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Inventory audit also referred to as stock audit, refers to an accounting process which
takes into account a company’s total stock of physical goods. This is especially needed
in manufacturing companies where raw materials need to be converted to finished
goods and is a quintessential process of maintaining a healthy business and for it to
succeed. Inventory audit is considered mandatory for keeping account of the quantity
and quality of raw materials remaining in stock. This is because anything more than 70%
of product cost involves material cost. Additionally, inventory audit is absolutely
necessary for organisations with multiple branches as they tend to have a massive stock
of physical goods. Audit of essential physical inventories is generally conducted at or
near the end of the year.
Inventory audit is also required to match the actual quantity of items in stock against
the accounting records while also adjusting for differences and allowing
for shrinkage so that the ledger reflects accurate values.
Inventory audit will be able to reveal which physical goods or products are over- or
under- stocked. This will allow you to properly and effectively stock your business
thus helping maximize profit.
Inventory audit is necessary to reduce unnecessary investment on stocks and to
ensure that you have a proper line balancing in the process.
Inventory audit is needed to compare actual physical counts and match it to
business records: When this count is conducted accurately, an inventory audit will
be able to disclose the true picture of what you actually hold as compared to the
recorded stocks which, in turn, will give you an understanding of the financial health
of the company. Misstatement of inventory balances often tends to have a direct
effect on reported profit.
Inventory audit is imperative to account for any sort of inventory losses resulting
from, wastage, pilferage, damage, obsolescence, and dormant stock.
An inventory audit will also help determine the effectiveness of your warehouse
procedures and help reveal any issues within your organisation’s warehouse
procedures, whether it is at the receiving dock or during the actual packaging. This
could help in highlighting any potential inefficiencies in the process such as
disorganisation of the warehouse and slow retrieving methods.
Inventory audit will help reveal any failure owing to lack of security which results in
loss, theft or misappropriation.
High levels of stock generally result in unnecessary overstocking thus resulting in
poor cash flows and financial loss. An inventory audit at timely intervals will help
remedy that issue. Similarly, it helps in determining any obsolete inventory in stock
or orders incorrectly supplied to customers which could not only lead to financial
loss but also result in an irreparable damage to the organisation’s reputation.
Procedures of Inventory Audit
Comprehending the importance of inventory audit is half the battle won; to truly realise
your inventory audit goals, you need to enlist the services of a professional to truly
understand what’s working and what’s not working and ensure your in-store operations
are efficient. Considering how enormous inventories tend to be, auditors may conduct
several inventory audit procedures before they sign off that the valuation you have
stated for the inventory asset is reasonable.
Here are some of the inventory audit procedures that the auditor may follow:
Cut-off analysis.
Observing the physical inventory count.
Reconciling the inventory count to the general ledger.
Testing high-value items
Testing error-prone items.
Testing inventory in transit.
Testing and matching item costs for accurate inventory valuation.
Reviewing freight costs.
Testing for lower of cost or market.
Accurate analysis of finished goods costs.
Direct labor cost analysis and matching with payroll records.
Overhead analysis.
Work-in-process testing.
Inventory allowances for obsolete inventory or scrap.
Inventory ownership of stock actually owned by the company.
Testing the Inventory layers to determine If you are using a FIFO or LIFO inventory
valuation
It involves a comprehensive physical inventory count from wall to wall, counting each
and every inventory article. It is a strict tight rope audit during which all operations are
placed to halt and long hours working is assumed to ensure minimum time taken in the
process. Detailed stock reconciliations with due explanations for all the variances are
compiled and necessary follow up action plan is chalked out for future implementation.
This exercise is a substantive audit process and resorted to not more than once in a
quarter or may be only twice in a year, depending on the size and nature of the
particular business, coupled with the state of internal control in place. As Indian retail
market is in a developing phase, more of such substantive audits are resorted to here
than as compared to developed markets where sophisticated and automated internal
controls are in place.
Time is the key in setting up new stores as well as relocation of existing stores. We offer
our nationwide specialized services to set up the inventory at the new store, right from
inventory pick up at the warehouse to the final setting up of sales floor as well as the
backroom storage of the retail outlet to make the store running sales with minimum lead
time in such setting up. The same applies to relocation of stores with additional job of
settling administrative and financial issues of winding up stores.
The concept of super market envisages a wide variety of inventory ranging from
perishable eatables, garments, grocery store, medical stores, electronic goods, Petrol
pump, mobile recharge, food court and what not. To cover the entire super market is
altogether a different Facility Audit by itself. We at VGNC has a specialized team to
undertake inventory audit for all size and variety of supermarket including not only metro
malls but rural supermarkets with same rigour and efficiency.
It is akin to warehouse wall to wall inventory except that in case of the retail store the
level of inventory is relatively quite low. It is also a substantive inventory count where
operations are halted during the audit process. However at VGNC, we plan the timings
in such a manner that the floor inventory is undertaken overnight and in day time back
rooms are covered such that there is no halting of sales, after all, sales is the spring
where from all business is fed and nourished.
Perpetual Inventory
In this model, inventory is classified into non-moving, slow-moving and fast- moving
inventory. The idea is to complete the substantive physical inventory of fast-moving
items in minimum possible time and lift the halt from operations just after that. The
inventory count of non-moving and slow -moving items is undertaken without halting
operations of fast moving items. Further, the audit plan is so designed that non-moving
and slow-moving items are audited with lesser frequency while fast moving items are
audited at more frequently in time, almost perpetually, say, on monthly basis. This
inventory audit model achieves optimum efficiency without hindering operations to
achieve round the year sales window open for maximum time duration.
Partial Inventory
Partial inventory is resorted to for some selected products. The reasons may be to count
new season products, to count some new stock arriving at large quantity from some new
supplier, to count some lots being scraped or dismantled being no longer fit for sales or
to count some lots which are the subject matter of internal stock transfer. The aforesaid
are few instances where inventory count is undertaken to count specific lots for a
specific purpose in the course of regular business operations.
To keep the floor team on alert and to inculcate a sales discipline towards customer
service and organizational integrity, we provide surprise inventory check services
wherein none is informed about the timings of the surprise audit irrespective of his rank.
In this model, we randomly select the outlets for surprise visits and we conduct surprise
audits randomly for any lot of inventory and merchandise. The audit reports are also
quick and fast what we call as flash reports.