Auditing Your Inventory

THE MAIN STEPS THAT NEED TO BE DONE ARE:

1. Account for the variances on the “End-of-Month Status by Location / Product Code or Rep Class” - WHSEOM (Inventory module, Task 10, Sub-task 2) report that is run as part of the end of month closing procedures for I/C.  Make the appropriate GL journal entries to the General Ledger.  (See RECONCILING THE AUDIT VARIANCES below for details about variances.)

2. Compare the ending value on the WHSEOM report to the adjusted GL figures, if they match then stop here.

3.  If the GL and the Ending value on the WHSEOM do not match:

• Determine if the discrepancy is on the Sales or Purchasing side by running reports specified in the REPORTS section of this document (See REPORTS below for details.)

INVENTORY AUDIT PROCEDURES

GENERAL STEPS TO BE TAKEN TO AUDIT THE INVENTORY:

The inventory audit procedures should be done on a monthly basis once the physical inventory count has been completed. After doing the physical inventory count (if one is required), compare this to the periodic count sheets as per the system (The Ending Inventory for the month using the reports in the REPORTS section below.) Any variances should be reconciled.  

RECONCILING THE AUDIT VARIANCES:

The audit variances can be found on the EOM Status Report (WHSEOM).  See if there were any Reversals, Accruals, or Quantity Changes made.  Once the variances on the reports are quantified, G/L journal entries can be made accordingly. For instance, Accruals need to be made for the inventory received but not yet invoiced and for inventory returned to the vendor but a credit memo has not yet been received,  in the month being closed, and then reversed the next month. 

Running the Received Items report (Purchase Order module, Task 22, Sub-task 4) and Shipped-Back Item report (Purchase Order module, Task 23, Sub-task 4) will account for $ variances caused by items that have been purchased and not yet been vouchered or credited in the PO module.  These types of variances are the most common.  The reports will provide the data needed to complete the adjusting entries in the GL.

REPORTS: 

The following reports should "tie out" with each other in the various categories.  Follow the chart below - it is designed to be read up and down …i.e. the figures for Beginning Inventory [Beg. Inv] come from GL Trial Balance - GLTBAL [Module 4, Task 9] and Inventory EOM Status - WHSEOM [Module 5, Task 10- Subtask 2];   another example is the figures for Purchases [Purch] comes from GL Trial Balance – GLTBAL [Module 4, Task 9] and AP to GL Interface –APTOGL [Module 3, Task 32, Sub-task 3] and Expense Distribution – APDIST [Module 3, Task 11] and EOM Status – WHSEOM [Module 5, Task 10, Sub-task 2]

ISSUES/QUESTIONS TO BE AWARE OF CONCERNING VARIANCES ON THE REPORTS:

• Non-stock items.  If they are NOT being added to Inventory, they will not appear on the I/C reports.
• Are transactions being entered directly into either Accounts Payable or Accounts Receivable instead of through Order Processing or Purchasing?  Transactions entered directly into AR or AP DO NOT appear on reports generated out of the Purchasing or Order Entry modules.
• Labor items, are they indicated as such?  Labor items do not appear on Inventory reports.
• Regarding any figures in the variance column of the End of Month Status (EOM Status) report, were any accruals, reversals or quantity changes made?  If so, has the General Ledger been adjusted accordingly?

ADDITIONAL INFORMATION:

Follow an item through to verify that the amounts (quantity and dollar) on the valuation report are correct.  Find an item or two that have a known correct beginning value and run two reports to determine the activity of the item(s).

1. Summary by Expense Account (PO module, Task 10, Sub-task 6 - MHSACT).  This report will detail the purchase activity for an item or range of items by a date range.  It is useful in determining the quantity purchased and what the purchase cost was for the item(s).  If the beginning quantity/valuation of the item is added to the purchased quantities, all that is needed then is to determine how many of the item(s) were sold for the same time period.  Use the G/L Sales Account/Date/Item report.
2. G/L Sales Account/Date/Item (OE module, Task 15, Sub-task 11 - IHSACT).  This report details the sales activity for an item or group of items.  Subtracting the sold quantity from the beginning on-hand and purchased quantities from the report suggested above (MHSACT), will provide the on-hand physical quantities, as well as the valuation for the item(s).