Stock Audit: Objectives, Importance and 10 Procedures for Inventory Audit in eCommerce
Inventories contain finished goods for sale in the ordinary course of business, work-in-progress goods, supplies, and goods employed in manufacturing goods and order fulfillment services. Because inventory is critical to any firm, performing an inventory control audit is crucial. The procedure entails determining whether the entity holds the inventory value recorded in the entity’s books.
While performing stock audits internally or through external auditors, the organization should consider the following considerations. These factors include whether the company’s inventory can be physically counted by hand, whether the Inventory is held in the company’s warehouse or a third-party facility, and if the audit time is adequate. These considerations will aid in determining the audit method and schedule.
- What is a Stock Audit?
- The Stock Audit Process
- 10 Best Procedures for Stock Audit
- Stock Auditing Challenges and Solutions
- 5 Benefits of Stock Audit in eCommerce Businesses
- 4 Ways to Optimize the Internal Audit of Inventory Management Process
- Frequently Asked Questions
What is a Stock Audit?
A stock audit, also known as an inventory audit, ensures that the actual products are accessible in your store’s warehouse corresponding to the stock registry findings. The Inventory audit procedure entails validating or cross-checking an inventory’s financial records with its physical count. External auditors or internal firm employees carry out the stock audit, and the auditors use a variety of audit processes, which we will go over in detail.
“The global financial auditing professional services market size was assessed at USD 109.21 billion in 2017,” according to Grand View Research. From 2018 to 2025, it is expected to grow at a 7.4% compound annual growth rate.”
An audit can be divided into two main categories:
- Internal Audit
Internal audits can be carried out in which the team examines the process, assets, and inventories. The company employs an auditor and reports to the CEO or the organization’s senior management.
When a company wants to prepare for an external audit, it conducts an internal audit. Another situation is when they are unsure about inventory or another issue.
- External Audit
An external audit is a review undertaken by a non-affiliated accountant. This sort of audit is most typically used to get a certification of an entity’s financial statements. Confident investors and lenders, as well as all publicly traded companies, demand this certification.
Inventory Audit Objectives
The main inventory audit objective is to compare and contrast financial inventory records with physical counts. However, because financial records are kept internally, there is a potential that they are wrong due to human mistakes, omission, or purposeful manipulation for personal gain, which is considered fraud.
A stock audit ensures that these errors are avoided and that the audit is carried out correctly to present a truthful and fair picture of the organization’s inventory situation. Therefore, inventory auditing involves verifying or cross-checking inventory counts and the quality and condition of inventory that is not recorded in financial records.
The following are the stock audit objectives-
Verifying Physical Existence
As previously stated, the primary goal of a stock audit is to cross-reference financial data with physical counts. While conducting a stock audit, auditors keep an eye on the inventory counting process to verify if it is being done efficiently. They choose a sample of commodities to see whether physical counts correspond to financial records and vice versa.
Examining the Operations Accuracy
An auditor checks to see if the inventory counting system is accurate, and they do it using a statistical sample approach.
Another goal of the inventory audit is to evaluate whether the firm genuinely owns the inventory it has documented.
Evaluation of Realizable Value
One of the audit’s goals is to see if the inventories are reported in the general ledger at the proper value. In addition, the auditor examines whether or not damaged and low-quality products are documented at a realizable value.
Importance of Inventory Audit
Inventory is a critical component of any organization, which is why auditing inventory is crucial. Inventory auditing is essential for gathering proof, especially for retail businesses. In addition, it may deal with a massive asset or capital balance.
Inspecting Inventory should validate the amount of supply, quality, and condition to see if the stock’s worth is accurately represented in financial records and articulations.
The following points will help you understand the importance of stock audit-
- Inventory audits are necessary to compare the actual number of things in stock to accounting records, compensating for variances and allowing for shrinkage so that the ledger represents accurate values.
- A Stock audit will indicate which physical commodities or products are overstocked or understocked. This will allow you to stock your firm appropriately and effectively, allowing you to optimize earnings.
- Auditing inventory is required to eliminate wasteful stock investments and maintain correct line balancing in operation.
- An Inventory audit is required to compare accurate physical counts with company data. Auditing inventory will provide an actual image of what you own compared to the recorded stocks. If this count is done correctly, which will offer you a knowledge of the company’s financial health. Inventory balances are frequently misstated, and this has a direct impact on reported profit.
- An inventory control audit will also uncover any faults with your warehouse practices, whether at the receiving dock or during packaging. This might assist in identifying any possible inefficiencies in the process, such as warehouse disorganization and delayed retrieval techniques.
- Stock levels that are too high sometimes lead to wasteful overstocking, resulting in poor cash flow and financial loss. A stock audit performed at regular intervals will aid in the resolution of this problem. It also aids in identifying any obsolete product in stock or orders mistakenly delivered to clients, which might result in financial loss and permanent harm to the company’s image.
