Accounting Best Practices, Fifth Edition

16–15. Audit All Inventory Transactions

For any manufacturing organization, there are myriad transactions associated with the receipt of goods, their transfer to locations in the warehouse, and additional movement to the production floor, as well as the return of any excess items to the warehouse. Given the inordinate volume of transactions, some are bound to be done incorrectly. When this happens, the recorded quantities of inventory on hand and used will be incorrect, resulting in incorrect financial results. The problem impacts other departments too, since inaccurate inventory volumes impact the purchasing, production, and warehouse departments.

One solution is auditing inventory transactions. By doing so, one can spot problems, research why they happened, and take action to keep the transaction errors from occurring again. For example, if an audit uncovers a lack of operator training that results in receiving not being completed in the computer, either a comprehensive or focused training session with that person, along with follow-up reviews, will eliminate the error.

Auditing can be assigned to the internal audit department. However, continual review work may be necessary, which the audit department may not have sufficient manpower to provide; the accounting department is well advised to take on this chore itself, if no other approach will work. Once the entity doing the work has been determined, the next step is to find the best way to spot transaction problems among the ...