Auditing Physical Inventory Controls and Valuation Impairment under IAS 2
Auditing inventory under IAS 2 verifies physical existence, landed cost absorption, and lower-of-cost-or-NRV valuation across direct and channel routes.
Inventory Shrinkage Audit
Meaning
Physical verification procedures compare the actual stock on the warehouse floor with the digital records held in the management system. An inventory shrinkage audit identifies the gap between expected and actual quantities caused by theft or damage. This process is a fundamental part of loss prevention and financial accuracy in distribution centers.
It covers every location from the receiving bay to the outbound loading zones. The audit defines the precise dollar value of goods that are no longer available for sale.
Discrepancy Investigation
Root cause analysis follows the detection of missing items to prevent future losses. The inventory shrinkage audit often reveals patterns such as recurring losses in specific product categories. Investigating these patterns leads to better security protocols.
Cycle Counting
Regular small-scale checks provide continuous monitoring between major annual reviews. An inventory shrinkage audit performed on a rotating basis minimizes the impact of errors on the financial statements. This approach ensures that the most valuable items are checked more frequently.
Financial Adjustment
Final results of the verification lead to a direct write-down of the asset value on the company books. The inventory shrinkage audit ensures that the reported profit is not inflated by non-existent stock. Precise record keeping supports tax compliance and insurance claims.