It is an essential prerequisite to put in place an inventory audit procedure for the establishment of an office or a warehouse. An inventory audit involves the process of periodically verifying the items on an inventory list. This prevents stockouts and ensures that the products to meet customer demand are in place. Audit firms in Dubai use multiple approaches to provide inventory auditing services.
What Is an Inventory Audit?
An inventory audit is a process where auditors systematically inspect stocks and compare them to the records of what is on hand. This is done to make sure that the two match up and that there are no discrepancies. It is important to know what an inventory audit entails and how to prepare for one.
Do I Need an Inventory Audit?
Every corporation is different and has different needs. Nevertheless, an inventory audit or stock audit is an essential requirement for corporations. For instance, if a corporation is experiencing a high rate of product loss if a corporation had a recent change in ownership, or if there is a change in your business processes. In these cases, a corporation should consider an inventory audit. An inventory audit assists in identifying any discrepancies in your inventory.
How Often Should I Audit My Inventory?
It is determined by the size of your inventory and the rate of turnover. However, it is highly recommended to conduct an inventory audit at least once a year. However, other companies conduct inventory audits every quarter or month. For high-value items, or if your inventory is constantly changing, corporations might be required to conduct audits more often.
How to Prepare for an Inventory Audit?
Corporations can prepare for Inventory audits by ensuring that all records are up-to-date and accurate, making sure there is a functioning system in place for tracking inventory, and enforcing that all employees are familiar with it. There should also be a process for receiving and inspecting inventory, and for dealing with discrepancies. If any errors are found, it is essential to make sure they are rectified immediately.
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
An inventory audit helps to reconcile items investigated 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 the company's 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 test it by reviewing your transfer documentation.
7. Test item costs
Accounting records are kept 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.
8. Review freight costs
An auditor has to review freight costs 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 cost or market
The lower cost or market rule is 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 your overhead costs, whether overhead includes any abnormal costs, and 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 an inventory valuation system, the auditors will test the inventory layers that you have recorded to verify that they are valid.
What Happens During an Inventory Audit?
- The first step is for the auditor to meet the corporation and discuss the scope of the audit. Auditors will want to know what you're looking for and what you hope to achieve.
- The auditor will start to take stock of your inventory. They'll check the quantities and quality of your products, and make sure that everything is accounted for.
- The auditors will proceed to check your records against your physical inventory. They'll make sure that all the data is correct and that there are no discrepancies.
- Lastly, the auditor will prepare a report detailing their findings. This report will help you to identify any areas where you need to make improvements so that you can stay in compliance with all the relevant regulations.
What Should I Do After an Inventory Audit?
It is essential to follow the below steps:
Compare your results with your business plan. This is the first step of seeing how well your business is doing. It is imperative to take stock of everything that has changed since you drafted your business plan.
- Set new goals based on your findings. Once you know where you stand, it's time to set some new goals for your business. Maybe you want to increase your sales by a certain percentage, or maybe you want to cut down on costs by a certain percentage.
- Create a plan of action. This is where you put all of those new goals into action. Planning is key to making sure that your goals become a reality.
- Implement and track your progress. Put your plan into effect and track your progress along the way. What Are the Benefits of Conducting an Inventory Audit in Dubai?
What Are the Benefits of Conducting an Inventory Audit Through Approved Audit Firms in Dubai?
- Corporations can get an accurate picture of their stocks. This is the first step in making sure you're not overstocking or understocking.
- You can identify slow-selling items and get rid of them. This will help you free up space in your inventory and make way for new products.
- You can identify missing items. This will help you track down where your products are disappearing and put a stop to it.
- You can track product changes. This is important for ensuring that the products you're selling are still the same ones that you bought from your supplier.
- You can find discrepancies between your records and your physical stock. This is a sign that you may have some accounting issues that need to be addressed.
Auditing Firms in Dubai
An inventory audit in the UAE is an important process to ensure the accuracy of your company's inventory. By following the proper procedures and using the right tools, Farhat & Co, a top audit firm in Dubai, can conduct a thorough and accurate inventory audit for you. Our qualified auditors can help you develop a plan and an inventory audit checklist. We lay hold of clients’ demands and manage financial statements effectively. We have over 30+ years of experience in providing audit services, in compliance with the rules and regulations set by the UAE government.