{"id":667,"date":"2023-11-06T18:48:19","date_gmt":"2023-11-06T18:48:19","guid":{"rendered":"https:\/\/www.shipbob.com\/uk\/blog\/inventory-audit\/"},"modified":"2025-10-08T20:58:32","modified_gmt":"2025-10-08T20:58:32","slug":"inventory-audit","status":"publish","type":"blog","link":"https:\/\/www.shipbob.com\/uk\/blog\/inventory-audit\/","title":{"rendered":"Your Expert Guide to Inventory Audits: Best Practices & Time-Saving Tips\u00a0"},"content":{"rendered":"\n

Table of Contents<\/p>

** Minutes<\/p><\/div><\/div>\n

What is an inventory audit?<\/a><\/p>\n\n\n\n

9 common inventory audit procedures<\/a><\/p>\n\n\n\n

Why inventory auditing is important for ecommerce businesses<\/a><\/p>\n\n\n\n

3 challenges of performing an inventory audit<\/a><\/p>\n\n\n\n

Easily improve audit efficiency with ShipBob\u2019s inventory management software<\/a><\/p>\n\n\n\n

Inventory audit FAQs<\/a><\/p>\n<\/div>\n\n\n\n

Audits of any kind are time-consuming and require manual work, but they provide an insightful deep dive into a business\u2019s different accounts and\/or financial situation.<\/p>\n\n\n\n

When it comes to selling goods, ecommerce businesses may audit their inventory \u2014 whether it\u2019s for tax purposes annually or to simply verify units on hand.<\/p>\n\n\n\n

Inventory audits can be done in-house or by a third party and represent one point in time. Let\u2019s dive into auditing one of your most valuable assets \u2014 your inventory!<\/p>\n\n\n\n

What is an inventory audit?<\/h2>\n\n\n\n

An inventory audit is defined as the process of checking a company\u2019s actual inventory levels against their financial records to ensure accurate inventory accounting. Inventory audits can be performed by the <\/span>company<\/span> or an outside auditor to identify any problems with the inventory storage and accounting methods a company is using. <\/span><\/p>\n\n\n\n

They can be as simple as counting physical stock levels and cross checking against records, or as involved as hiring a third party auditor to assess all of your inventory procedures. <\/span><\/p>\n\n\n\n

9 common inventory audit procedures<\/h2>\n\n\n\n

To audit your inventory, you\u2019ll need to choose the method that makes the most sense for the purpose it serves and who is performing the audit. Here are a few of the most common inventory audit analyses and procedures used.<\/p>\n\n\n\n

1. Cutoff analysis<\/h3>\n\n\n\n

Cutoff analysis is when you pause operations such as receiving and shipping at the time of the physical count to ensure nothing is being handled and goes unaccounted for. <\/p>\n\n\n\n

You should communicate when you\u2019re doing cutoff analysis with stakeholders and customers ahead of time so if delays occur as a result of the audit, they know why.  <\/p>\n\n\n\n

2. Physical inventory count<\/h3>\n\n\n\n

Physical inventory counts are done to make sure that your system\u2019s numbers match up with your physical stock. This is done by counting each unit. Traditionally this was done manually, but the use of product barcodes<\/a> and devices like inventory barcode scanners<\/a> can streamline the process. Using an inventory management software can help you keep track of inventory during physical inventory counts.  <\/p>\n\n\n\n

By doing physical inventory counts you can improve demand forecasting, minimise stockouts, maintain inventory shrinkage, and more.  <\/p>\n\n\n\n

3. Analytical procedures<\/h3>\n\n\n\n

Doing analytical procedures during inventory audits involves comparing gross margins, inventory turnover ratio<\/a>, and\/or unit costs of inventory with previous years. <\/p>\n\n\n\n

This helps you understand trends so you can be better informed during inventory procurement and when you\u2019re forecasting demand.  <\/p>\n\n\n\n

