Count less, verify more
For decades, verifying inventory has meant the same thing: count a portion and extrapolate to the rest. Radio-frequency identification (RFID) changes that equation. It makes it possible to compare the entire population against the accounting records, not just a sample, and that alters the nature, timing and extent of testing on the existence assertion. With one condition: the auditor must be able to rely on the system that generates that evidence.
Anyone who has attended a physical inventory count knows the drill: warehouses at a standstill, early-morning counts on a set date and differences reconciled by hand for weeks. In entities with thousands of SKUs, multiple warehouses or dispersed assets, the auditor has no choice but to work with samples. RFID does not eliminate professional judgement, but it does change the evidence base on which that judgement is exercised. And the difference is no longer theoretical: with RFID, auditing a warehouse takes minutes or hours rather than days, and published studies put inventory accuracy above 95%, compared with the 60–75% typical of manual counts or barcodes.
What RFID is and what the auditor needs to know
An RFID system has three components: the tag (a chip and antenna attached to or embedded in the item), the reader and its antennas (fixed in portals and dock doors, or handheld) and the middleware, which filters the reads and passes them to the management system or ERP. Unlike barcodes, reading requires neither contact nor line of sight and happens in bulk: current UHF readers based on the EPC Gen2 standard read more than 1,000 tags per second, and high-end handheld units reach around 1,300.
Each tag stores a unique identifier. In logistics and retail it usually follows the GS1 EPC standard, which identifies each individual unit rather than just the product reference. For the auditor, this serialisation is the key: we are no longer talking about “500 units of SKU X”, but about 500 units, each with its own traceable identity.
|
Band |
Frequency |
Typical read range |
Typical use |
Relevance to audit |
|---|---|---|---|---|
|
LF |
125–134 kHz |
Centimetres |
Access control, animal identification |
Low |
|
HF / NFC |
13.56 MHz |
Up to approx. 1 m |
Documents, libraries, high-value assets |
Spot verification of assets |
|
UHF (RAIN RFID) |
865–868 MHz in Europe |
Several metres with passive tags |
Warehouses, retail, logistics, fixed assets |
High: bulk counts and movement control |
Tags can be passive (battery-free, powered by the reader’s signal, low cost) or active (battery-powered with a longer range, for containers or high-value assets). Most applications relevant to financial auditing use passive UHF.
That said, the technology should not be idealised: it has physical limitations the auditor needs to understand. Metals and liquids attenuate or reflect the signal and cause missed reads. Cross-reads can capture tags from an adjacent area. The read rate depends on tag orientation, item density and reader configuration. None of these limitations invalidates the technology, but all of them affect the reliability of the evidence.
What the data says
Published results from real-world deployments and independent studies are hard to ignore:
|
Indicator |
Without RFID |
With RFID |
Source |
|---|---|---|---|
|
In-store inventory accuracy |
63% (barcode) |
95% |
Auburn University RFID Lab and GS1 US (2018) |
|
Cycle count time |
Baseline |
−96% |
Auburn University RFID Lab and GS1 US (2018) |
|
Accuracy of shipped and received orders |
69% of orders with data errors |
99.9% |
Auburn University RFID Lab and GS1 US (2018) |
|
Stock-outs |
Baseline |
Up to −50% |
Auburn University RFID Lab and GS1 US (2018) |
|
Full count of a store |
5 hours |
6 minutes |
Piticas (RFID Journal) |
|
Store inventory audit (RFID robot) |
More than 80 hours of work |
3 hours, accuracy above 99% |
Decathlon US (Simbe Robotics) |
Figures from vendors and success stories should be read with caution, but they all point in the same direction. What matters to the auditor is the order of magnitude: an inventory that is 95% accurate and can be recounted every week is a very different evidence base from an annual count in which more than a third of SKUs do not reconcile.
Three cases that lead the way: Inditex, Uniqlo and Decathlon
Inditex. It was one of the first major groups to commit to RFID at scale. By the end of 2014 it had rolled it out across all its logistics centres and in almost 1,000 Zara stores in 22 countries, and by 2015 it reached more than 1,500 stores in 63 markets. It then integrated RFID into checkouts and self-checkout, and in 2023 it unified RFID with its integrated stock management system (SINT) across all its brands: a single view of every garment, whether it is in a warehouse, in a store or in an online order.
