Let’s be honest—inventory audits aren’t optional if your business deals with physical goods. Audits can be tedious and time-consuming, but they offer valuable insights into a business’s financial health and operations. For eCommerce businesses, inventory audits are crucial for maintaining accurate records—whether for tax purposes or to verify stock levels. These audits can be conducted internally or by a third party, providing a snapshot of your inventory at a given moment. Let’s examine how inventory audits work and why they are critical for your business!
What Is an Inventory Audit?
An inventory audit verifies that your recorded stock matches what’s on hand. It helps uncover discrepancies, improve accuracy, and keep your inventory well-organized. Businesses can conduct audits internally or hire an external auditor to review how inventory is tracked and managed.
Audits can be as simple as a physical count or as thorough as a third-party assessment of the entire inventory process. Regardless of the method, the goal remains to ensure accurate records and smooth operations.
9 Common Inventory Audit Procedures
Choosing the right inventory audit method depends on your business needs and who’s performing the audit. Below are some of the most widely used inventory audit procedures and how they help maintain accuracy.
- Review Cutoff Transactions: During a cutoff analysis, operations such as receiving and shipping are temporarily paused during a physical inventory count to prevent unaccounted stock movement. It’s crucial to notify stakeholders in advance to avoid unexpected delays.
- Conduct a Physical Inventory Count: This is the classic method—manually counting inventory and comparing it to recorded stock levels. While this was a tedious manual process, barcode scanners and inventory management software now make it much easier and more accurate.
- Perform Analytical Procedures: This method compares key inventory metrics—such as gross margins, inventory turnover, and unit costs—against historical data. Identifying trends helps with demand forecasting and smarter procurement decisions.
- Utilize ABC Analysis: ABC analysis categorizes inventory into three groups based on value and volume:
- A-items: High-value, low-volume stock requiring the most oversight
- B-items: Moderate-value, moderate-volume stock
- C-items: Low-value, high-volume stock that requires less scrutiny
This method helps businesses prioritize inventory management efforts where they matter most.
- Evaluate Freight Costs: Tracking freight costs ensures that shipping expenses are optimized, prevents overspending, and provides visibility into transit times, lost items, and potential damages.
- Analyze Finished Goods Costs: This method ensures that finished goods are correctly valued in financial statements for businesses that manufacture products. Regular analysis helps with pricing decisions, raw material purchases, and inventory storage optimization.
- Examine Overhead Allocation: Understanding indirect costs—such as rent, utilities, and administrative expenses—helps businesses track hidden costs and improve profitability.
- Reconcile Discrepancies: A reconciliation process helps identify and correct discrepancies if inventory counts don’t match records. This involves reviewing physical counts, purchase orders, sales records, and shipping details to determine the root cause of errors.
- Match Invoices with Shipping Logs: Cross-checking invoices against shipping logs ensures that the right quantities were correctly shipped, received, and billed. Random audits of these records help catch potential errors and prevent financial inconsistencies.
The Importance of Inventory Auditing for eCommerce Businesses
Inventory audits are critical for keeping your eCommerce business running smoothly. Here’s why they matter:
- Ensure Profitability: Audits help track profits by maintaining accurate inventory records. They prevent shrinkage, which occurs when actual stock is less than what is recorded, and they highlight slow-moving products that could negatively impact your bottom line.
- Improve Budgeting: Without a clear view of your inventory’s value, budgeting for new stock becomes challenging. Audits provide precise data, allowing you to manage purchases effectively and avoid overstocking.
- Spot Inefficiencies: Audits help identify issues such as slow-selling products, frequent stockouts, or tracking errors. Addressing these problems improves efficiency and increases profitability.
- Optimize Inventory Management: Carrying excess inventory leads to higher costs. Audits help reduce holding costs by ensuring you are not stuck with unsellable or outdated stock.
Since inventory systems are constantly evolving, tools that sync inventory in real-time can make audits more manageable and accurate. This saves time and minimizes hassle in the long run.
Best Practices for Efficient and Accurate Inventory Auditing
Inventory audits can feel overwhelming with all the moving parts, but breaking the process down can help make it more manageable. Here are some practical tips for making your inventory audits go more smoothly:
Identify & Prioritize Inventory Items
Start by deciding which inventory items should be included in the audit and rank them based on importance. If you haven’t done an audit in a while (or ever), it’s a good idea to audit your entire product catalog. For more frequent audits, focus on high-value items that impact your business most.
