How do you audit the inventory of a manufacturing company?

An annual inventory audit should be conducted on every manufacturing company’s inventory and warehouse. It is beneficial to conduct regular inventory audits to identify and prevent any potential issues in the inventory area, whether they are conducted internally or externally. This blog post will outline what a manufacturing inventory audit entails.

What is Inventory Auditing?

The process of auditing inventory involves comparing financial records with physical inventories. An auditor can perform this task. An auditor audits an organization on behalf of someone or a company. This is a structured, methodical process consisting of an examination and participation from third parties.

First, let’s look at some of the probable issues that the auditor can face while auditing inventory:

  • An outdated or damaged inventory.
  • Miscounted inventory, either accidentally or on purpose. Over counting pumps up current earnings, while undercounting lowers them.
  • The end-of-year cut-off for receipts and shipments of inventory has been recorded incorrectly.
  • End-of-year liabilities are not included because an invoice has not been obtained, or the business wishes to enhance its stated debt situation.
  • The inventory is held by the client on consignment.

The Significance of Inventory Auditing:

An independent auditor offers an opinion on the financial report records of inventory effectively mirror the physical inventory being carried, which is a generally accepted auditing technique.

Inventory auditing is a key part of evidence collection, particularly for manufacturing and retail organizations. It might represent a significant asset or financial balance.

Inventory audits require verifying not only the quantities, but also the quality and condition of the inventory to determine whether the value of the inventory is fairly represented on financial statements and records.

Processes for Inventory Audit

The following techniques are commonly performed during an inventory audit:

● Inventory count analysis 

The auditors will discuss the counting process with you, monitor the “live” numbers as they are recorded, tally some inventory, compare the counts against the ones recorded, and verify that all inventory tags are included in the count. They may search for spots with a lot of inventory if you have a lot of inventory areas.

● Cost analysis of commodities 

Inspectors will evaluate amounts on current supplier bills to expenses indicated in your inventory valuation reports to determine where the acquired expenses in your financial records came from.

● Cost of overhead analysis

In the case of using overhead costs to value inventory, the auditor will verify whether overhead costs are consistently recorded from the same general ledger account, whether abnormal costs apply, and whether overhead costs are consistently applied.

● Verification of inventory ownership

During the inventory audit, inspectors will review sales data to ensure that everything in your warehouses belongs to you, rather than to customers or consignors.

● Inspection of high-value commodities

If the worth of some products in your inventory is unusually high, the auditors will tally them in inventory to ensure that the valuation is correct and will evaluate valuation reports for these goods.

● A cost analysis of the finished goods

The inspectors will examine the bill of materials for a variety of finished goods products and evaluate them to see whether they reflect an accurate synthesis and costing of the completed goods elements.

● The cut-off analysis

The auditors will look at how you manage the elimination of potentially unnecessary inventory systems by looking at the most recent receiving and shipping activities, both before and after the physical inventory records.

● Inventory in transit is inspected.

Inspectors may ask to view your transference documents during an inventory audit if any of your goods are in the process of being transferred between sites.

● Inventory allowances should be assessed.

The auditors will examine the relevance of quantities you have reported as allowances for obsolete or disposed inventory based on your historical patterns and records.

● Validation of inventory tiers

Inspectors will evaluate the inventory levels that you have documented to evaluate their correctness if you are utilizing a FIFO/ LIFO method of inventory valuation.

You now have a better knowledge of what happens during an inventory audit. Partner with the leading company audit in the Philippines for hassle-free inventory audit procedures. The information contained herein should prove helpful to you in the future for inventory audits.

Wrapping Up

Inventory audits consist of comparing financial records to physical records and inventory levels. Get in touch with the leading company audit in the Philippines today for hassle-free inventory audits.

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