Audit Warehouse Inventory

Auditing Warehouse Inventory

What is Auditing Warehouse Inventory

Maintaining an optimal level of inventory is always a challenge for warehouse managers. Both high and low level of inventory is risky for organizations. A high level of inventory is associated with high holding, hidden, and opportunity costs while a low level of inventory may cause business loss. So, an optimal level of inventory is required to be maintained to be cost-effective and satisfactory service level.

Inventory auditing is an effort of the warehouse management team to evaluate the inventory policies and their implementation, inventory level, inventory accuracy, and matching of the document with the actual level of the inventory. The audit may be performed either with internal staff or 3rd party organization. Internal auditing takes less cost while external auditing ensures more accuracy.


The objectives of the inventory auditing are as follows.

  1. Match physical inventory count with financial, documented, or system inventory
  2. Maintain optimal level of inventory.
  3. Develop forecasting for next quarter/year

Inventory Auditing Tasks

1. ABC analysis

This method is used based on annual dollar volume. The items are categorized into three categories of A, B, and C. Category A includes all items whose annual volume is up to 70 to 80 percent. B category ranges between 80 to 95 while C category items range from 95 to 100. category A items are highly cost items and they are paid more attention.

2. Cut off analysis

All the operation in the warehouse is stopped and physical counting is performed to know the actual level of inventory. All incoming and outgoing shipments are suspended for inventory auditing purposes.

3. Overhead analysis

Inventory and warehouse also carry overheads such as rent, utility, insurance, etc. The audit is also performed to know the overhead expense of inventory.

4. Freight cost analysis

The transportation and shipping costs from one warehouse to another warehouse are found for cost optimization. The cost may also be audited between the manufacturing facility and warehouse or any facility concerning warehouse location.

5. Physical counting

Goods or items in the warehouse are physically counted for physical verification of the inventory. This is done either based on a perpetual or periodic system. Under the perpetual system, the inventory is counted after each unit enter or leaves the stores while under the periodic system the inventory is counted after a specific time interval.

Importance of Inventory Auditing

Inventory audit is important as this helps:

  1. To know the difference between actual and documented inventory. This helps to maintain the accurate level of inventory which helps in effective inventory management.
  2. Inventory auditing helps find the cost so that cost reduction techniques may be applied to reduce the high cost
  3. Inventory auditing also helps organizations in budgeting. High or low-level inventory orders because of inaccuracy in inventory may cause over budgeting or under budgeting.

Auditing Process

Following steps need to be followed for inventory auditing

  1. Schedule the inventory auditing activity with prior notifications to all the stakeholders. (in some cases, unannounced auditing of inventory may also be carried out to catch any fraud, corruption, or intentional manipulation).
  2. Perform the audit and physically check the inventory and inventory procedures.
  3. Write down the deficiencies and improvement points.
  4. Communicate the findings to the organization for improvement purpose

Challenges in Inventory Auditing

Following are some of the key challenges in inventory auditing.

  1. Time-consuming task as this involves thorough investigation and physical count of inventory
  2. Inventory auditing also represent cost as regular operation of the company is halted and employees are used for inventory auditing. In the case of 3rd party auditing, the cost is relatively higher.
  3. Production and efficiency loss also occur as in many cases the warehouse operation is halted during inventory auditing. This is also representing overhead expenses and capacity underutilization.

Modern Technologies in Inventory Auditing

Modern technologies such as RFID and GPS are used for inventory auditing. QR code is used in these technologies which contain all the information such as batch number, date of receiving, supplier name, manufacturing, expiry date, etc. The technologies are also helping the locating of inventory and hence traceability becomes easier. Technology introduction has reduced the challenges to inventory auditing and hence make the process easier, simple, and less time taking. Modern technologies and software are also helping the companies in effective and efficient layout and product placement in the warehouse.


Inventory auditing is a systematic approach to monitor and verify the actual inventory at the warehouse concerning documented accounting system. There are different methods for conducting inventory audit and each method has pros and cons. The method chosen depends on organization requirements and system requirements. Inventory auditing is time consuming and costly approach that may also affect production and operation efficiency. The benefits of inventory auditing include updating the actual level of inventory, maintaining accuracy, evaluating costs, and preparing future budgets. Modern technologies have facilitated inventory auditing methods.

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