Inventory audit

How and what to check in quantitative inventories?

Companies often audit their processes, and inventory is no exception: in fact, in certain cases it is required by law. Inventory processes can be audited by a number of different types of organisations (a body specified by the company’s financial investor, auditor, labour inspector, fire safety inspector, etc.), though the fundamental goal is the same: to provide an exact count of the stocks/fixed assets being inventoried. What’s more, the quantitative inventory may itself be the subject of an inventory audit to check whether it is being conducted in accordance with the method agreed on beforehand.

• What should you devote special attention to in an inventory?
• What should an auditor check, and when?

Based on applicable requirements and our experiences, we gathered the answers to these questions and the most critical points where mistakes can be made.

The topic should be approached from two different angles:

• audits pertaining to the inventory’s compliance with the process steps specified in the schedule, and
• according to the possibilities for review and control aiming to prevent errors and superficial work, and to ensure the veracity of counting.

The main auditing points of inventory:

• inventory is one of the neuralgic points of quantitative stocktaking; what accompanies the entire process is the checking of the correct specification of storage locations: comprehensiveness and clarity.
• examining the deviations between the inventory rules and the practice of quantitative stocktaking. For example, the tools (post-its, standard counting slips, paper slips, pens/markers of different colours, etc.) and methods (packaging in groups of 5, bagging, etc.) used for pre-counting and their standard application, or even recording (bar code scanning or entering quantities), where the products, storage locations, etc. have to be indicated.
• the audit also extends to the systemised management and retrievability of the (usually loads of) documents generated in the course of the audit (inventory sheet, attendance sheet, working time and rest period records, etc.)

The adage “First time right” made popular by quality management is especially true for quantitative stocktaking, as experience shows that the identification and correction of an error takes about 3-4 times as much time as performing the task correctly the first time around, which is why standards and the consistent application of the markings specified in the inventory rules are so important. Auditing the quantitative stocktaking confirms the sustainability of these rules.

Auditing the correctness of counting:

• every auditor first checks the quantity of products with high unit prices, which is the correct way to proceed because even a single product may have a significant impact on finances. We too recommend always subjecting high unit price products to the audit.
• taking stock of smaller value products with the same importance: it is important to check (by sampling) whether leaders or auditors correctly recorded the amounts of products of smaller value, as it is not only the incorrect counting of products with high values that may result in negative effects for the business process.

Why are low-value goods important? The reason should be approached from the angle of customer experience: purchasing an expensive perfume in a drugstore is just as important for the customer as purchasing tissues. If the customer is unable to buy tissues, he will leave the store and the more expensive item…

• it is also worth checking the storage locations affected by the threat of superficial counting (tight spaces, many small items): in situs like these, it is worth making preparations, such as pre-batching and bagging.
• when entering something into the inventory, don’t just record whether a certain product is available, but also the person doing the stocktaking (it is best to use a code assigned to the individual beforehand, which avoids complications with different methods of recording or illegible handwriting)

It is worth taking all of the above steps when performing an audit, and of course during every inventory, not to mention collecting the critical points pertaining to it. Determining these may pose difficulties for the persons participating in the company’s everyday activities, which is why we recommend contracting an external expert who, in addition to providing the necessary expertise, also fills the position of being an “objective onlooker” for the inspection.

By: Eszter Puskás & András Takács