Inventory auditing is the process of reconciliation between the quantities of physical inventory and the quantities of logical inventory. Here physical inventory refers to the inventory we have on-hand, hence also known as on-hand inventory. And logical inventory refers to the inventory we have on the books or in your ERP or in your system.
As you know, physical inventory is the ultimate truth and you can produce something only with the issue of physical inventory irrespective of whatever the quantities you have in logical inventory. But as the organisations grow, we need the representation of the physical inventory in our records, which we call as the logical inventory and we make all the inventory decisions based on the logical inventory. Hence it is of paramount importance to reconcile the physical inventory with the logical inventory.
Primarily there are two methods available for inventory auditing - Periodic Inventory Auditing and Perpetual Inventory Auditing. We will discuss these inventory auditing types in some other podcast.