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The Stock Audit Process
While there is no one-size-fits-all approach to conducting an audit, there are key stages and activities that are similar to most audits:
Demand Forecasting and Stockpiling
Running out of stock would be the worst thing that could happen to you during the stock audit. After all, you don’t want to put your entire business on pause while the audit is conducted. Of course, this isn’t always possible, and some smaller businesses may be able to shut down for a day, but this is a dangerous approach. That is why, prior to auditing, it is critical to dive deeply into the data you have on hand to forecast future demand.
Count the Tangible Items
Here, there are a variety of techniques and methodologies to consider. For example, you can browse your warehouse’s shelves item by item and document everything you see. You may perform a cutoff analysis to make things simpler by putting your entire business on hold during the audit, but this might lead to various concerns.
You might instead try a cycle count, which does not need you to count your whole stock at once. You can specify a product type to audit within a specific term with a cycle count. It’s less exact than a comprehensive physical count, but it’s less disruptive to your business.
You can also do a spot check audit, in which you merely evaluate one or two goods to discover any recordkeeping errors. If there are no discrepancies, you may assume that your sources are current and your stock is safe.
Double-check your findings
While doing everything twice may seem excessive, double-checking in-stock audits are necessary. Human error is a concern here, and the project scope is frequently too large to entrust to a single source. This is why it’s critical to double-check your findings.
Mix and match your auditing tactics (as long as you can justify it), give UPC tags or QR codes to each item to digitize the process for your future self, and employ a helping hand – there are lots of possibilities here; make sure the final count is as accurate as possible.
Compare Between Your Results and The Financial Records
It’s time to compare your results to your sales records after you’ve tallied all of your physical merchandise. Any differences or mismatches signify the start of a distinct process of locating the problem’s cause.
10 Best Procedures for Stock Audit
Some audit processes can be used to accomplish stock audits.
Ten of the most popular audit processes are listed below-
Count of Physical Inventory
The most typical method for conducting an inventory audit is to use a spreadsheet. It entails physically counting all of your inventory items and comparing the results to the numbers in your system. This is simpler for organizations that utilize a just-in-time inventory system or regularly compute their economic order quantity.
Counting the Inventory Cycle
Cycle counting, like physical counting, is manually counting a number of goods and comparing them to your system. On the other hand, cycle counts are done on a limited number of items regularly. This means you may do more frequent audits of your most valued items and avoid concerns like inventory loss.
Analyze ABC Inventory
ABC analysis is a method of categorizing goods based on their monetary worth, and this allows you to save and audit the groups that you wish.
Analysis of the Cutoff Point
You suspend all processes during the physical inventory count using this analysis. This eliminates the possibility of uncontrollable variables causing errors.
In this section, you may compare your inventory turnover ratio, gross margins, or unit costs to past years’ statistics, allowing you to detect any unexpected spikes in volatility.
Analysis of Overhead
An overhead analysis is a thorough examination of all non-material costs. This covers rent, utilities, payroll, and other “invisible” inventory expenses.
Analyze the Cost of Finished Items.
For manufacturers and producers, this strategy is excellent. To guarantee that financial statements are accurate, all products are accounted for and valued upon completion.
Analysis of Freight Costs
This research looks at how much you spend on shipping and how long it takes (lead time). It also takes into consideration any losses or damage that occurred during transport.
Shipping Invoice Matching
This inventory audit is frequently performed at random by auditors. It entails matching the cost of sent goods to the number of items shipped. It ensures that no things are sent out at the incorrect price.
Reconciliation of Products
You must explore any problems discovered during your inventory count to reconcile items. This will allow you to note any SKU numbers that are prone to mistakes in the future.
Stock Auditing Challenges and Solutions
Almost every stock auditor must deal with some procedural difficulties at some time. Fortunately, they are usually minor annoyances that you should be aware of rather than significant issues that you should avoid at all costs.
So, here are a few of the most prevalent stock audit issues:
Stock management Is Time Consuming
It takes time since it necessitates a great deal of attention to detail and personnel. As a result, the best method to avoid this problem is to plan audits and allocate a suitable amount of time for them. The procedure might take anywhere from a few days to a few weeks, depending on the magnitude of your surgery.
No Real-Time Inventory View
Most of the time, there is no real-time view of your inventory. Thus stock verification must be done regularly. Weekly or monthly auditing sessions may be excessive, but double-checking that the number of your actual things matches your sales record at least twice a year might save you a lot of pain.
Procedure Cannot Be Automated
Most audit procedures cannot be automated, and many operations must still be completed by hand. However, certain auditing activities may now be performed with the assistance of specialized software. Thus, our first recommendation is to invest in such a system. Aside from that, following the preceding two pieces of advice should reduce the manual labour you must do.
