An inventory audit is an independent check that your stock records can be trusted. It tests whether the goods on record exist, whether the shelf holds goods the records miss, and whether costs and dates are right. It also checks who changed the records, which a plain count never does.
Your own team can run one, or an outside auditor can as part of an audit of your accounts. This guide sets out the tests, seven steps any owner can follow, and a worked example from Dar es Salaam.
What does an inventory audit check?
An inventory audit runs five tests, and a stock count covers only the first two. Each test answers one question about your records.
| Test | The question it answers | How to run it |
|---|---|---|
| Existence: count from records to shelf | Is every item on record really here? | Pick lines from the stock report and find them on the shelf. |
| Completeness: count from shelf to records | Is everything on the shelf on record? | Pick items on the shelf and find them in the stock report. |
| Cut-off | Does each delivery and sale fall in the right period? | Check the last deliveries and sales before the audit date, and the first ones after it. |
| Invoice matching | Did you receive what you paid for? | Match each supplier invoice to its purchase order and its signed delivery note. |
| Valuation | Does each item carry the right cost, and is it worth that much? | Compare costs with recent invoices, and mark down damaged, expired or outdated goods. |
The counts in both directions come from the international auditing standard that covers stock counts, ISA 501. An auditor traces items from the count records to the goods, and from the goods back to the records.
Each direction finds a different error. Records to shelf finds stock that exists only on paper. Shelf to records finds goods that arrived and were never entered.
How is an audit different from a stock take or a cycle count?
A stock take and a cycle count correct the numbers, while an audit tests whether you can trust them. It also tests the people and the steps behind the numbers.
| Check | What it does | Who does it | How often |
|---|---|---|---|
| Stock take | Counts everything once and corrects the records | Your staff | Once or twice a year |
| Cycle count | Counts a few lines a day on a rota | Your staff | Every trading day |
| Inventory reconciliation | Traces each difference to an entry and fixes it | Whoever keeps the stock records | After every count |
| Inventory audit | Tests records, dates, costs and adjustments on a sample | Someone who doesn't handle the stock | Quarterly, and before the year-end accounts |
How to do an inventory audit in 7 steps
An owner's audit tests a sample, not the whole shop. Forty lines tested with care tell you more than 800 counted in a rush.
1. Choose the date and freeze the records
Pick the audit date and print the stock report at the close of trade that day. Write down the last delivery note, the last sale number and the last adjustment, so later entries can't slip in.
2. Gather the documents
Collect the last ten supplier invoices with their purchase orders and delivery notes. Add the count sheets from the last count and the list of adjustments since the last audit.
3. Choose the sample
Rank your lines by sales value with ABC analysis, then take the A lines and add random B and C lines. Pick 20 lines from the stock report, and pick 20 more by walking the shelves.
4. Count the sample blind
Count without seeing the recorded quantity, in the unit you sell. Write the count first, then compare it with the record.
5. Test the cut-off and the invoices
For each delivery near the audit date, check that the goods and the purchase entry fall on the same side of it. Match each invoice to its delivery note: the quantities, the prices, and anything billed twice.
6. Test the costs
Compare each sampled line's cost with its latest invoice, including transport and clearing. IAS 2 measures stock at the lower of cost and net realisable value: the expected selling price less the costs to sell.
Goods that are damaged, expired or out of fashion are usually where cost and value part. Mark each one down to what it will fetch.
7. Review the adjustments, then report
List every adjustment since the last audit: who made it, how much, and whether it gives a reason. Write up each finding with a person responsible and a date to fix it, and share the results with the team.
Worked example: a hardware shop audit in Dar es Salaam
For example, a hardware shop in Dar es Salaam holds 800 lines worth TZS 60,000,000 at cost. The owner audits 40 lines on 31 March. These are illustrative figures, not a real shop's.
Thirty-five of the 40 lines matched exactly, so line accuracy was 87.5%. The five that didn't are below, at cost in Tanzanian shillings.
| Product | Records | Counted | Difference | Cost each | Value |
|---|---|---|---|---|---|
| Cement, 50 kg bag | 120 | 112 | −8 | 17,000 | −136,000 |
| Nails, 1 kg pack | 85 | 79 | −6 | 4,500 | −27,000 |
| Padlock, 50 mm | 25 | 22 | −3 | 9,000 | −27,000 |
| Wheelbarrow | 6 | 5 | −1 | 95,000 | −95,000 |
| Tile adhesive, 20 kg bag | 30 | 50 | +20 | 14,000 | +280,000 |
The other tests explained one difference and found three more problems.
- Cut-off. The 20 bags of tile adhesive arrived on 31 March and were entered on 2 April. The surplus is timing, not extra stock, so it needs no adjustment.
- Shortfalls. The four short lines come to TZS 285,000 at cost, 3.0% of the TZS 9,500,000 the 40 lines are worth. Across the whole TZS 60,000,000, that suggests about TZS 1,800,000 missing: a rough guide, not a precise figure.