Gather Important Documentation
Auditors will need several documents to carry out the audit, so having everything ready will save time and make the process more efficient. This includes inventory records, invoices, shipping/receiving reports, and proof of inventory ownership, like a bill of sale. It’s also helpful to provide a manual outlining your inventory management processes so the auditor understands how you track your stock.
Schedule Recurring Audits
The longer you wait between audits, the more complicated things can become—and the more discrepancies you may find. Regular audits help catch small issues before they turn into bigger problems. Aim to audit your inventory at least once or twice a year, but conducting them quarterly can help identify discrepancies early and keep everything on track.
Run the Audit Without Bias
It’s easy for internal stakeholders to have biases when running audits, especially if they were involved in creating the inventory processes. External auditors often provide a fresh, impartial perspective. They will ask difficult questions and spot inefficiencies or problems that might be missed by someone too close to the process. Regardless of who’s auditing, it’s crucial to look at things without bias and consider all factors—like theft, mismanagement, and damage.
Record & Share Results
Once the audit is complete, share the findings with key stakeholders and staff. This helps everyone understand where discrepancies were found and ensures that processes are adjusted to prevent similar issues in the future. Document any issues and share them with your team so they have a reference for resolving problems in the future.
Top 3 Challenges in Conducting an Inventory Audit
Inventory audits can be tough, and the larger your business, the more complex they become. Here are the three biggest challenges you might face:
Time-Consuming Process
Manually checking inventory levels against records can drag on for days—or even weeks—especially if you have hundreds or thousands of SKUs. Even a single SKU with thousands of units can be a time-consuming task. The good news? Inventory management software and electronic reports can speed things up, giving you real-time data across multiple locations and saving you much time.
Scaling Challenges
The bigger your business, the trickier it is to keep up with audits. Instead of counting everything all at once, spot-checking specific products between full audits can make things more manageable. With the right technology, you can even automate this process—flagging items for review when inventory counts hit zero—so you stay in control without the extra hassle.
Potential Disruptions to Operations
Stopping everything for an inventory audit can slow down order fulfillment and delay shipments, which isn’t great—especially when customers expect fast delivery. The key is finding a way to audit your inventory without throwing a wrench into daily operations. A well-planned process helps you stay on top of inventory without compromising customer satisfaction.
With the right tools and approach, you can make inventory audits smoother, faster, and less stressful.
Achieve Real-Time Inventory Control with Lowry Solutions
Inventory management shouldn’t be a hassle. With Lowry Solutions, you get an intelligent, automated tracking system that keeps your stock accurate, your operations efficient, and your business moving forward. Our Sonaria software delivers real-time inventory insights, helping you reduce costs, eliminate stock discrepancies, and stay compliant—all without the manual effort.
With over 40 years of expertise and partnerships with leading technology providers, we design RFID solutions that fit your unique needs. From seamless implementation to ongoing support, we ensure your inventory tracking is not just reliable—but a competitive advantage.
Stop chasing inventory. Start controlling it. Let’s build a smarter tracking solution together.
Frequently Asked Questions
Businesses can minimize disruptions by scheduling audits during off-peak hours or slower seasons to avoid interfering with daily operations. Cycle counting—where small inventory sections are checked regularly instead of auditing everything at once—helps maintain accuracy without slowing workflow. RFID technology and automation can also speed up the process, reducing manual effort and ensuring real-time inventory updates with minimal downtime.
AI transforms inventory audits by identifying real-time discrepancies, predicting demand, and automating reconciliation. Machine learning algorithms analyze inventory patterns, flag anomalies, and provide data-driven insights, allowing businesses to address issues before they become costly problems. This shift makes audits faster, more accurate, and proactive rather than reactive.
Inventory audits play a crucial role in financial accuracy and compliance. They ensure that stock values are correctly reflected in financial statements, reducing the risk of tax errors and regulatory issues. Accurate records improve business valuation and support more intelligent purchasing and pricing decisions by providing real-time inventory insights.
A stock take is a simple physical count of inventory at a given time to confirm stock levels. On the other hand, an inventory audit provides a more detailed assessment—it verifies records, evaluates inventory costs, checks compliance, and ensures reported figures match actual stock. While stock takes are a component of audits, audits offer a broader financial and operational review to maintain accuracy and accountability.
Small businesses can conduct inventory audits without specialized software using spreadsheets, manual tracking, and regular physical counts. Implementing structured reconciliation processes and simple tools like barcode scanners can help reduce errors. While inventory management software streamlines the process, staying organized with clear records and routine checks ensures accuracy and control over stock levels.