4. ABC analysis<\/h3>\n\n\n\n

ABC analysis is when you group items of different value and volume together by high-value items (\u201cA\u201d products), medium value items (\u201cB\u201d products), and low-value items (\u201cC\u201d products).  <\/p>\n\n\n\n

You may even choose to store these items accordingly, so an auditor can pay closer attention to mainly the high-value inventory items. <\/p>\n\n\n\n

ABC analysis helps you understand how to manage inventory and make informed decisions about what items to restock. <\/p>\n\n\n\n

5. Freight cost analysis<\/h3>\n\n\n\n

Freight cost analysis determines the cost of getting inventory from one place to another, such as freight shipping<\/a> costs and tracking the time between the date of shipment and the date of receipt.  <\/p>\n\n\n\n

This documentation accounts for any units that are in transit and also in case anything is lost or damaged in transit. Doing this analysis helps you make informed decisions about freight shipments, find out if you\u2019re overspending, and gain greater visibility into freight shipments.  <\/p>\n\n\n\n

6. Finished goods cost analysis<\/h3>\n\n\n\n

A finished goods cost analysis is ideal if you create your own products. This type of analysis demonstrates when a product is ready to be sold so an auditor can immediately value the inventory for the current accounting period. Auditors may test this inventory to ensure financial statements are accurate. Learn more about finished goods inventory<\/a> here. <\/p>\n\n\n\n

By regularly completing finished good cost analyses, you are better informed when it comes to setting product pricing, placing orders for raw materials, and reduce inventory storage costs.  <\/p>\n\n\n\n

7. Overhead analysis<\/h3>\n\n\n\n

Overhead analysis helps you understand your business\u2019s ongoing expenses. Knowing how much you\u2019re spending on these indirect costs aids in budgeting. Outside of direct materials and labour, this analysis looks at \u201chidden\u201d expenses such as rent, utilities, insurance, administrative costs, and other costs of doing business \u2014 if you record overhead as part of your inventory costs. <\/p>\n\n\n\n

Keeping track of overhead costs shows what expenses are cutting into your margins and helps you achieve profitability.<\/p>\n\n\n\n

8. Reconciling items<\/h3>\n\n\n\n

If there are discrepancies found in your inventory audit, you may wish to do a reconciling items investigation to determine the root cause.  <\/p>\n\n\n\n

In order to reconcile your inventory, you\u2019ll want to follow these steps:  <\/p>\n\n\n\n

    \n
  1. Check your physical inventory counts to make sure you\u2019re starting with an accurate count. <\/li>\n<\/ol>\n\n\n\n
      \n
    1.  Compare your physical count with your inventory records. This is where you\u2019ll find any discrepancies.  <\/li>\n<\/ol>\n\n\n\n
        \n
      1. Look over shipment details, delivery info, and sales records to see where discrepancies took place.  <\/li>\n<\/ol>\n\n\n\n
          \n
        1. When you discover the cause of the discrepancy, create a \u201cstock reconciliation statement\u201d that overrides previous inventory records.  <\/li>\n<\/ol>\n\n\n\n

          Learn more about inventory reconciliation<\/a> here.  <\/p>\n\n\n\n

          9. Match invoices to shipping log<\/h3>\n\n\n\n

          You\u2019ll want to double check your purchase orders or invoices against your shipping log to make sure there aren\u2019t any discrepancies. Verify that invoices match the amount of items and cost of inventory shipped from your ecommerce warehouse<\/a>. This may be done at random by an auditor to verify that the right amount was charged to the right customer at the right time. <\/p>\n\n\n\n

          By doing this two-way matching, you avoid shipping mistakes and duplicate charges, improve order accuracy, and ensure your customers are getting what they ordered. <\/p>\n\n\n\n

          Why inventory auditing is important for ecommerce businesses<\/h2>\n\n\n\n

          An efficient inventory management<\/a> process can reduce the frequency, length, and complexity of audits. Ecommerce inventory<\/a> is different from physical retail stores, as sales can take place anywhere across the globe and are thus more unpredictable.<\/p>\n\n\n\n