- Invoice matching. One invoice billed 50 bags of cement, and its signed delivery note shows 45. The shop paid TZS 85,000 for cement it never received.
- Valuation. Six dented tins of paint cost TZS 38,000 each and will sell for about TZS 27,000, less TZS 2,000 to deliver. Each is worth TZS 25,000, so the write-down is 6 × 13,000 = TZS 78,000.
- Adjustments. One storekeeper made 14 of the quarter's 16 adjustments, all subtractions, none with a note.
The sample found TZS 448,000 of problems: TZS 285,000 short, TZS 85,000 overpaid and a TZS 78,000 write-down. The adjustments finding matters most, because it shows how shortfalls can be hidden.
If the same lines come up short at the next audit, treat them as inventory shrinkage and find the cause. The controls that close the gap, such as who may adjust stock, belong in your inventory control.
Which numbers tell you where to look?
Compare this quarter's figures with the last few before you choose the sample. A change you can't explain points to the lines to test.
| Signal | What it can mean | What to test |
|---|---|---|
| Gross margin fell while sales held steady | Missing stock, or goods sold below their price | Count the high-value lines and check price changes at the till |
| Inventory turnover slowed | Slow stock, or stock that exists only on paper | Find the slowest lines on the shelf |
| More adjustments than last quarter | Counting errors, or losses written off quietly | Who made each one, and whether it gives a reason |
| Freight and clearing missing from cost | Stock and profit both misstated | Rebuild the landed cost of three recent imports |
| Storage costs rising | Too much stock | Count what sits in the store room |
Rent, storage and insurance are costs of the period, not part of what your stock cost. IAS 2 leaves storage out of the cost of stock unless storage is a step in production.
Manufacturers should test finished goods on their own. A product counts as finished only when it is ready to sell. Its cost includes materials, labour and its share of factory overheads.
Who should audit your inventory, and how often?
Someone who doesn't handle the stock should run the audit, because whoever receives, sells or adjusts goods can hide a gap. In a small shop that means the owner, a partner, or a bookkeeper from outside.
Audit quarterly, and again before the year-end accounts. After a bad result, audit monthly until two audits in a row come back clean.
If your accounts are audited, the auditor attends your year-end inventory count and makes test counts of their own. ISA 501 requires this when stock is material, unless attending is impracticable.
The usual complaints about audits are that they take days and stop the shop. Both come from counting everything; a sample of 40 lines does neither.
How to audit inventory in ArmPOS
ArmPOS keeps every record an audit tests. It holds stock by warehouse, each product's history, each adjustment with who made it, and the invoice on each purchase.
- Freeze the records. Open Reports › Stock Report, choose the Warehouse and export it with EXCEL at the close of trade. That file is the records side of your audit (Stock reports).
- Make the count sheet. Products › Count Stock › Count gives a sheet for one warehouse, or one Category of it. Download it and hide the Quantity column so the count is blind (Count and adjust stock).
- Trace a product. On the Stock Report, Reports on a product's row opens its sales, purchases, returns, transfers and adjustments on tabs.
- Match the invoices. In Purchases › All Purchases, each purchase's menu has Purchase Detail and Attach Documents. The supplier's invoice then sits with the purchase (Record a purchase).
- Check the costs. Inventory Valuation multiplies each product's stock on hand by its Cost. Compare the sample's costs with their latest invoices.
- Review the adjustments. The Stock Adjustment Report totals what was added and removed, with each adjustment's cost. The Users Report shows each person's Total adjustments, and Reports on their row lists them (Team and system reports).
- Close the gap. In User Management › Group Permissions, tick Create in the Adjustment panel only for the people who should correct stock (Roles and permissions).
ArmPOS works this way for hardware stores and other shops in Tanzania and across Africa.
Frequently asked questions
What is the difference between an inventory audit and a stock take?
A stock take counts everything and corrects the records. An audit tests a sample of records, dates, costs and adjustments. It shows whether the records, and the people keeping them, can be trusted.
Why are inventory audits important?
Your profit is only as right as the stock figure behind it, because closing stock sets the cost of goods sold. Audits also catch missing stock, overbilling and goods worth less than they cost: TZS 448,000 of it in the 40-line example above.
How often should a small business audit its inventory?
Quarterly, plus once before the year-end accounts. Move to monthly after a bad result, until two audits in a row come back clean.
What documents does an inventory audit need?
The stock report on the audit date, the last count sheets, and recent supplier invoices with their purchase orders and delivery notes. Add the list of adjustments, with who made each one.
Can I audit my own inventory?
Yes, if you don't handle the stock day to day. If you receive, sell or adjust goods yourself, ask a partner or an outside bookkeeper to run the tests.
What happens if the audit finds missing stock?
Recount first, then trace each shortfall through its sales, deliveries and adjustments. Whatever stays unexplained is a loss, so adjust the records with a note. IAS 2 treats the loss as an expense of the period it happened in.
Pick your audit date this week, print the stock report and choose your 40 lines. To keep every count, adjustment and supplier invoice in one place for the next audit, create a free ArmPOS account.
