Purpose of Inventory Audit

In simple terms an inventory audit can be defined as “the process of comparison of the actual quantity of goods in stock with its financial records.” This procedure is conducted to ensure genuine and accurate inventory accounting. 

Inventory audits can be conducted in two ways, to keep an accurate track:

  • Perpetual analysis – when inventory audit procedures are carried out once a year.
  • Periodic analysis – when inventory audit procedures are carried out at regular intervals throughout the year.

What is the purpose of Inventory Audit?

The purpose of inventory audit is discussed as below: 

  • Inventory audit is essential to tally the actual quantity of items in stock against its financial/accounting records and for adjusting the differences.
  • It keeps a check on the stock flow by revealing the actual count of the physical items. In other words, whether the items are under stock or over stock.
  • It enables the company to decide on its forthcoming budget so that the business remains afloat.  
  • It determines the holding cost which is the sum of all costs related to inventory like storage, warehousing, labour, insurance, combined with the value of damaged, expired, and out-of-date stock. 
  • It ensures necessary investment in the stocks and creates a balance in the process. 
  • It reveals the true picture of actual stock as compared to the recorded stocks which enables a better understanding of the financial situation of the company. 
  • It also reveals the losses which result from wastage, damage, or even dormant stock.
  • It determines the efficiency of the storage system, whether adequate measures are being taken to keep the stock away from any kind of damage.
  • It determines the effectiveness of the warehouse workings and reveals its issues, if any. This could aid in highlighting inefficiencies in the process.
  • It facilitates lack of security which might result in fraud, theft, or misappropriation.
  • Usually overstocking results in financial loss and poor cash flow. Inventory audit conducted at timely intervals would help solving this problem. 
  • It aims to keep the employees in place by having a check on the dealings done by them.  
  • It detects any inventory in stock incorrectly supplied to customers which could lead to financial loss. 
  • It assists in calculating the actual profits or losses, which further decides the course of business for the company. 
  • Based on the findings of the inventory audit report, the company plans its course of business, and decides whether the current workings require any changes or not.
  • It keeps the management and the Board informed about the finances and accounts so that they can take correct measures for maximizing profits and prevent the reputation of the company from irreparable damage. 

Conclusion

The objectives of internal audit can be drawn from its purpose. The objectives/aims would suggest reduction of wastage; reduction of risks; cost control; decision-making regarding the business; evaluation of the existing internal controls of stock; reduce holding cost of the inventory, etc. Inventory audit is thus an important part of the auditing process which helps to reach conclusions and gives a boost of confidence to make right decisions in the benefit of the company, its employees and customers. 


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