The chief objective of audit in any department of the company is to get a clear picture of all available assets. It is significantly helpful in managing the resources for effective decision making in the business sector. However, the audit of inventory requires more vigilance and a proactive approach. The reason is that it is usually performed on different production levels to ensure a comprehensive estimation of stock. In this way, companies use several inventory audit procedures in business to keep track of their stocks with accuracy.
There is no denying that the management of stock is an essential activity performed by almost every business company. It is considered the most critical assets mentioned in the financial statements. Owing to this, most of the businesses in the UAE and other parts of the world are paying greater attention to optimize inventory management with the help of standardized audit measures, including perpetual and periodic analysis.
Are you new to this concept but want to ensure stock analysis? Consider reading the article until the end to get a detailed overview of the controls and procedures required to accomplish audits.
Inventory Audit Procedures Necessary for Every Business
In the inventory analysis process, auditors used various analytical tools and techniques to verify the facts provided in the bookkeeping journals and the actually presented stock. Given the huge size of records, businesses get assistance from the top audit firms in Dubai for the valuation of assets and preparation of reports. The following steps are used to perform the essential process of audit:
Cutoff Analysis
It is referred to as the examination of processes that are deferred or halted. For example, not all shipping products are received in time during the year. So, the physical count should also handle such shipments. It is a necessary measure to ensure that everything is counted to the inventory.
Observation of Physical Count
It is referred to as the process of counting the available assets in the inventory. However, the auditors determine all-required procedures to make the counting process accurate through in-depth observation. Test counts are used to recording the items for verifying assets comprehensively.
Inventory Count Reconciliation
The audits are significantly helpful in determining the reasons for inventory reconciliation. It is because; the procedures used by the professional help in tracing out the error-prone bookkeeping methods and replace them with standardized accounting journals.
High-value stuff testing
A categorization of inventory items into high-value and casual stuff is essential to ensure the accuracy of audit reports. Therefore, the experts help the businesses to comply with inventory procedures in the best way to count the halted, physical, and high-value items for the purpose of testing. It helps the companies in getting an accurate valuation of the inventory stuff.
Error-prone stuff testing
There is no denying that businesses have to deal with several items that are prone to frequent errors and mismanagement. For this purpose, companies spend most of their time during the audits to test the error-prone items. The companies have to deal with the accounting cycle precisely to avoid errors in financial statements.
Inventory in transit testing
It is important to count the inventory that is in the transit from the one physical storage to the other. The audit tests can run collectively to count all the items after a review of the business transfer documents.
Item costs testing
The auditors usually track the accounting records of the inventory based on cost classification to note down in the records. In this process, the costs are compared to the invoice of suppliers for determining accuracy.
Freight costs review
The freight charges for the movement of items, including the shipments and inventory replacements, are also counted in the total expenses of inventory. So, the auditors have to take care of all expense detail using the inventory audit procedures.
Price inflation vs. cost testing
The auditors are responsible for testing the lowers cost that is also known as a market rule with price inflation. This helps businesses to analyze record costs from the perspective of market prices.
Cost analysis of finished goods
The companies have to deal with raw material inventories for production purposes. So, it is not only related to the audit of raw goods, but the finished items are also audited to ensure transparency of records. The procedure for inventory audit is followed as finished goods are recorded within a specified accounting period.
Analysis of overhead cost
Overhead cost is one of the important accounting numbers for business companies. Therefore, they hire experienced audit agents to perform an analysis of overhead valuation. The costs are analyzed using general ledger accounts, as mentioned in the inventory for costs. It is done to identify the abnormal costs to validate the consistency.
Observation of inventory allowances
It is imperative for companies to mention inventory allowances while recording costs. It actually helps determine obsolete or scrap inventory precisely. In a case that allowances are not created, the auditors have to do it on behalf of the companies to comply with inventory procedures for inventory.
Inventory ownership
The procedure helps in reviewing the accounting record to determine the ownership of warehouses used by the companies. The process comes under the heading of authentication testing to stay at a bay from penalties at the time of external audits by the state.
Inventory Layers
In a case that companies are using a valuation system for maintaining their inventory, they need to ensure audits for system layers. It is significantly helpful in verifying the validity and transparency of the financial records.
Feel overwhelmed? Hire Audit Services!
Hopefully, you have got a fair idea of how to audit procedures work for inventory to ensure the highest accuracy in the records. Essentially, it would be very difficult for the companies to picture their financial assets without accomplishing the analysis task of the inventory. It is crucial for the companies operating in the Middle East and Gulf states, in particular, to comply with the requirements of VAT compliance.
However, the audit process gets more complicated when it comes to performing the mentioned procedures to the inventory. Do you feel concern for lack of proper knowledge to accomplished the analysis and testing of your company’s inventory assets for comprehensive review? You can deal with the complexities and overwhelming situations with the help of top audit firms in Dubai for getting an exact image of financial assets.
Remember! Keeping an eye on your assets helps in business decision making – so, conduct a regular audit to stay transparent in determining business position within the market for effective decision making.
