Typically, the small and private businesses will appoint in-house auditors or engage an audit firm in Johor Bahru to perform an internal inventory audit every year. Their warehouse inventories may be in either an onsite or an offsite place. Although the procedures for valuing and counting inventories can be similar to that of those public companies, there may be a big difference between their audit objective. As an instance, due to the requirement of law, public companies need to disclose their financial data fully. As a result, they need to concentrate mainly on the valuation of inventory. On the other hand, the privately held companies do not have full disclosure obligations. Thus, they will prioritise the evaluation of the effectiveness of warehouse operations.
The Objectives of Inventory Audits
What the business thinks is the most important will influence the objectives of inventory audits as well as the weight of each objective. However, what remains unchanged is that the inventory audits focus on control objectives and accuracy. When the auditors perform an inventory audit, they need to evaluate the efficiency of warehouse operation, identify if the warehouse processes follow the safety policies and procedures, compare the inventory records and the results of the physical count, and measure the service levels and the performance of the warehouse (Also see Procedures of Field Audit for Inventory Audits). Then, the management or the relevant department may use the audit results to improve processes of the warehouse. Also, they can use them as pieces of evidence that help in justifying some items such as time or space-saving capital expenditures.
Inventory Counting in Warehouse
A small company may perform a full or partial physical count of inventory, and most of the time, this depends on the inventory system it uses, whether it is a perpetual or a periodic one. The perpetual system enables real-time and continual tracking of the inventory balance. An example of this system is the point-of-sales tracking. On the other hand, the periodic system depends on manual records as well as a plan for manual inventory counts throughout the whole year for the company to identify its inventory balances. As a result, companies that implement the periodic system have a higher probability of performing a full physical inventory count. Conversely, those that use the perpetual system tend to conduct a partial physical count of inventory. However, if the inventory records and the items counted are not the same, the auditors will take a full count.
Performing an Inventory Audit
Usually, the auditors will collect information as they inspect the warehouse records, observe the operation of the warehouse, and interview the staff. By doing so, they can get a better understanding of the processes in the warehouse, its efficiency, as well as its compliance with safety policies and procedures. When they inspect the records, they can obtain financial data so that they can set the warehouse budget for the following year. Also, records inspection will allow them to perform the valuation of inventory (Also see Revaluation of Fixed Assets) and assess if there are any signs of abuse, fraud or waste. Besides, by using confirmation letters to confirm surveys or transactions, auditors could reach out to the company’s clients and suppliers and calculate customer satisfaction levels.
Once the auditors have completed the warehouse inventory audit, they will have an audit evaluation. Such an assessment helps them in determining cost controls or processes which need modification and making recommendations for improvements to boost the efficiency and the productivity of the audit process. In some occasions, it helps in establishing a case for capital expenditure (Also see What is Capital Budgeting?) in the warehouse too. Furthermore, auditors can identify the suitable ways that the warehouse may implement to increase its productivity, such as adding another shift, extending the warehouse hours, increasing the use of technology, improving processes to save time and combining processes to reduce needless repetition.