Performing an inventory audit is like doing your taxes — it’s tedious, takes up too much time and leaves you exhausted. But it’s something you must do. Adopting inventory audit software or an inventory management system can save you from operational chaos. Thirty-four percent of businesses admit their products weren’t shipped on time because of unavailable items in their stock. When you don’t have a clear snapshot of your goods, you can’t satisfy your customers’ needs.

A direct solution to this problem is inventory audit software, which is specifically designed for managing these audits and streamlines the entire process while saving you time, effort and unnecessary stress.

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What is an Inventory Audit?

Before you think about conducting an inventory audit, you need to have a clear understanding of what it is, especially since it’s one of the most integral parts of inventory management. An inventory audit is defined as the process of assessing the stock maintained in your company’s books and comparing it against your physical stock to ensure they match. This process may be conducted internally or at the request of an external auditor.

Here are some questions to consider as you prepare to assess your inventory:

• Is my inventory of raw materials, finished goods or other assets too much to count by hand?
• Is my inventory stored at my company or a third-party logistics building?
• Is this the best time for me to conduct my inventory audit?

These audits can interfere with normal business operations, so it’s important to conduct them during a time when business is typically slow or not heavily productive, like the end of the year after the holiday season.

Typical Procedures

There’s no one-size-fits-all approach for conducting an audit. It’s a matter of utilizing the procedure that most appropriately fits your business and inventory needs. Here are some common proceedings.

Cutoff Analysis

A cutoff analysis is when you cut off all receiving and shipping operations to ensure nothing is mistakenly handled or goes unaccounted for when you do the physical inventory count. If you don’t do this, it can throw off your data and lead to a reconciling items investigation.

Physical Inventory Count

To save you the suspense, this is where you physically count your inventory so you know what you have onsite. Ideally, you’ll want to do this with a barcode scanner to record data electronically. If you’re doing this with a professional auditor, they will watch and reconcile your amount with a general ledger to ensure the numbers match.

Freight Cost Analysis

If your business ships products to different locations, this procedure will aid in determining shipping costs. It records when your items were sent and when they arrived at their proper destinations. This also serves as an excellent way to document items that are lost or damaged en route.

Overhead Analysis

Although this is an optional procedure, it’s still popular. Overhead costs include utilities like rent and electricity. Analyzing these costs helps you predict the indirect costs of doing business, which can assist you with budgeting for the upcoming year. Again, this procedure is optional and only useful if you count these costs as part of your inventory calculations.

High-Value Item Inventory/ABC Analysis

High-value item inventory, often referred to as ABC analysis, is one of the most common procedures for inventory assessments. High-value, rare items are categorized as A items. Medium or mid-value items are sorted as B items. C items are low-value items.

ABC analysis can be an effective method to manage stockrooms. Group C items should be placed by the entrance to quickly speed up trips to the sales floor. Group A items should be properly placed and secured in a safe place to minimize theft and costly losses.

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Investigate Discrepancies

If your physical stock doesn’t match the number set in your books after the audit, then you should perform a reconciling items investigation to find the cause of these discrepancies. Here are some common reasons why differences between physical stock and recorded values occur:

Miscounted Inventory

It’s highly plausible that someone miscounted the inventory. It happens. A recount is the first thing you should do for this investigation. When recounting the inventory, have a different person crunch the numbers, because the first person could miscount again. If the number is significantly different from what’s recorded in your ledgers, it could be there’s more inventory in a second, hidden location. Search for a potential second location and count again.

Misread Part Number

Misreading an item’s part number or guessing an item’s part number because it’s missing, faded or slightly torn can also be the culprit behind inventory discrepancies. Reach out to an experienced staff person for help or search for the item’s description in the master records.

Differences in Units of Measure

Do the units of measure match what’s recorded in your books? One of your products may be measured as an individual unit, but it could be marked in your ledger as pounds, boxes, inches, etc. If you already did a recount and there’s still a significant difference, it’s likely the units of measure aren’t the same.

