Audits are notorious for being time-consuming and lengthy procedures that require a lot of manual work. However, audits provide an insight into the financial situation of your business and different accounts. Similarly, the purpose of an inventory audit is to provide an accurate picture of the inventory and to avoid possible stock-outs.
E-commerce businesses are different from physical retail companies, so their inventory process is also different. Inventory auditing is essential for these businesses for tax purposes and managing their goods. Inventory audits can be quite challenging to perform, and the bigger the company the more complex auditing becomes.
Most Common Inventory Audit Procedures Followed by Auditors
Inventory audits can be done either in-house or by a third auditing party. Inventory is one of the most important assets of a business, so let us take a look at different inventory audit procedures that you can use in your companies.
1. Physical Inventory Count Observation
This procedure involves counting each unit to make sure that numbers on your system match with your physical stock. Most companies use barcodes to keep track of the inventory and make sure that all the inventory count tags are accounted for.
2. Cut-off Analysis
This analysis is used when you halt operations like receiving and shipping at the time of physical count of the products to make sure that nothing goes unaccounted for—this way, unnecessary inventory goods are excluded.
3. High-Value Items Testing
In case your business has some high-value items in the inventory, the auditors are likely to spend extra time counting them to ensure that these items are correctly valued. The auditors also trace the value of these items into the inventory balance in the general ledger of the company to make sure that nothing goes unaccounted for.
If your business deals with items of high value, we recommend getting help from top auditing firms in Dubai to make sure there are no mistakes in the ledger because small mistakes can lead you to legal consequences and penalties during audits.
4. Test Item Cost
Auditors keep track of costs in your accounting records and compare these costs listed in the inventory valuation to the supplier invoices to make sure everything is accounted for.
5. Test Inventory in Transit
Risk associates with inventory in transit from one storage location to another can be calculated at the time of the physical count of the inventory. To do that, auditors review your inventory transfer documents in detail.
6. Finished Goods Cost Analysis
This valuation is done on items when they are ready to be sold. Finished good cost analysis is ideal for companies that produce their own products as the auditor can value the inventory for the current accounting period when the product is ready to be sold in the market.
Auditors also conduct this analysis to make sure the financial statements are accurate, as suggested by the inventory. We recommend getting the assistance of a professional auditor to make sure your accounting books are correct and your business is conforming to the state laws.
7.Overhead Cost Analysis
In this analysis, the auditor applies the method of overhead cost analysis to the inventory. Apart from the direct materials and labor, this analysis accounts for all the “hidden” costs and expenses like utilities, rent, and other overheads as part of your inventory cost.
This analysis also ensures that there are no abnormal costs in the overheads, and there is a consistency in the valuation method applied to the overhead inventory.
8. ABC Analysis
In ABC Analysis, the auditor groups together items of various values together. For example, high-value items can be grouped as ‘Category A,’ mid-tier value items as ‘Category B,’ and low-value products as ‘Category C.’ It is a very useful method as you can also follow this rule for storing your inventory to make it easier for auditors for high-value item testing.
9. Freight Cost Analysis
This analysis calculates the cost of freight, i.e., moving things from one place to another, including freight shipping cost and tracking the total time from date of shipment to the date of receipt. It not only accounts for all the units of inventory in transit but also includes information in goods that might be lost or damaged in transit.
10. Match invoices to the shipping log
In this analysis, the auditor matches the cost of inventory items shipped from the warehouse with your invoices to verify the costs. This is done by the auditor to make sure that the right amount is charged to the client at the right time.
Importance of Inventory Auditing for E-Commerce Businesses
An efficient inventory audit can minimize the complexity and length of audits for a company. Inventory auditing is important for e-commerce businesses as they are different from physical retail outlets with global sales. The following are some of the benefits of inventory audition for e-commerce businesses.
- Inventory Audits help in the calculation of profits by tracking manufacturing costs and sales.
- Inventory Audits help in accurate calculation of budget for the next batch of inventory. It also lets you know how much you should invest in the safety stock for next season.
- Audits help businesses find inefficiencies in their inventory stocks by highlighting areas that are not selling, inaccuracies in the storage, items that are selling out too quickly, causing stockouts, etc. Companies can use this information to optimize the supply chain and manage inventory.
- Inventory audits can help you optimize inventory holding by limiting factors like out-of-date expired products, damaged products, and warehouse costs. The longer you store inventory, the higher cost you have to incur.
Improve Business Efficiency with Inventory Audit
It is essential to understand the importance of inventory audit as it helps you maintain inventory accurately and identify weak areas to ensure that you always have enough stock at hand. For small business and e-commerce platforms, outsourcing auditing and inventory management is the best option to keep inventory safe without doing much time-consuming work themselves.
Avail services of Top audit firms to ensure the financial safety of your business.
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