Pauses Other Operations
Inventory audits frequently disrupt other activities, creating delays in shipments and annoying in general. The most straightforward approach to avoid this is, once again, to plan ahead of time for your auditing and to rely on timely market research to estimate demand.
5 Benefits of Stock Audit in eCommerce Businesses
A sound inventory management system may reduce audit frequency, length, and complexity. In addition, eCommerce inventory differs from traditional retail inventory in that sales can occur anywhere on the planet, making it more unpredictable.
In today’s digital environment, your inventory auditing processes must also be digital. The following are aided by employing technology that maintains inventory counts synchronized in real-time rather than using something static like Excel.
Inventory audits can assist you in calculating correct earnings since inventory accounting accuracy informs your bottom line. Accounting for variations in inventory value over time as it pertains to production and expenses of goods sold can significantly influence your accounting records. Inventory audits can help reduce inventory shrinkage (when actual inventory levels are lower than accounting reports) and detect expensive, slow-moving items.
Budgeting With Precision
You can’t budget for the next batch of merchandise you need to buy if you don’t have an accurate system for keeping track of its value. When you know the precise inventory count you’re going through and how much safety stock you should have, stock audits may help you budget better and more correctly.
Look For Inefficiencies.
Inventory that isn’t selling rapidly (or at all), SKUs that are selling out quickly and generating frequent stockouts, inconsistencies with storage or inventory monitoring procedures, and other operational issues can be discovered through audits.
By abandoning failing goods, doubling down on what’s working, and improving other elements of your supply chain — from manufacturers to warehouse locations — you may enhance your company’s financial health.
Make The Most of Your Inventory Storage.
The total of all expenses associated with carrying inventory, such as storage, labour, insurance, and rent, plus the value of damaged, expired, and out-of-date items, is known as holding costs. The more money you pay, the longer you keep merchandise and the more useless goods you have. Inventory audits can assist you in limiting these variables.
Getting Rid of Phantom Inventory
It’s not beneficial for the business to have phantom inventory. Phantom inventory is inventory that is shown as being available at a storage place but is unavailable when you try to utilize it.
It’s one of the most common causes of shelf issues. But unfortunately, many businesses overlook this problem because they believe it is minor.
On the other hand, asset and inventory audits can help you solve this problem. You may appropriately delete them from your business and business documents using auditing. However, it is impossible for it to exist because of this programme.
4 Ways to Optimize the Internal Audit of Inventory Management Process
Inventory audits address high-risk, high-value areas that firms need to be aware of to enhance the efficiency and efficacy of their inventory audits. Use the best practices listed below for your 2021 audit programme.
Recognize Value and Risks of the Warehouse
Examine the warehouse’s accounting before entering. Spend time learning about the inventory, identifying outliers, and determining where the biggest value and risk are. Look for things that aren’t like the rest of the population. Examining reconciliations and roll-forwards for reconciling items might reveal what management is having trouble with and where you should focus your efforts. This data can assist you in optimizing your stock audit so that you can focus more time on high-value products that pose the most danger to your financial statements.
Consider Using a Qualitative Methodology.
Asking as many questions as possible and not making any assumptions is the most effective method of learning the inventory system. Meet with management and warehouse teams in person or organize a video conference to discover how they receive inventory and process it in the design of record (SAP, Oracle, etc. ), as well as how they process and run reports. Ask specifically whether they are having any problems with the system and what efforts have been made to resolve them. These discussions will put you in a better position to spend your time where management is spending its time and having problems, allowing you to conduct a more successful audit.
Look At The Cycle Count Results.
Variations in cycle counts might help you figure out what’s going on. However, these should not be utilized to determine fundamental causes but as symptoms to consider in conjunction with your other studies to complete the inventory system’s picture.
Strengthen Your Connections.
Recognize that audit customers frequently have a negative impression of auditors. Therefore, make your audit clients allies by stating that the internal audit’s purpose is to learn how they conduct their jobs so that improvements may be made to simplify their lives. When audit customers realize that the purpose of internal audit is to assist the organization rather than discover faults, they are more willing to cooperate.
A stock audit is an essential step for every eCommerce fulfillment services firm since it guarantees that everything operates properly and provides you with a clear picture of your financial situation.
While audits by your fulfilment partner are not mandatory, they might be beneficial in the long run, especially if you run an international company with a variety of warehouses worldwide. Many logistics and fulfilment partners provide this service as a courtesy and may conduct inventory checks with minimum impact on your business. You’ll be safe against the most common auditing problems in such a situation.
Regular, thorough inventory reviews may help you avoid fraud, improve inventory management strategies, and increase income!
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