Here are the 9 audit procedures for inventory that you should apply:
1. Physical inventory count
The inventory count audit procedure is to take physical counts of inventory in your warehouse and compare the numbers to what is shown in your system. You can use a barcode scanner to support you count the items physically. This is convenient for businesses that follow a just-in-time inventory method or regularly compute their economic order quantity.
For example, your inventory management software shows you have 1,000 products, but you only count 950 units in your warehouse. You should check what causes the difference as soon as possible.
2. Cutoff analysis
Cutoff analysis means halting all operations during the physical inventory count. There will be no receiving or shipment of products during this process to avoid mistakes from uncontrolled variables. At the cutoff time, all transactions before that shall be reported properly in the financial period. Auditors will check the documents of receipt and shipment to verify the recorded stock movement is accurate.
For example, you plan to conduct a cutoff analysis from 9:00 AM to 3:00 PM on 1st December 2022. All activities that move inventory in and out of the warehouse are paused during this period.
3. Finished goods inventory analysis
Analysis of finished goods cost is ideal for manufacturers and producers. When inventory goes through the production process, it becomes a “finished good” to be sold. Then, you can calculate the inventory value of the finished products to make sure the financial statements are correct and better control inventory.
For example, you create 100 T-shirts with $600 cost of fabrics, embroidery, T-shirt buttons, etc. It means each T-shirt costs $6 for raw materials to produce.
4. Freight cost analysis
Analysis of freight cost measures the shipping costs to transport products from one location to another, and instances of items getting lost or damaged during transit. It also accounts for losses and damage incurred during transit.
For example, you transfer the products from your warehouse to your stores and monitor how much it costs, such as carrier by truck.
5. Overhead analysis
Overheads are the business expenses that exclude the direct materials and labor required for production, such as rent, electricity, or other “hidden” costs associated with inventory. When analyzing overhead costs, you want to see how they affect the overall inventory cost so that you can plan your budget properly.
For example, your indirect costs are $5,000 per month with the capability of producing 2,000 T-shirts per month. If you want to scale up to produce 4,000 T-shirts, your overhead will be $7,000 per month. Together with the variable cost, you can use the economics of scale to find the optimal point.
6. Inventory in transit analysis