The purpose of the audit is to get accurate information about the inventory and to avoid stock-outs. This process should be carried out at different levels of productions, so that correct information about the stock at a different level can be judged. Inventory Audit can be done as frequently as a business wants to keep an accurate track on its inventory.
You may be interested in reading: Auditing Standards for Private Companies
Inventory Audit procedures followed by Auditors
1. Cutoff Analysis
This procedure is an examination for halting processes such as receiving and shipping at the time of the physical count to ensure nothing is being handled and goes unaccounted for. So that unnecessary inventory item is excluded.
2. Physical Inventory Count Observation
In this make sure that the auditors are relaxed with the procedures you use to count the inventory. Auditors will discuss the procedures to count and observe the count as they are being done, test counts of the inventory themselves and also trace the counts for the amounts recorded by the counters of the company and verify that all inventory count tags were accounted for.
3. Reconcile the Inventory Count to the General Ledger
Inventory audit help to reconciling items investigation to determine the root reason. They trace certain error-prone in the company’s general ledger to verify that the counted balance was carried forward into companies accounting records.
4. High-value items Testing
External auditors will possibly spend extra time on high-value items and will likely spend extra time counting them in inventory, ensuring that they are valued correctly and tracing them into the report for valuation that carries forward into the inventory balance in the general ledger.
5. Prone Items Testing
If there is any error trend in previous years of specific inventory items, they will be more likely to test items again.
6. Test Inventory in Transit
A risk of inventory in transit from one storage location to another at the time of the physical count can be calculated. Auditors testing it by reviewing your transfer documentation.
7. Test item costs
Accounting records are kept a track by auditors on the costs in your accounting records and they will compare the amounts in recent supplier invoices to the cost listed in your inventory valuation.
Read more: Audited Financial Statements
8. Review freight costs
An auditor has to review freight cost and include freight costs in inventory or charge it to expense in the period incurred, but you need to be consistent in your treatment. So, the auditors will trace the accounts for any units that are in transit and also in case anything is lost or damaged in transit.
9. Test for lower of cost or market
The lower cost or market rule to be followed by the auditor and will do so by comparing a selection of market prices to their record costs.
10. Finished goods cost analysis
The valuation is comprised of goods when the product is ready to be sold so an auditor can immediately value the inventory for the current accounting period. This inventory is tested by auditors to ensure financial statements are accurate
11. Overhead Cost Analysis
An auditor applies the overhead cost analysis to the inventory valuation, the auditors will also verify that you are consistently using the same general ledger accounts as the source for you overhead costs, whether overhead includes any abnormal costs and the test the validity and consistency of the method used to apply overhead costs of inventory.
12. Inventory allowances
The allowances mentioned in the inventory will determine whether the amounts you have recorded as allowances for obsolete inventory or scrap are adequate, based on your procedures. If you do not have such allowances, they may require you to create them.
13. Inventory ownership
Under this procedure, the auditors will review the records to ensure that the inventory in your warehouse is actually owned by the company.
14. Inventory Layers
If you are using inventory valuation system, the auditors will test the inventory layers that you have recorded to verify that they are valid.
The points mentioned above make it very clear that the audit is very important for a company. Without an audit, it would be very challenging to determine the exact financial picture of the company and pinpoint any flaw in its workings. When there is a growth in the size of the company, the audit process would grow more complex. thus, it is very important an audit to be conducted by experts
If you are searching for an audit firm in Dubai, then you must avail the services of top audit firms in UAE.