What Is Inventory Audit? Its Purpose and Benefits Explained.

Auditing is an essential process for all organizations, particularly medium and largesized businesses. It helps determine the actual value of an organization and its assets, highlighting areas for improvement and optimization.  

Inventory auditing is a critical component of this process. In this blog, we will explore what inventory auditing entails and the objectives behind it in detail. Let's begin!  

What Is an Inventory Audit?  

An inventory audit involves the physical verification of inventory and crossreferencing these items with the records in financial books. This process is crucial for ensuring the accuracy of financial records, making it a complex yet necessary task.  

According to Grand View Research, "The global financial auditing professional services market size was valued at USD 109.21 billion in 2017. It is anticipated to progress at a CAGR of 7.4% from 2018 to 2025."  

What Are the Various Categories of an Audit? What Is the Objective of the Inventory Audit Process?  

Audits can be divided into two main categories:  

Internal Audit  

An internal audit is conducted by the company's own team, who check the processes, assets, and inventory. The auditors are on the company payroll and report directly to the CEO or top management. Internal audits are often performed in preparation for an external audit or when there are concerns about inventory or other issues.  

External Audit  

An external audit is conducted by government authorities or independent auditors. They verify that the assets and inventory listed in the accounts match the physical inventory. If discrepancies are found, the organization may face substantial penalties. External auditors meticulously check and verify all documents related to assets and inventory.  

The primary objective of an inventory audit is the physical verification of assets and inventory, ensuring that the records are accurate and consistent with the actual items.  

What Is the Importance of Inventory Auditing?

Inventory is a vital part of any business, making inventory auditing equally important. For retailbased organizations, inventory auditing is crucial for collecting evidence and ensuring the proper balance of assets or capital.  

The audit process verifies not only the quantity of stock but also its quality and condition, ensuring that the value of the stock is accurately represented in financial records and statements.

Audits help organizations reduce unnecessary inventory expenses. For instance, audits can reveal overstocked items, enabling the organization to adjust purchasing quantities accordingly.  

Additionally, audits can identify if inventory shrinkage is occurring within the organization.  

An organization equipped with automated inventory management software can verify if the recorded numbers match the physical count, ensuring accurate valuation of inventory, whether it is expired, obsolete, or damaged.  

What Are the Consequences When Phantom Inventory Exists in Your Business?  

Phantom inventory, or inventory that appears in records but does not exist physically, can have severe consequences for a business. For example, if operations continue as usual and a needed item is shown as available in spreadsheets but is not actually in stock, this can halt production, waste time, disappoint customers, and ultimately lead to business losses.  

How to Eliminate Inventory Audit Issues?  

Inventory audit issues can be mitigated by automating the process. Asset management software is instrumental in maintaining accurate records and supporting the audit process. This software records all data related to assets and inventory, facilitating easy identification and physical verification.  

What Are the Benefits of Asset & Inventory Audit Software?

The benefits of inventory audit software include:  

1. Increased Accuracy  

Regular audits help identify and eliminate errors before they disrupt daily operations. Consistent auditing reduces the likelihood of errors, thereby increasing accuracy.  

2. Regulatory Compliance  

Compliance with industry regulations is critical. Organizations that fail to meet these standards can incur significant penalties. Audits help identify compliance issues, allowing organizations to rectify records and avoid fines.  

3. Eliminating Phantom Inventory  

Phantom inventory, which appears in records but not in physical stock, poses significant risks. It can lead to production delays and other operational inefficiencies. Inventory audits help identify and remove phantom inventory, ensuring accurate business records.  

4. Quick Physical Verification  

Physical verification is a crucial part of the audit process. Asset tags, such as barcodes or RFID tags, are used to track assets and inventories. These tags provide realtime information, allowing for quick and accurate verification.

5. Eliminating Long & Complex Audits  

Without automated software, audits can be lengthy and complex. Automation simplifies the process, making it quicker and more effective. Mobile applications can further expedite the physical verification of assets and inventory.  

Conclusion

Regular audits are crucial for business integrity and accuracy. Asset management software like Infizo Stock offers several advantages, including enhanced accuracy, regulatory compliance, and efficient management of inventory and assets. With cloud technology, concerns about data theft are minimized, as the security responsibility lies with the cloud service provider.  

Moreover, mobile applications can be used to schedule audits or make necessary changes, providing flexibility and convenience. Effective audits not only help avoid penalties and faulty records but also enhance transparency, which is crucial for attracting investors.  

Frequently Asked Questions (FAQs)  

What are ghost assets, and why are they similar to phantom inventory?  

Ghost assets are detrimental to a business as they represent items that are recorded in financial books but do not physically exist. They can result from theft, loss, or errors. Both ghost assets and phantom inventory involve discrepancies between recorded and actual stock, posing risks to the business.  

What are the main reasons for phantom inventory?  

These are some of the primary causes of phantom inventory in businesses:  

Inaccurate counting

Manual processes

Employee theft

Inefficient audits  

How are asset tags helpful to businesses in inventory auditing?

Asset tags, attached to assets and inventories, play a crucial role in the physical verification process. These tags, which can include barcodes, QR Codes, or RFID technology, provide realtime information. Each tag contains a unique identification number, stored in automated software, that allows businesses to track and verify assets accurately.