some to consider.

Cut off analysis:

For an accurate physical inventory count, a company must rely on auditing inventory for a specific moment in time. Any physical inventory count must be attributed to the correct time period. A cut off analysis involves audit procedures where the auditors ensure that no inventory either leaves or is received in the warehouse during the audit period. It also ensures that any process to exclude inventory from the physical count is followed.

Physical inventory system counts:

Auditors need to understand the procedures used to inventory items, the physical inventory counting process. They want to know how the inventory system works, to ensure it’s proper and consistent. They may want to see how the SKUs are recorded or counted, whether individually with a barcode scanner or with test counts. If items are in multiple warehouses, the inventory counting process should be the same for each.

Cycle counts:

The entire inventory doesn’t have to be checked in one day or over a few days. Auditors can also use cycle counts, checking particular SKUs or product types at a specified time each year. That inventory system still uses a physical count procedure, but it is done during one cycle at the end of a reporting period. The cycle counts model can spread out the auditing period to make it easier.

Overhead analysis:

Overhead analysis is sometimes used to integrate overhead costs with the value of the inventory. These analytical procedures help the CPA or financial controllers to produce a goods cost analysis. This helps the company understand how the indirect business costs affect the overall inventory cost, for budgeting and pricing. The overhead analysis includes less visible expenses.

Finished goods cost analysis:

If your company produces its own products, the finished goods cost analysis differentiates the raw materials from the finished goods. It marks that the product can be valued for sale as inventory items during the specific period covered by this audit or the period’s financial statements.

High-value items or consignment:

High-value items can have an outsized effect on inventory management and the goods cost analysis. Consignment items should be separate in inventory control, as they are accounted for differently in the general ledger.

Freight costs:

Freight costs can be charged as part of the inventory cost, as a percentage of each item. It can be included in the cost of goods stored and sold.

The inventory audit procedures are important and should be thought through in advance, with a CPA or financial controller who needs accurate inventory control figures for the financial records. The physical inventory process should be consistent among locations, and checked against any electronic records. Companies using visibility and tracking software, like Stord’s system, may have an easier time with the reconciliation process. Find out how Stord can help your company make the inventory auditing process as easy as possible: https://www.stord.com/get-started