The objectives of an inventory audit process are to prove the existence, rights, accuracy and realizable value of items in a company's inventory. An auditor uses multiple analytical procedures to verify a company's inventory methods and confirm that the financial records match the physical counts.
An auditor reviews the company's plans and procedures for counting inventory and often physically observes the actual counting methods to determine efficiency. To verify the physical inventory counts, the auditor may randomly select samples from the warehouse or storage area and locate them in the count records. This also may be done in reverse, with the auditor selecting records from the count and then matching the figures to the actual items in inventory to verify existence.
Statistical sampling is one method businesses use to count inventory. Counting only a portion of the inventory and then applying the statistical results to the inventory as a whole can greatly reduce the time spent on the count. When an auditor uses this method, he then checks to see that the results, if reasonable, have statistical validity and are properly applied across the entire inventory. The auditor determines whether the statistical methods would produce the same results as a complete physical count.
Ascertaining Ownership Rights
An inventory audit establishes that all inventory recorded by the business actually belongs to the company. For example, the auditor may reconcile purchase orders and vendor invoices with canceled checks to ascertain whether the inventory has been purchased. During the inventory audit process, the auditor will determine whether or not any inventory belongs to customers and has not yet been shipped and if any products and items in inventory stand as collateral for a business loan.
Evaluating Realizable Value
The auditor will match the inventory counts to records in the general ledger to ensure that the values are correct and conform to generally accepted accounting principles. In situations where the business carries high-value items in inventory, an auditor may do a physical count on these to verify value. The results will then be reconciled with the inventory values as listed in the financial records. The auditor checks the quality of products and items in inventory and verifies that excessive or damaged products are accurately listed at realizable value.
Vicki A Benge began writing professionally in 1984 as a newspaper reporter. A small-business owner since 1999, Benge has worked as a licensed insurance agent and has more than 20 years experience in income tax preparation for businesses and individuals. Her business and finance articles can be found on the websites of "The Arizona Republic," "Houston Chronicle," The Motley Fool, "San Francisco Chronicle," and Zacks, among others.