          In a digital world, your inventory audit methods must match. Using technology that keeps inventory counts synced in real-time rather than using something static like Excel helps with the following.<\/p>\n\n\n\n

          1. Calculate profit<\/h3>\n\n\n\n

          Inventory audits can help you calculate accurate profits, as the accuracy of your inventory accounting<\/a> informs your bottom line. Tracking and accounting for changes in the value of inventory over time as it relates to manufacturing and costs of goods sold can drastically impact your accounting records. Inventory audits can prevent inventory shrinkage<\/a> (or when the actual inventory levels are less than accounting has them recorded as) and identify costly slow-moving products.<\/p>\n\n\n\n

          2. Budget with accuracy<\/h3>\n\n\n\n

          If you don\u2019t have an accurate method for keeping track of your inventory\u2019s value, you can\u2019t budget for the next batch of inventory you need to purchase. Inventory audits can help you budget better and more accurately when you know the exact inventory count you\u2019re running through, and how much safety stock<\/a> you should keep.<\/p>\n\n\n\n

          3. Find inefficiencies<\/h3>\n\n\n\n

          Audits can help you find inefficiencies, including inventory that\u2019s not selling quickly (or much at all), SKUs<\/a> that are selling out quickly and causing frequent stockouts, inaccuracies with storage or inventory tracking<\/a> techniques, and other operational errors.<\/p>\n\n\n\n

          You can use this information to improve the financial health of your business by discontinuing unsuccessful products, doubling down on what\u2019s working, and optimising other areas of your supply chain<\/a> \u2014 from manufacturers to warehouse locations.<\/p>\n\n\n\n

          4. Optimise your inventory holding<\/h3>\n\n\n\n

          Holding costs<\/a> are the sum of all costs related to carrying inventory including warehousing, labour, insurance, and rent, combined with the value of damaged, expired, and out-of-date products. The longer you hold inventory and the more unusable inventory you have, the more money you pay. Inventory audits can help you limit these factors.<\/p>\n\n\n\n

          Best practices for smoother inventory auditing<\/h2>\n\n\n\n

          Inventory audits can be challenging \u2013 there are many moving parts and factors to consider. Here are some general inventory management tips to make the process go more smoothly.  <\/p>\n\n\n\n

          Identify & prioritize inventory items <\/h3>\n\n\n\n

          First you\u2019ll want to select what inventory you want to include in the audit process and prioritize that inventory from most important to less important. If you haven\u2019t completed an audit in a while (or ever before), you\u2019d want to run and audit your entire product catalogue <\/a>. During more regular inventory audits, you may choose to only prioritize high-value items.  <\/p>\n\n\n\n

          Gather important documentation <\/h3>\n\n\n\n

          Auditors will require various documentation to complete your audit. Having that information at the ready will make the process much easier and more efficient. You should have inventory records, invoices, shipping and receiving reports, and proof of inventory ownership like a bill of sale. You can also provide an auditor with a manual of your inventory protocols so they can better understand how you manage inventory.  <\/p>\n\n\n\n

          Schedule recurring audits <\/h3>\n\n\n\n

          When you haven\u2019t completed an inventory audit in a while, they can be complicated and you can unearth more discrepancies than you expected. By doing regular audits you\u2019re able to catch minor issues before they become major problems and ensure inventory is at the right level.  <\/p>\n\n\n\n

          You should be running inventory audits at least once or twice per year. Performing audits quarterly is a better timeframe to catch discrepancies and issues.  <\/p>\n\n\n\n

          Run the audit without bias <\/h3>\n\n\n\n

          Running an audit can be rife with bias for internal stakeholders. For example, if the person completing the audit is the same person who was instrumental in creating processes, they might not be able to see when inefficiencies are holding the business back. Sometimes, an external auditor can provide a more impartial view of where you stand. They ask the tough questions that can be overlooked when an internal auditor completes a report.  <\/p>\n\n\n\n

