Inventory Audit

Comprehensive guide to inventory audit processes in Nubras ERP.

Inventory Audit Overview

Inventory auditing in Nubras ERP involves verifying the accuracy of your inventory records by comparing system data with physical counts. Regular auditing helps maintain inventory accuracy, identify discrepancies, and ensure financial reporting integrity.

Key Concepts

  • Inventory Accuracy: Measure of how well system records match physical reality
  • Cycle Counting: Ongoing partial inventory verification
  • Physical Inventory: Complete count of all inventory items
  • Count Variance: Difference between system and physical counts
  • Reconciliation: Process of resolving count discrepancies
  • Adjustment: Correction of inventory quantities in the system
  • Audit Trail: Record of inventory changes and verifications
Audit Process Overview
  1. Planning: Define scope and approach
    • Determine count frequency
    • Select items or locations
    • Assign responsibilities
    • Schedule activities
  2. Preparation: Get ready for counting
    • Generate count sheets
    • Organize inventory
    • Train count personnel
    • Freeze transactions if needed
  3. Counting: Perform physical verification
    • Count physical inventory
    • Record count results
    • Verify questionable items
    • Document count process
  4. Reconciliation: Address discrepancies
    • Compare counts to system
    • Investigate variances
    • Determine root causes
    • Approve adjustments
  5. Adjustment: Update inventory records
    • Process approved adjustments
    • Document adjustment reasons
    • Update financial records
    • Maintain audit trail
  6. Analysis: Review and improve
    • Analyze accuracy metrics
    • Identify problem areas
    • Implement process improvements
    • Update audit procedures

Benefits of Inventory Auditing

Operational Benefits
  • Improved inventory accuracy
  • Reduced stockouts
  • Better order fulfillment
  • Optimized storage utilization
  • Enhanced productivity
  • Reduced search time
Financial Benefits
  • Accurate financial reporting
  • Reduced inventory write-offs
  • Better cash flow management
  • Lower carrying costs
  • Improved asset utilization
  • Tax compliance
Strategic Benefits
  • Data-driven decision making
  • Process improvement insights
  • Enhanced loss prevention
  • Better supplier management
  • Improved forecasting accuracy
  • Regulatory compliance

Cycle Counting

Cycle counting is a perpetual inventory auditing method where a subset of inventory is counted on a rotating schedule. This approach allows for continuous verification without disrupting operations, helping to maintain high inventory accuracy year-round.

Cycle Count Planning

Designing Your Cycle Count Program

Count Frequency Determination

Establishing how often items should be counted:

  • ABC Analysis Method:
    • A Items (High Value): Count frequently (e.g., monthly)
    • B Items (Medium Value): Count periodically (e.g., quarterly)
    • C Items (Low Value): Count less frequently (e.g., semi-annually)
  • Risk-Based Method:
    • High-Risk Items: Items with history of discrepancies
    • High-Movement Items: Frequently handled inventory
    • Critical Items: Items essential to operations
    • Valuable Items: High-cost or high-margin products
Cycle Count Execution

Step-by-step process for performing cycle counts:

  1. Count Preparation:
    • Generate cycle count list based on schedule
    • Prepare count sheets or mobile devices
    • Organize count area if needed
    • Brief counting personnel
  2. Physical Counting:
    • Navigate to count locations
    • Count items without referencing system quantities
    • Record counts on sheets or devices
    • Note any condition or location issues
  3. Count Verification:
    • Compare physical counts to system quantities
    • Identify discrepancies above threshold
    • Perform recounts for significant variances
    • Document verification results
  4. Variance Resolution:
    • Investigate causes of discrepancies
    • Document findings and root causes
    • Obtain approval for adjustments
    • Process inventory adjustments
  5. Analysis and Reporting:
    • Calculate accuracy metrics
    • Document count results
    • Identify improvement opportunities
    • Update cycle count schedule if needed

Real-World Example: Fabric Cycle Counting

Implementing Cycle Counting in a Tailoring Business

Business Context

Elegant Tailors, a medium-sized tailoring business with over 300 fabric types and 2,000 SKUs, was struggling with inventory accuracy. They frequently discovered stockouts during production and had difficulty locating specific fabrics. Their annual physical inventory was disruptive and still resulted in only 85% accuracy.

Cycle Count Implementation
  1. ABC Classification:
    • A Items (20%): Premium silks, specialty fabrics, high-value embellishments
    • B Items (30%): Standard wools, cottons, common linings
    • C Items (50%): Basic notions, threads, standard trims
  2. Count Schedule Development:
    • A Items: Counted monthly (complete coverage in 3 months)
    • B Items: Counted quarterly (complete coverage in 9 months)
    • C Items: Counted semi-annually (complete coverage in 12 months)
    • Daily counts of 15-20 items across categories
  3. Process Implementation:
    • Created mobile counting app with barcode scanning
    • Trained two staff members as primary counters
    • Established count verification process
    • Implemented adjustment approval workflow
    • Developed accuracy metrics dashboard
  4. Root Cause Analysis:
    • Tracked patterns in discrepancies
    • Identified common error sources
    • Implemented targeted process improvements
    • Provided focused staff training
Results
  • Inventory accuracy improved from 85% to 97% within six months
  • Production delays due to fabric stockouts reduced by 80%
  • Time spent searching for materials decreased by 65%
  • Eliminated disruptive annual physical inventory
  • Reduced inventory write-offs by 40%
  • Improved financial reporting accuracy
  • Enhanced staff awareness of inventory management importance
Implementation Tips:
  • Start Small: Begin with a limited area or category to refine your process
  • Be Consistent: Count regularly according to schedule
  • Use Technology: Mobile devices and barcode scanning improve efficiency and accuracy
  • Focus on Root Causes: Don't just correct counts; fix underlying issues
  • Measure and Share Results: Track accuracy metrics and share improvements

Physical Inventory

Physical inventory is a comprehensive count of all inventory items at a specific point in time. This process provides a complete verification of inventory records and is often required for financial reporting and regulatory compliance.

