Inventory Audits

In an inventory audit, several procedures are used to check the company’s inventory methods. These procedures confirm that financial records and actual physical goods are in line.

Inventory is a key asset in financial statements. It can be used as collateral for bank loans and misappropriated for fraudulent reporting purposes.

While companies keep track of their stock regularly by maintaining records, they need to periodically assess and reconcile these records to check the accuracy of their books. They need to take the necessary corrective measures where required.

This is done through a stock audit.

Inventory is a balance sheet account, so the relevant assertions are existence, rights, completeness, and valuation.

Existence refers to whether the inventory is present, rights refer to whether the company undergoing the audit owns the rights to the goods; valuation refers to the correct pricing and 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 performed correctly and efficiently?

• Observe the quality and condition of the goods.

• Is there any sign of impairment/obsolescence?