How to Read a Warehouse Audit Report as an Investor

A warehouse audit report of forty pages reaches you, and on its first page is a reassuring phrase: "no material differences were found". Do you rest on it and close the file? A good report deserves a careful reading, and a weak one can mislead you with a comforting sentence that nothing supports. Fortunately there is a reading order that takes minutes and usually shows whether the report deserves a decision to be built on it.

Start with the summary, then test it

Read the summary first, then ask: does it answer the question you posed when you commissioned the work? Does it give figures, or only general statements? A good summary says what was counted, where and when, what the result was against the books, what remains unexplained and what the limits of the work are. If the summary comes in two comforting lines without a single number, treat that as a warning and go through the later sections to look for what it leaves out.

Three questions on coverage and method

1. What was covered? The locations, the categories and the share of the stock value that the count reached. A coverage of 100 percent differs greatly from a coverage of 40 percent in what can be concluded.
2. How were the items chosen? Did the auditor choose them or did management? If it was a sample, by what rule?
3. When and how was the cut-off fixed? And does it match the date of the books against which the count was compared?

Add a simple fourth question: who actually did the counting? An independent team, or warehouse staff supervised by the auditor? Either may be acceptable, but it should be stated plainly.

Differences and limits

Set what is said about differences against the above. Where is the difference in units and in value? Is only the net figure given, or the gross too? Were the differences classed as confirmed, probable and open, and what share is open? A small net difference can hide large errors that cancel each other, which is why the reader needs the gross figure as well.

Then read the section on limits before the conclusions. It is one of the most important sections of a report, and the most neglected. It states what was not counted, what could not be reached and what rested on management's word without checking. It decides what the reader can safely conclude. A report with no section on limits does not mean the work had no limits; it means nobody wrote them down.

A worked example (conditional figures)

The report says the team counted items worth 720,000 dollars out of stock worth 1,000,000 dollars, a coverage of 72 percent. The net difference was 10,080 dollars short, which is 1.4 percent of the value counted, while the gross difference in both directions was 28,080 dollars, or 3.9 percent. Of that, 6,000 dollars remained unexplained, about 0.8 percent. These are figures that can be discussed. Notice that 28 percent of the stock was outside the coverage, so you may not say that all the stock is sound, but you may ask: what is in the remaining 28 percent, and shall we count it?

Signs of a weak report

• No date of the count and no written cut-off.
• The phrase "no material differences" with no number and no definition of "material".
• A net difference alone, with no gross.
• A method that is not described, or a sample chosen by the party whose goods are being counted.
• Photographs with no date, or the same angle and the same pallets repeated.
• Conclusions larger than the figures shown can bear.
• No indication of who reviewed the figures before the report was issued.

If doubts remain after reading, do not ignore them. Write to the party that prepared the report with three specific questions: what happened in the part not covered? What are the reasons for the open differences, and what is the plan to close them? What rested on management's statement without verification? A written answer to these questions adds value to the report even if not one figure in it changes.

In short

Read the report in order: the summary, then coverage and method, then differences, then limits, then evidence. WarehouseDepo writes its reports in the same order: a short summary for the decision-maker, followed by the detail for those who want to go deeper, stating what was covered and what was not.