Inventory self-auditing refers to a process where a business periodically checks its own inventory to verify that the quantities and values recorded in its accounting system match the actual physical quantities and conditions of the items in its inventory. The goal of an inventory self-audit is to identify and correct discrepancies, such as overages, shortages, or damage, as well as to prevent theft, obsolescence, and mismanagement.
A comprehensive inventory self-audit typically includes the following steps:
- physical count: The actual physical count of inventory is conducted and recorded. This could involve counting all items (known as a wall-to-wall count) or counting a subset of items on a rotating schedule (known as cycle counting).
- Reconciliation: The results of the physical count are compared to the inventory records in the company’s accounting or inventory management system. Discrepancies between the physical count and the recorded quantities are identified.
- Investigation: Discrepancies are investigated to determine their causes. This might involve reviewing purchase and sales records, checking for data entry errors, or looking for signs of theft or damage.
- Adjustments: Necessary adjustments are made to the inventory records to reflect the actual physical quantities. Any significant discrepancies should be reported to management and might also require adjusting the company’s financial statements.
- Improvement: The company identifies ways to improve its inventory management based on the findings of the self-audit. This might involve implementing better security measures, improving data entry procedures, or updating the methods used to estimate inventory obsolescence.
Inventory self-auditing is a crucial component of effective inventory management. By regularly conducting self-audits, a company can ensure that its inventory records are accurate, which is important for making informed decisions about purchasing, sales, and production. It also helps the company to detect and prevent issues such as theft, loss, and waste.
Example of Inventory Self-Auditing
Let’s say you manage a bookstore, and you decide to perform an inventory self-audit.
Here are the steps you might take:
1. Physical Count: You and your team count every book in the store over the weekend. You categorize and record them according to title, author, and ISBN.
2. Reconciliation: You compare the numbers from your physical count to the inventory records in your bookstore’s management software. You notice that there are discrepancies for certain titles. For example, your physical count indicates that there are 15 copies of a particular novel, but your system indicates that there should be 20 copies.
3. Investigation: You examine the sales records and find that only 5 copies of the novel have been sold, so there is a discrepancy of 5 books that is unaccounted for. You check the receiving records to ensure that you did initially receive 20 copies from the supplier, which is confirmed.
4. Adjustments: After failing to locate the missing books and ensuring that they were not misplaced or categorized incorrectly, you adjust your inventory records in the system from 20 to 15 for that particular novel. This means you have to also adjust your financial statements to write off the cost of the 5 missing books.
5. Improvement: To prevent such discrepancies in the future, you decide to enhance security measures and train your staff on the importance of properly recording sales and inventory movements. You also decide to conduct inventory self-audits more frequently to catch discrepancies earlier.
By performing this inventory self-audit, you’ve been able to correct your inventory records, adjust your financial statements, identify potential issues with theft or mismanagement, and take steps to improve your bookstore’s operations.