What are Inventory Audits???

In an inventory audit, several procedures are used to check the company’s inventory methods confirm that the financial records and actual physical count of goods match. Inventory is a key asset in a company’s financial statements as they can be used as collateral for bank loans and also can be misappropriated for fraudulent reporting purposes. While companies do keep track of the stock on a regular basis by maintaining records, they need to periodically assess and reconcile these records to check the accuracy of books and take the necessary corrective measures where required. This is done by undertaking a stock audit.

Inventory is a balance sheet account and so the relevant assertions are existence, rights, completeness and valuation. Existence refers to whether the inventory is actually present, rights refers to whether the company undergoing the audit actually owns the rights to the goods, valuation refers to the correct pricing as well as any impairment issues, and finally, completeness addresses whether all the goods that should be recorded are fully recorded. The auditor observes whether the client complies with the proposed policies/procedures for the count –

  • Are these procedures being performed correctly and efficiently?
  • Observe the quality and the condition of the goods.
  • Is there any sign of impairment/obsolescence?