How Should Auditors Run An Inventory Audit In 2021 Using ShipBob

Table of Contents

Audits of any kind are time-consuming and manual, but they offer an in-depth look at a business’s various accounts and/or financial situation. When it comes to selling products, eCommerce businesses may conduct inventory audits — whether for tax purposes or to simply verify the number of units on hand. Regardless of whether the audit is conducted internally or at the request of an external auditor, anticipating and comprehending the nuances of an inventory audit in advance will prepare you for what lies ahead and position you for success.

Utilising the appropriate inventory audit or inventory management software for your business improves efficiency, alleviates stress, and assists you in meeting compliance requirements, ensuring that your business or company runs smoothly. 

Stock management is a method of managing, maintaining, and tracking inventory objects. Inventory control is a critical component of supply chain management and it governs all processes from the time an object reaches your shop before it is dispatched. To put it simply, inventory management assists you in streamlining your processes, organising your tools, and optimising your returns. Find out how an inventory management tool and audit report system such as ShipBob can highly improve your inventory audit standards.

What Is an Inventory Audit’s Purpose?

The purpose of an inventory audit is to ensure that the quantity of stock on hand matches the quantity recorded in your financial records. Regular inventory audits improve your understanding of your stock flow, assist you in accurately calculating profits and losses, and ensure that your business runs smoothly. While it is possible to audit inventory manually, the time commitment may deter you from doing so regularly—or at all. With inventory management software, you can automate the process and improve accuracy of your inventory report. Inventory software cuts down on auditing time, allowing you to establish a routine that you won’t dread.

The Advantages of Conducting An Inventory Audit

Three advantages of conducting an inventory audit are identifying items that are missing, assessing overall status, and optimising your budget.

Determine which items are missing 

As you count physical items and add them to your records, you can identify missing products, SKUs, or other items. If you discover consistent shrinkage of supplies or products, further investigation can help determine whether they were lost, stolen, damaged, or discarded. Additionally, you can take steps to halt shrinkage. Regular inventory audits will reveal whether or not specific items are consistently out of stock. Additionally, you can determine which supplies are unused and take up valuable storage space.

Improve your budgeting 

When you know which items are needed most, it’s much easier to budget more efficiently.

Regular inventory audits help you avoid wasting money on products that are perpetually in excess. Audits assist you in determining whether you should discontinue surplus items and reallocate funds to items that experience frequent stockouts.

Why Auditing Inventory Is Critical For Ecommerce Businesses

A well-managed inventory can help reduce the frequency, duration, and complexity of audits. Ecommerce inventory is distinct from physical retail inventory in that sales can occur anywhere in the world, making them more unpredictable. In a digital world, your inventory auditing procedures must be consistent.

Using technology that maintains real-time inventory counts rather than something static like Excel helps with the following.

1. Determine profit

Inventory audits can assist you in calculating accurate profits, as inventory accounting accuracy informs your bottom line. Accounting for and tracking changes in the value of inventory over time as they relate to manufacturing and the cost of goods sold can have a significant impact on your accounting records.

Inventory audits can help prevent inventory shrinkage (or identify instances where actual inventory levels are less than what accounting records) and identify expensive slow-moving products.

2. Look for inefficiencies

Audits can assist you in identifying inefficiencies such as inventory that is not selling quickly (or at all), SKUs that are selling out rapidly and resulting in frequent stockouts, inaccuracies in storage or inventory tracking techniques, and other operational errors. You can use this data to strengthen your business’s financial health by discontinuing ineffective products, doubling down on what works, and optimising other components of your supply chain, from manufacturers to warehouse locations.

3. Make the most of your inventory holdings

Holding costs are the sum of all costs associated with inventory management, such as warehousing, labour, insurance, and rent, plus the value of damaged, expired, and out-of-date products. The longer inventory is held and the more unusable inventory is held, the more money you pay. Inventory audits can assist you in limiting these variables.

4. Budget with precision

Without an accurate method for tracking the value of your inventory, you will be unable to budget for the next batch of inventory you need to purchase. Inventory audits can assist you in budgeting more effectively and accurately when you know the exact inventory count you’re working through and the appropriate amount of safety stock to keep.

Frequently Used Inventory Audit Procedures

Physical Inventory Count

Many private businesses regard inventory auditing as a necessary component of operating an efficient business, even if they are not required to do so. However, it is one of those best practices that underpin proper operational finances and business management to the point where it can feel mandatory. 

A physical inventory audit, in particular, can assist teams in ensuring appropriate inventory levels, identifying inefficiencies, and budgeting more accurately. A physical inventory count provides the business owner with an accurate count of available inventory, allowing them to ensure they maintain an adequate supply for customers.

Additionally, an inventory count assists the business in establishing the correct inventory value on its balance sheet. It can assist in identifying more nefarious activities, such as theft. Products may be damaged or stolen as well and the inventory management system may not always detect this error. This is to ensure that the system’s numbers correspond to your physical stock, which is counted individually. Electronic tracking can be facilitated through the use of product barcodes and devices such as inventory barcode scanners.

Finished goods cost analysis

Finished goods cost analysis is advantageous if you manufacture your products because it indicates when a product is ready to be sold, allowing an auditor to quickly value the inventory for the current accounting period. Auditors may examine this inventory to verify the accuracy of financial statements. Discover more about finished goods inventory on this page.

Cutoff Values Analysis

This is when you pause operations such as receiving and shipping during the physical count to ensure that nothing is handled incorrectly or goes missing.

Reconcile invoices and shipping logs

Check to ensure that invoices accurately reflect the quantity and cost of inventory shipped from your eCommerce warehouse. An auditor may conduct random checks to ensure that the correct amount was charged to the right customer at the exact time.

Analytical techniques

This is accomplished by comparing gross margins, inventory turnover ratios, and/or inventory unit costs to prior years.

Freight Costs Analysis

This determines the costs of transporting items between locations, such as freight shipping and tracking the time between shipment and receipt. This documentation keeps track of all units in transit and also serves as a backup if anything is lost or damaged during transit.

ABC Analysis

This is when items of varying value and volume are grouped, such as high-value items (or “A” products), mid-tier “B” products, and low-value “C” products. You may even wish to store these items in this manner (which can make it easier for an auditor who pays attention to mainly the high-value inventory items). 

Overhead Analysis

Budgeting becomes easier when you understand your indirect costs of doing business. Apart from direct materials and labour costs, this section examines “hidden” costs such as rent, utilities, and other costs of doing business — assuming that overhead is included in your inventory costs.

Reconciling items

If discrepancies in your inventory audit are discovered, you may wish to conduct a reconciling items investigation to ascertain the root cause. You’ll want to keep an eye out for any error-prone SKUs and monitor them in the future.

Final Thoughts

By implementing an efficient inventory management process, you can shorten and simplify audits. For instance, if you have a system that tracks and scans items as they enter or exit your store, each action will have a timestamp where users can easily track them. Inventory management systems, such as ShipBob, ensure that your business operates efficiently and precisely track your inventory. Thus, when inventory audit requests arise, you can respond quickly with accurate data and take the necessary steps to complete an audit.