Deciding to create a new stock audit procedure is not an easy one. Even if you’re upgrading an old framework, numerous options may influence the quality of your future audits.
As a result, careful planning may save you time and money in the long run by streamlining and improving the efficiency and accuracy of your data and reporting.
Taking the time to deliberate over a strategy may save you time and money in the long run. We’ve gathered some of the questions you need to ask when creating your stock audit plan.
Auditing Your Physical Stock
A key feature of any new audit will be the subject matter. Depending on your situation, you might just be looking to keep tabs on your funded physical inventory, as part of a risk management process.
Or, if you are a borrower, you have a requirement to reconcile your entire inventory. This, of course, can be subdivided into specific areas, which might form a segmented part of a larger reporting demand.
Each approach can require a separate auditing solution, so it’s critical to finalise your requirements before you start outlining a formal strategy.
What Is the Purpose of Inventory Audits?
Fundamentally, inventory audits are designed to verify that your accounting data and financial reporting are correct. The objectives of an inventory auditing process are to prove the existence, rights, accuracy and correct value of items in a company’s inventory.
There are several benefits from inventory auditing which are discussed later in this article.
How Do Auditors Verify Stock?
Traditionally, auditing inventory is a process of cross-checking financial records with physical stock and would be done in person by visiting the site and carrying out a physical count. This would then be matched against stock records and the numbers would be compared to verify the financial reporting information.
In many cases, there is also a requirement to assess the condition of physical stock to ensure accurate valuation reporting, particularly for high value assets.
As in many areas of life, technology is now influencing auditing procedures with specialist software and systems enabling digital auditing.
There are several innovative tools that can help you collect inventory data, automate procedures, perform analysis, and determine the most serious risk. This technology helps to support more efficient, accurate, and regular inventory management and physical stock checks.
Such technologies can also play a role in evolving the scope of the intelligence generated for the business by using data analytics and machine learning to help identify fraud or business process issues.
It’s about understanding how technology can assist us and then putting it to use in the auditing process.
Technology doesn’t just mean that auditors can carry out their activities with greater accuracy and efficiency, it also facilitates self-auditing.
This brings benefits in two key ways:
- businesses can conduct elements of the inventory audit themselves, working collaboratively with the auditor
- using such services to support more regular review, supporting accounting reporting, and helping to identify data discrepancies.
One of the key benefits of digital inventory management tools is the ease of use; requiring very little knowledge or training to use and meaning that unskilled resources can be engaged in carrying out the physical inventory counting and verification.
What Are You Verifying in the Audit?
Once the target has been decided, you need to think about the key characteristics of the data you want. This is going to reflect your core audit goals, whether it be reconciling physical stock for funding purposes, or pursuing deeper operational goals.
These can include mileage checks, condition checks, or even just display standards. This is only skimming the surface of the potential information your organisation might require, so ensure that you know what you want from your audit.
Different Types of Audit
One of the most common audit types is financial. External audits are the most usual, carried out by a third party such as an accountant and typically at the end of each accounting period or financial year-end. The external auditor has no ties to your company and is considered independent.
During a financial audit, the auditor examines a company’s financial statements for fairness and accuracy. Auditors examine transactions, procedures, and balances during their checks.
External auditors must adhere to generally accepted auditing standards.
You will receive a report after your company has been reviewed. Auditing reports include information on how the audit was conducted and what was discovered.
A funder’s aim in performing a stock audit is to make sure that banked funds are secure and that they are correctly valued.
As it sounds, internal audits take place within the business and can be for a variety of reasons.
Internal auditing may be used by businesses to inform shareholders or board members on the financial status.
An internal audit is a way to make sure that your business is compliant with laws and regulations, reviewing financial information, evaluating risk management policies.
It can also be valuable in assessing operational effectiveness and identifying areas for targeting business improvement activities.
A compliance audit examines your business’s policies and procedures to see if they comply with internal or external standards. This would be used for organisations that have achieved accreditations such as an ISO quality certification.
Deciding on Procedures
From a logistical standpoint, the location of the audit is going to define a large part of your setup. A setup that services inventory on-site is going to differ substantively from an off-site arrangement.
Similarly, a larger company will need to take into account the complexities introduced by auditing their entire storage and distribution network.
Where Is the Inventory Data Sourced?
Different arrangements will have different requirements as to the sources of data they interact with, so make sure that any prospective process will be compatible with your registry set-up.
This can range from simple workbook-based inventory management to extensive logistics and production systems. So, whatever you settle on, compatibility and consistency will be key considerations going forward.
How Often Do I Need an Inventory Audit?
Depending on the type of company you’re operating, the frequency of a physical count of stock may vary from year to year. In most cases, a stock audit is performed once or twice per year depending on how many physical inventory locations there are.
What Is the Purpose of an Inventory Audit?
The purpose and scope of an audit should be the principal element of your planning, so make sure to take into account any factors that might influence the final product.
A standard control process might be fairly undemanding in terms of the observation needed, while a fault-identification or detailed cost of inventory may require more granular investigation.
Similarly, rechecks or follow-up analysis will be much more focused in scope, with different requirements from both the organisation and the auditor.
