Inventory Management
What Is Inventory Audit? Its Purpose and Benefits Explained

What Is Inventory Audit? Its Purpose and Benefits Explained

What Is Inventory Audit? Its Purpose and Benefits Explained

Auditing is an inevitable process that all organizations need to perform especially medium and big-size organizations. It helps identify the actual value of an organization and its assets. Audit lets you know where improvement can be made and how the process can be optimized.

Moreover, inventory auditing is also an important part of the whole procedure. In this blog, you will know what is inventory audit and what is the objective of inventory auditing in detail. So, let us begin!

What Is an Inventory Audit?

Inventory audit is the process of physical checking of inventory and cross-checking them with the record mentioned in the books. Financial records are also checked in the process. An inventory count can be a simple-looking process but it is very complex.

According to Grand View Research,  “The global financial auditing professional services market size was valued at USD 109.21 billion in 2017. It is anticipated to progress at a CAGR of 7.4% from 2018 to 2025.”

Also Read: How Does Asset Management Software Help in Audits?

What Are the Various Categories of an Audit? What Is the Objective of the Inventory Auditor Process?

An audit can be divided into two main categories:

1. Internal Audit

An audit can be conducted internally where the team checks the process, assets & including inventory also. The auditor is on the company payroll and reports to the CEO or top management of the organization.

The internal audit is conducted when an organization wants to prepare for an external audit. Another scenario when they have doubt about inventory or some other issue.

2. External Audit

The external audit is conducted by government authorizations. They check if the assets are the same as mentioned in the accounts similar goes for inventory. In this case, an independent asset auditor & his team check the inventory and everything.

If they are not the same as in the account books then the organization will have to pay a huge amount of penalty. All the documents are checked and verified about assets and inventory.

The objective of inventory audit is the physical verification of assets and inventory. Another main objective of the audit is to ensure that records are accurate and the same as mentioned in the books.

What Is the Importance of Inventory Auditing?

Inventory is a very important part of business and that is why auditing of inventory is also important. Inventory auditing is a significant aspect of collecting proof, particularly for retail-based organizations. It can address an enormous equilibrium of assets or capital.

Inspecting stock should confirm the amount of stock as well as its quality and condition to see whether the worth of the stock is genuinely addressed in monetary records and articulations.

The audit is helpful to organizations by reducing unnecessary expenses of inventory. For instance, with auditing, you will find goods that are overstocked so you can reduce the inventory purchasing quantity.

The audit also lets you know if an inventory shrinkage scenario occurring in the organization or not.

Furthermore, if an organization is equipped with automated inventory management software, then are the numbers actually matching with physical count or not.

Inventory audit assists in letting know the exact value of inventory. As inventory can be expired, obsolete, damaged, and so on.

What Are the Consequences When Phantom Inventory Exists in Your Business?

When phantom inventory exists in your business, there can be dangerous consequences for your business. For instance, daily operations run as usual then there is the need for inventory your team member checks the inventory in the spreadsheet and it is available but when he goes into the stock room, he finds that the stock is almost finished.

As a result, production work halts, time wastage, production is not completed on time, customer disappointment, productivity loss. Overall, the business loss is the consequence of phantom inventory.

How to Eliminate Inventory Audit Issues?

You can eliminate inventory audit issues by automating the process. You can use asset management software that is helpful in many ways as it provides keep accurate records.

Moreover, all the data related to assets and inventory are recorded as it is helpful in the audit process. Furthermore, you can easily identify each asset and inventory for physical verification.

What Are the Benefits of Asset & Inventory Audit Software?

The benefits of inventory audit software are discussed below:

Also Read: What Is Stock Audit? Why Is It Done and What Are the Stock Audit Processes?
Benefits of Inventory Audit Software

1. Increased Accuracy

When you perform an audit, errors are discovered and eliminated before they hamper and create hindrance in daily operation. When the audit is done on regular basis chances of error are reduced and accuracy increases.

2. Regulatory Compliance

Compliance is always a big issue for organizations. When organizations are not able to meet the industry rules and regulations then the organization can be penalized.

For instance, if you do not have updated records, it can cost your company huge amounts of money. An audit helps in identifying compliance problems and you can rectify your records and avoid penalties.

3. Eliminating Phantom Inventory

Phantom inventory is not good for business. Phantom inventory is that inventory that is mentioned as available in storage location but when you want to use them it is unavailable.

It is one of the main reasons for shelf problems. Lots of organizations ignore this issue thinking it is not a big issue.

However, you can overcome this problem with asset & inventory auditing. With auditing, you can properly eliminate them from your business and business records. This software ensures that it does not exist.

4. Quick Physical Verification

Physical verification is the most important part of audit procedures. For this purpose, the organization utilizes asset tags that are very important in knowing the actual locations of assets and inventories.

In this process, the asset and inventory list is compared to the actual assets and inventories available.

5. Eliminating Long & Complex Audit

Without automated software, the process of audit is long and complex. The software simplifies the process and makes it quick and effective. Using a mobile application takes little time to conduct physical verification of assets and inventory.


Business needs to conduct audits regularly. For more convenience asset management software can be used that provides several advantages that we have mentioned above.

This software comes with cloud technology you do not have to worry about data theft. As data security is the responsibility of the cloud technology service provider.

Moreover, mobile can be used for scheduling audits or make a change in the audit. An effective audit can be fruitful for your business and you can avoid penalties and faulty records.

Furthermore, investors look for those organizations that have clean and transparent records.

Also Read: What Are the Steps to Streamline Procurement Process?

Frequently Asked Questions (FAQs)

1. What are ghost assets why they are similar to phantom inventory?

Ghost assets are very lethal for business. They are not good for business as eating your business because you are paying taxes for those assets which you are not even using. Ghost asset occurs due to irresponsible asset usage, theft.
The audit process helps in identifying & eliminating ghost assets. Both ghost assets and phantom inventory are not available physically but are mentioned in the business records.

2. What are the main reasons that phantom inventory?

1. Inaccurate count
2. Manual process
3. Employee theft
4. Inefficient audits
These are a few of the main reasons behind phantom inventory existence.

3. How asset tags are helpful to businesses in inventory auditing?

Asset tags are attached to assets and inventories & they play a crucial role in the physical verification process. Asset tags provide real-time information they have inbuilt technology such as barcode, QR Code, RFID, etc., each tag contains a unique identification number that is stored in automated software and with these unique numbers, you can know the information in real-time.

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