          Regardless if an internal or external auditor is completing the reporting, they should be able to impartially consider theft, mismanagement, inefficiencies, damage and inventory obsolescence. <\/p>\n\n\n\n

          Record and share results <\/h3>\n\n\n\n

          Once you\u2019ve completed your audit, it\u2019s important to share your findings with stakeholders and staff. This way you can share where you found discrepancies and change processes if necessary to ensure those types of issues arise in the future. Making a record of these discrepancies and share them with the team so they can refer back to it to resolve issues, if needed.  <\/p>\n\n\n\n

          3 challenges when performing an inventory audit<\/h2>\n\n\n\n

          Inventory audits can be an incredibly challenging task to perform. And the bigger the business, the more complex it becomes. Here\u2019s what you may encounter.<\/p>\n\n\n\n

          1. It\u2019s time-consuming<\/h3>\n\n\n\n

          Auditing physical inventory<\/a> is very tedious. Think about it: If you sell 500 SKUs and you check actual inventory levels<\/a> against the amount of inventory you have listed on hand electronically or in an inventory sheet<\/a>, that can take you days, if not weeks, to complete.<\/p>\n\n\n\n

          Even if you have one SKU and 3,000 units, you\u2019re going to spend a while on a manual task. Going electronic with inventory reports<\/a> is key to saving time, with access to the most up-to-date information across locations. 3PLs like ShipBob help with this.<\/p>\n\n\n\n

          2. It\u2019s difficult to scale<\/h3>\n\n\n\n

          The bigger you get, the more strategic you\u2019ll need to be with inventory solutions<\/a>. Spot checking can be a more manageable way to keep inventory audits under control in between full physical inventory audits. This means choosing a specific product, counting the number of units on hand, and comparing it to the number of units listed in the system.<\/p>\n\n\n\n

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          \u201cI felt like I couldn\u2019t grow until I moved to ShipBob. Our old 3PL was slowing us down. Now I am encouraged to sell more with them. My CPA even said to me, \u2018thank god you switched to ShipBob. ShipBob provides me clarity and insight to help me make business decisions when I need it, along with responsive customer support.\u201d <\/p>\nCourtney Lee, founder of Prymal<\/a><\/cite><\/blockquote>\n\n\n\n

          Inventory management technology can help simplify inventory methods by prompting a spot check when the system marks the product stock as zero to confirm there are no more units on hand.<\/p>\n\n\n\n

          3. It can halt operations<\/h3>\n\n\n\n

          If you pause everything to conduct an inventory audit, you halt operations, which includes order fulfilment<\/a> and getting items shipped to customers. In the age of Amazon, meeting customer expectations around timely delivery can influence their experience and impression of your product and brand.<\/p>\n\n\n\n

          Easily improve audit efficiency with ShipBob\u2019s inventory management software <\/h2>\n\n\n\n

          Stock control<\/a> is difficult, but the use of tools can help streamline it. Ecommerce businesses can outsource fulfilment<\/a> to ShipBob to receive the fulfilment services, warehouses, and technology needed to compete today.  <\/p>\n\n\n\n

          But if outsourced fulfilment isn\u2019t for you, ShipBob also has a warehouse management system (WMS) that brands can leverage to manage and track their inventory.  <\/p>\n\n\n\n

          Learn more about how ShipBob\u2019s proprietary system can help your brand with inventory audits and management.  <\/p>\n\n\n\n

          1. Forecast demand<\/h3>\n\n\n\n

          Auditing inventory helps you understand current counts, but it\u2019s another thing entirely to use data to make future business decisions. Demand forecasting<\/a> is predicting future orders by using historical data. This enables a business to make better decisions around inventory planning, product storage, and marketing promotions while meeting customer expectations.<\/p>\n\n\n\n

          ShipBob\u2019s analytics provides the following distribution metrics<\/a> and data visually:<\/p>\n\n\n\n