Benefits of an Inventory Audit
An inventory stock audit is a valuable tool that can ensure that an organisation’s stock records are as accurate as possible, and everything is exactly where it should be. It provides the opportunity to check the inventory on-site and reveal errors such as stock-taking mistakes, stock theft, or damage; highlighting those areas in need of further attention.
Benefits of well-executed stock audits:
- Discover stock-taking errors and stock loss, highlighting areas for improvement
- Ensure stock accuracy and identify any issues with data entry
- Ensure physical stock is safe and secure (and compliant)
- Reduce the risk of discrepancies in stock records between multiple departments.
- Identify best practices across a dealer group
- Allows for more informed decisions
- Facilitates more proactive management of stock
- Minimises risk of fraud
- Supports increases in operational efficiency, helping to identify poor processes
- Enables more accurate accounting, especially regarding cash-flow, VAT, and commission payments
- Management can focus on anomalies
Who Is Required To Conduct the Stock Audit?
The next step to identifying your stock audit structure is to identify the key resources involved. A critical component will generally be the internal auditor, from within your firm’s audit staff. Or, you might find yourself in need of external audit professionals, particularly in the case of larger or more dispersed operations.
These can either form the core of your inventory audit procedures or supplement your dedicated staff. It might also be worth considering “partisan” auditors from within the business or department you are auditing. This can provide critical information on internal systems that can significantly reduce miscommunication in the long term.
When Should You Carry Out the Inventory Audit?
While audits are typically organised in advance, it is worth considering your options in the event of a short-term need.
Sometimes the call for an inspection might be the result of an unforeseen consequence of a process failure, in which case you might need to implement one immediately.
This can be a huge strain on resources, so make sure that relevant procedures and planning have been completed ahead of time.
You should also consider risk factors such as missed payment deadlines, which could trigger an auditor visit. Having a plan for these in advance can be critical, so plan flexibility and responsiveness into your process.
On the other hand, you may have defined periodic auditing requirements, perhaps prior to accounting periods or key reporting dates, for which your firm should be well prepared. It is still worth defining all of your procedures and standardising processes so that any recurring audits are consistent and can be streamlined.
Stock Audit Practicalities
Logistically, it’s important to think about how your auditing will work at a practical level. Will analogue methods, like a pen and clipboard, be enough for your purposes? Or will you require more specific instruments, whether that’s a dedicated device, tablet or smartphone to support a system or related software? It’s worth considering this before the process, as different products might be adequate or suitable depending on the nature of your auditing plan.
How Important Is the Accuracy of the Stock Audit?
It’s important to consider the type of results you need your stock audit to provide, as this will tie into most of your practical concerns. A routine physical verification might require minimal outlay on your part, in terms of actual staff and time, whereas highly accurate audits are going to have considerably higher resource requirements. A truly granular survey report may require extensive external support, and dedicated staff, so don’t get caught out by limited planning.
How Long Will It Take?
Time is a vital inventory auditing resource, as we’ve touched on briefly before. So manage it the same way you would costs and technology, and don’t leave it outside of your planning.
This isn’t just a once-off consideration either.
How much time you have to plan, conduct, and reconcile the audit is essential to its execution, and should be an ongoing concern for your planning team.
Good inventory audit procedures conducted over too long a period can be unreliable.
Equally a ‘quick’ audit that takes too long to reconcile can leave the audit actions impotent.
Getting to the Bottom Line: What Are the Costs Involved?
The issue at the forefront of most business planning agendas is, of course, the cost.
For firms running leaner business models in particular, how an inventory audit is conducted is intimately tied to the outlay required, as well as the value of the inventory; is it high value or low value, slow moving or fast?
In a smaller business, with good bookkeeping, it might be possible to run a “free” audit, in the sense of little to no additional accounting expenditure.
Most businesses, however, can expect to pay something for their auditing services, whether that’s in lost staff hours or external team fees.
So before you begin, outline what you need and what you can provide in your plan. If money is not an object to your firm, that is certainly a significant planning benefit. But the reality for many is that the company needs the best return possible on their financial investment, which requires a frank understanding of cost structures from the get-go.
The final question on your planning brief should consider the aftermath of a stock audit.
What happens in the event that an inventory audit indicates accounting discrepancies or unexpected transactions in its results? Are you certain of the results? How will you match the report findings to accounting statements?
If a recheck is required, can it be done efficiently? If you use a different auditor, would you get a different result?
Related to these questions is the issue of repercussions. Can your company handle the consequences of a poor audit? If it is a routine survey, the immediate need to re-audit might be lessened and allowed to be moved forward to a future date.
However, for some companies, especially those with funded stock, it might be necessary to initiate a follow-up straight away, to avoid ramifications or a negative opinion of the business.
The above questions are all key considerations you should seek to balance when looking to determine your inventory audit procedures.
It is not a simple process, but it can greatly reward a company that plans properly.
By defining the answers to these planning questions, you can hopefully narrow down your stock audit strategy, and be well placed for stock reconciliation at year end.
If done properly, stock audits can save a company money while reducing fraud risks across an entire organisation – and that’s incredibly valuable in today’s business landscape.
Be thorough, plan for redundancy and do-overs, and be sure to consider these questions to avoid the consequences of a failed audit.