Inventory Audits: How to Create Counting Procedures

Inventory Audits: How to Create Counting Procedures
Inventory audits consist of analytical procedures to check a company's inventory methods.
by Meredith Galante May 02, 2019 — 5 min read
Inventory Audits: How to Create Counting Procedures

Even reading the word “audit” is enough to send shivers down most business owners’ spines. But, whether the audit is for internal purposes or at the request of an external auditor, understanding the nuances of an inventory audit ahead of time will prepare you for what’s to come and set you up for success.

What is an inventory audit?

An inventory audit is when either you or an auditor uses analytical procedure to check a company’s inventory methods and confirm that the financial records and actual count of goods match.

It’s important to conduct inventory audits to maintain inventory accuracy, spot causes of shrinkage, and ensure that you always have the right amount of stock at the right time. A better understanding of stock flow will also help ensure the business runs smoothly, because you’ll know what products you have on hand.

Audit procedures for inventory

If your inventory undergoes an audit, an internal employee or external auditor will conduct a series of procedures to validate your records. Procedures can include inspection, observation, confirmation, recalculation, performance, or analytical analysis of inventory during any stage of operations.

Here’s a list of the various inventory auditing procedures that could occur.

An inventory audit checklist

Conducting your own audit periodically increases visibility of how your materials are moving through the supply chain. It can help you evaluate costs and prepare for any external audit procedures.

The best inventory audits have three phases: planning, execution, and analysis. Here’s a checklist to help you conduct an inventory audit.

  1. Assess which items to audit: Higher-risk inventory items should be assessed more frequently. You can sort inventory out by SKU or bar code, then prioritize.
  2. Create an audit schedule: Next, you’ll need to map out an auditing schedule. Unfortunately, conducting an inventory audit can disrupt the normal business flow. You’ll want to choose times that are least impactful for the business, but also happen at a good frequency to ensure those high-value items will be accounted for. The policies and procedures of buying and shipping items may also affect the schedule of your audit.
  3. Collect the necessary documentation: Get out any important documents ahead of time and make sure they are easily accessible, but secure.
  4. Conduct the inventory audit: As discussed above, there are a number of different audits that can be essential, depending on the nature of your business. Make sure you have an internal auditor that is unbiased but knows how to conduct the audit.
  5. Record the findings: Keeping track of audit results year to year or cycle to cycle is key. The main goal of an audit is to find gaps in compliance and look at opportunities to fix the deficit and improve operational processes.
  6. Report the findings: When it’s all over, you’ll want to create an easy-to-read audit report to serve as evidence if an external audit is ever conducted.

Why inventory management is important

Maintaining an efficient inventory management process can reduce the length and complexity of audits. For example, if you have a system that tracks and scan items when they come in to or leave your store, there will be time stamps associated with each action that can be easily tracked.

Square POS has a built-in inventory management system that can help you successfully track inventory anywhere and at any time. You can import your product spreadsheet in the inventory management system and have the option to customize names, manage quantities, and edit prices of products.

You can also set up stock alerts that will notify you when your product inventory reaches a certain count. This can help you quickly react to sudden demand changes and keep your processes running smoothly.

If you’ve opened a retail store, you might need additional capabilities like managing inventory across multiple locations or creating purchase orders based on stock counts. Square’s retail POS has a powerful inventory management tool included that can satisfy these needs.

Having inventory management systems like these will keep your business operating efficiently and can track your inventory with precision. That way, when inventory audit requests arise you can quickly respond with accurate data and take the necessary steps to complete an audit without fear.

Running a business is no easy feat, but Square is here to help. We have all the tools you need to start, run, and grow your business, whether you’re selling in person, online, or both. And we’ve made all our tools to work together as one system, saving you time and money — and making decisions easier. So you can get back to doing the work you love and focusing on whatever’s next. See how Square works.

Meredith Galante
Meredith Galante is a freelancer writer based in New York City. She's been writing for Square since 2017 where she's covered everything from the best software for restaurants to use to maximize profit, minimum wage laws across the country, and tips for entrepreneurs to maximize their impact.


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