Timing and Scheduling

Determining when to conduct physical inventory.

Timing Considerations:

  • Fiscal year-end requirements
  • Seasonal business cycles
  • Operational impact
  • Resource availability
  • Inventory levels (ideally lower)

Schedule Development:

  1. Set inventory date
  2. Create detailed timeline
  3. Schedule pre-count activities
  4. Plan count sequence
  5. Allocate time for reconciliation
Resource Planning

Organizing personnel and equipment for counting.

Personnel Requirements:

  • Count teams formation
  • Team leader assignments
  • Verification personnel
  • Data entry staff
  • Supervisory oversight

Equipment Needs:

  • Count sheets or mobile devices
  • Barcode scanners
  • Counting scales
  • Measuring tools
  • Identification tags

Physical Inventory Workflow

Step-by-Step Physical Inventory Process

  1. Pre-Count Preparation:
    • Organize and clean inventory areas
    • Process pending transactions
    • Generate count sheets or prepare mobile devices
    • Assign count teams and areas
    • Conduct training sessions
    • Prepare signage and instructions
  2. Count Day Setup:
    • Freeze inventory transactions
    • Take system snapshot of current quantities
    • Distribute count materials
    • Brief count teams
    • Establish count control center
  3. First Count Execution:
    • Teams count assigned areas
    • Record quantities on count sheets or devices
    • Mark counted items or locations
    • Note any issues or special situations
    • Submit completed count sheets
  4. Count Verification:
    • Process first count data
    • Identify significant variances
    • Assign recount teams
    • Perform blind recounts of variance items
    • Document recount results
  5. Reconciliation:
    • Compare final counts to system quantities
    • Investigate significant variances
    • Document variance causes
    • Prepare adjustment recommendations
    • Obtain required approvals
  6. System Updates:
    • Process approved adjustments
    • Update inventory quantities
    • Generate adjustment reports
    • Unfreeze inventory system
    • Resume normal operations
  7. Post-Count Analysis:
    • Calculate accuracy metrics
    • Analyze variance patterns
    • Identify improvement opportunities
    • Document lessons learned
    • Update inventory procedures

Inventory Reconciliation

Inventory reconciliation is the process of investigating, explaining, and resolving discrepancies between physical counts and system records. Effective reconciliation ensures inventory accuracy, identifies process issues, and maintains financial integrity.

Variance Investigation

Investigating Count Discrepancies

Investigation Process

Systematic approach to researching variances:

  1. Variance Identification:
    • Review variance reports
    • Prioritize by value and significance
    • Group by potential common causes
    • Assign investigation responsibilities
  2. Data Verification:
    • Verify count data accuracy
    • Check for data entry errors
    • Confirm unit of measure consistency
    • Validate item identification
    • Review count documentation
  3. Transaction Analysis:
    • Review recent transactions
    • Check for unprocessed documents
    • Verify timing of transactions
    • Examine transaction details
    • Trace item history
  4. Root Cause Determination:
    • Analyze findings
    • Identify most likely cause
    • Document supporting evidence
    • Categorize variance type
    • Assess systemic implications
Common Variance Causes in Tailoring
  • Fabric Measurement Issues:
    • Inconsistent measuring techniques
    • Fabric stretching during handling
    • Failure to account for fabric width
    • Mixing metric and imperial measurements
  • Cutting Process Variances:
    • Unrecorded fabric waste
    • Pattern layout inefficiencies
    • Cutting errors requiring replacement
    • Remnant management issues
  • Transaction Errors:
    • Unrecorded fabric issuance
    • Failure to record customer-provided materials
    • Incorrect item selection in transactions
    • Delayed transaction recording

Real-World Example: Reconciliation Process

Resolving Fabric Inventory Discrepancies

Scenario

During a cycle count at Royal Tailors, a significant variance was discovered for premium silk fabric. The system showed 45 meters in stock, but only 32 meters were physically counted, representing a 29% discrepancy worth approximately $1,300.

Investigation Process
  1. Initial Assessment:
    • Verified count accuracy with recount (confirmed 32 meters)
    • Checked for measurement errors (none found)
    • Confirmed correct item identification
    • Searched alternative locations (none found)
  2. Transaction Review:
    • Examined all receipts and issues for past 30 days
    • Reviewed production orders using this fabric
    • Checked for pending transactions
    • Interviewed production staff about recent usage
  3. Root Cause Identification:
    • Discovered two custom orders where fabric was issued but not recorded
    • Found fabric was used for emergency sample creation without documentation
    • Identified process gap in rush order handling
  4. Resolution:
    • Documented findings with evidence
    • Created adjustment transaction with proper approvals
    • Updated inventory to match physical count
    • Linked adjustment to identified causes
  5. Process Improvement:
    • Implemented emergency material requisition process
    • Created mobile app for quick material issues
    • Trained staff on proper transaction recording
    • Added verification step for high-value fabrics
Results
  • Accurate inventory records restored
  • Financial impact properly documented and accounted for
  • Process gap identified and addressed
  • Staff awareness of inventory control improved
  • Similar discrepancies reduced by 85% in subsequent months
Inventory LocationsInventory Reports