Inventory audit

An inventory audit is a thorough assessment of your inventory position, aimed at determining whether the inventory recorded in the accounts exists, has been accurately recorded, has been correctly valued and has been fully included in the books. Because inventory often forms an important part of the balance sheet and is subject to risks such as obsolescence or impairment, auditors carry out this investigation in accordance with accepted auditing standards.

The basis of an inventory audit is the physical inspection of goods: the auditor compares the inventory as it physically exists with what is recorded in the accounts, for example by attending a count, carrying out random checks and reconciling the results with the book values.

In addition, the auditor looks at the valuation of the inventory. This means checking whether the valuation method used (e.g. FIFO or cost price calculation) has been applied correctly and whether the inventory has been overstated, for example because goods are damaged, obsolete or difficult to sell.

It is also important to assess the underlying processes and internal controls relating to inventory management — how are the receipt, storage, movement and issue of inventory recorded and checked? A well-designed internal control system reduces the risk of errors and incorrect inventory values.

Finally, the auditor examines whether there are any rights and obligations that affect the inventory, such as whether the company actually owns the goods and whether any obligations or consignment goods have been correctly processed.

The result of an inventory audit is an objective picture of the inventory position, with insight into any differences between physical inventory and administration, the correct valuation of the inventory, the quality of inventory management and the underlying risks. This helps to substantiate financial decisions, such as financing applications, valuations for acquisitions or restructurings.