The process of accounting the inventory levels of a company is an inventory audit. The analytical tools used by the auditor to confirm the match of the book and actual levels of the stock is called inventory audit procedures.
Stock is a vital asset in every company’s balance sheet. It is used as collateral for securing financial assistance. It also runs the risk of being inappropriate for fraudulent reports generation. Hence inventory audit procedures are enforced to ascertain the correct levels of inventory.
Most companies place internal controls in place to keep an accurate track of inventory. This audit inventory is conduct periodically depending upon the firm’s inventory levels. It might be a:
- Perpetual analysis– Where the inventory audit procedures are done in the year-end.
- Periodic analysis– Where the inventory audit procedures are done is specified intervals continuously during the whole year.
Checkpoints of inventory audit procedures:
- Does the business maintain complete and accurate records of inventory?
- Is the manufacturing process monitored?
- Is there is regular follow-up with the production department for out-of-stock and obsolete materials?
- The manner of stock storage and are proper personnel assign to maintain the stock?
- Do stocks carry adequate insurance against the risk of natural calamity, theft, pilferage, riots, and others?
- Does the company maintain proper records of the insurance policy?
- If insurance is not available, what are the steps by the senior management to protect their inventory?
- Is the stock report review periodically and internal transfers are account for?
- Are the records of perpetual stock maintain in proper condition?
- Are there any internal norms in place for carrying minimum inventory stock levels?
- Is the auditor carrying out their periodic review of the stock audit? And so on.
Auditors usually review these checkpoints before applying inventory audit procedures in a company.
The commonly used inventory audit procedures:
1. Cut-off analysis:
The auditors typically test the last few incoming and outgoing transactions before the physical count and also include the following immediate transactions. This helps the auditors to check the authenticity of the books and the inventory levels.
2. Physical inventory count:
This is one of the commonly used inventory audit procedures where the auditors physically check the counts of the inventory. They test and observe the counts and compare their counts to the company’s record. If the company has multiple warehouses, the auditors will conduct a check at every location.
3. Finished goods cost analysis:
This use of inventory valuation procedure is when the inventory comprises more of finish products. The auditors will use a combination of different inventory audit procedures to complete the analysis. They will review the bill of materials for a random product and then check whether they have the correct compilation of the materials used.
4. Test high-value items:
If the inventory list contains high-priced stock, the auditors will review every factor of the inventory. They ensure that the articles are not over-value or under-value in the company’s financial statements.
5. Test error-prone items:
In case, the auditors noticed a problem in specific inventory items a few years back; then, they are likely to recheck those items. This kind of inventory audit procedures have a few variations:
- During transit
- During calculating item cost
- Reviewing freight costs and so on.
6. Overhead analysis:
If the company is in the practice of applying overhead costs in inventory valuation, then they will be verified for consistency. The auditors will ensure that the company is following the same principle when calculating overhead expenses. This method of inventory audit procedures also tests the validity and authenticity of the overheads.
Companies and auditors use some of the inventory audit procedures for both internal and external stock auditing purposes. They help in ascertaining the accurate value and position of the firm’s inventory. It also helps the company find fraudulent practices and enforce a proper system of stock.