Missing Paperwork

One of the most common incidents to result in a reconciling items investigation is missing paperwork. A discrepancy in your inventory may have occurred because a transaction has taken place, but hasn’t been logged in your records. Other examples of missing paperwork include issuances from your warehouse to a production area or receipts not entered into your system.

Customer Ownership

Another reason why there may be no record of your missing inventory is one of the products you’re counting is no longer yours. The item may have been purchased by one of your customers. This more likely happens when a business renovates its building or upgrades its products.

Inventory Audit Software vs Inventory Management System

In the days before electronic and smart devices, businesses had to audit their inventory with pencil and paper. Though tedious and time-consuming, it was the only way to keep track of how many products and goods were available on the premises. Now the standard method of conducting an inventory count for big and small businesses is to choose a selection of items, physically count them and compare your data with the records in your software.

The future of retail will see an estimated 72% of retailers remodel their supply chain with immediate visibility permitted by mechanization, sensors and systematics. Businesses that adopt these technological advances will gain a clearer understanding of their stock so they can integrate efficient ways to reach a new pinnacle of customer satisfaction.

Using inventory audit software allows you to track, record and store your inventory information in one place no matter where it’s located. The software also indicates if your company’s audit procedures are effective or in need of a tune-up. Other perks include accurate data tracking, shrinkage in theft and faster assessments so you can return to regular hours of operations.

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An inventory management system, on the other hand, not only helps facilitate audits, but also creates a storage system that keeps your goods organized and optimized for distribution. You can also predict and manage demand, choose the ideal inventory management strategy for your business and find/develop partnerships with suppliers.

Example of how a user can track product data within an inventory management system.

Key Benefits & Features

Now that you understand some of the key procedures performed during inventory audits, as well as how technology can help, it’s important to pick the right software. Regardless of whether you choose to implement a management system with more robust capabilities or a solution designed specifically to facilitate an audit, you’ll want to be sure to keep a few key features on your list of must-haves. The ideal software should possess the following benefits and features:

Reduce Preparation Time

Scheduled audits at the request of a third-party auditor require you to gather all of your paperwork. This can be time-consuming and tedious if your team has to sift through mountains of documents, and even worse if they’re stored in various places. This software lets you prepare accurate reports in minutes. As a result, you save time for yourself and the auditor.

Make Verified Data Accessible

Work orders have common qualities (i.e., asset stocking, ordering, tracking and inventory processes) that should be recorded and made easily accessible during the audit. With this software, these common qualities are stored and made available to auditors with just a few keystrokes, thus relieving unnecessary headaches.

Facilitate Scanning and Tracking of Assets

A built-in barcode scanning tool is a top priority. Scanning each item automatically records and stores data into the software. If there’s no built-in scanning feature, ponder how easy or difficult it would be to integrate this function into the software.

Generate Reports

Generating on-demand and scheduled reports during your audit is a must. You should also have the capability to create customized inventory reports that uniquely and accurately fit your business’ needs.

Before we go any further, it’s important to understand that just having software alone won’t ensure sufficiency. You need to also consider implementing a well-defined procedure that closely aligns with your organization’s products and goods.

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Audit Checklist

To ensure you have all you need for your inventory audit, here’s a quick checklist:

• Conduct the audit around a time when business for your company is slow or not heavily productive
• If using an external auditor, ensure you have all of the required information needed to carry out the audit
• Have a good software that uses real-time asset management, facilitates scanning/tracking of inventory and generates reports
• Move forward with the appropriate procedures (i.e., cutoff analysis, physical inventory count, freight cost analysis, etc.)
• Record and report your findings
• Investigate item discrepancies if any are found in your audit

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Final Thoughts

Although audits vary from company to company, there’s nothing to fear. You now have the right know-how and tools to prepare for your audit and take note of your inventory. Using the ideal inventory audit or inventory management software for your business increases your efficiency, alleviates stress and helps you successfully meet compliance requirements to ensure smooth sailing for your business or company.

How has software helped you with your inventory audits? Let us know in the comments.