Uniqlo. In 2017 Fast Retailing began tagging every product it manufactures and distributes with RFID. The most visible result is at the checkout: customers place their basket on the self-checkout counter and all items are read at once, without scanning any barcodes. Behind it lies what interests the auditor: industry publications credit its system with inventory accuracy of around 97%, compared with the 65–75% typical in the sector.
Decathlon. In 2015 it completed the rollout across its 951 stores and some 43 warehouses. Most stores now carry out inventories about five times faster and twice as often, and shrinkage fell by 9%. In Brazil, across 50 stores, counting productivity rose by 38%. In its first US store an RFID robot patrols the aisles and maintains accuracy above 99%.
The three cases share one feature: inventory sits at the heart of their balance sheet and operations, and RFID has allowed them to move from an annual snapshot to near-continuous control. That is precisely the shift that matters to the auditor.
Where it makes a difference on an engagement
RFID adds most value for the existence, completeness and cut-off assertions, and in areas where physical evidence is decisive.
|
Area |
Main assertion |
What RFID provides |
Possible audit test |
|---|---|---|---|
|
Inventories |
Existence and completeness |
Complete and frequent counts, automatically reconciled with the ERP |
Reconciliation of the population read against the inventory master file; analysis of differences |
|
Property, plant and equipment |
Existence |
Location and individual identification of each asset |
Matching of the fixed asset register against reads; detection of assets that cannot be located |
|
Purchases and sales |
Cut-off |
Date- and time-stamped record of each physical receipt and dispatch |
Comparison of physical movements in the days before and after year-end with their accounting entries |
|
Goods in transit and on consignment |
Existence and rights |
Traceability between own and third-party locations |
Tracking of units in transit at year-end; comparison with third-party confirmations |
|
Inventory valuation |
Valuation |
Actual age and turnover per unit |
Identification of slow-moving inventory as an indicator of obsolescence |
Inventories. When the entity maintains a perpetual inventory with RFID-based cycle counts, the auditor can rely on that process. The auditor can attend counts at interim dates, re-perform reads with the entity’s reader and analyse how differences evolve over the year.
Property, plant and equipment. Almost every fixed asset register has its “ghost assets”: items physically disposed of long ago that remain on the books and continue to be depreciated. A complete RFID inventory brings them to light and makes it possible to quantify their impact on the balance sheet and on depreciation.
Cut-off. Dock-door portals generate an objective record of the moment goods leave or arrive. This is evidence independent of the invoicing process, useful for detecting early recognition of sales or deferred purchases.
Analytics and continuous auditing. Read data allows tests on 100% of the population: units read with no record, records with no read, out-of-hours movements or inconsistent locations. These tests fit within an approach based on substantive analytical procedures and data-driven auditing.
Fit within the regulatory framework
RFID does not require its own regulatory framework: its use is governed by the International Standards on Auditing as adapted for Spain (NIA-ES). The central point is that RFID data is information produced by the entity and, therefore, the auditor must evaluate its reliability before using it as evidence.
- NIA-ES 500, Audit evidence. When the auditor uses information produced by the entity, they must evaluate whether it is sufficiently reliable for their purposes, including its accuracy and completeness.
- NIA-ES 501, specific considerations for inventory. If inventory is material, the auditor must attend the physical count unless impracticable. An RFID system does not replace that attendance, but it changes its content: observing the reading process, re-performing reads and evaluating the count instructions and controls.
- NIA-ES 315 (revised), identifying and assessing risks. The auditor must understand the entity’s IT environment and the relevant general controls. The RFID system and its integration with the ERP form part of that environment when they feed financial information.
- NIA-ES 330, responses to assessed risks. If the auditor intends to rely on the controls of the RFID system, they must test their operating effectiveness throughout the period.
- NIA-ES 520 and NIA-ES 530. RFID data provides a basis for substantive analytical procedures and can reduce or replace sampling when the entire population is analysed.
One idea worth keeping in mind: analysing 100% of the population is not the same as obtaining evidence over 100%. The quality of the conclusion depends on the reliability of the source data.
What can go wrong and how to test it
The risks of an RFID system are concentrated at four points: the physical link between tag and item, the capture of reads, the processing of the data and its transfer to the accounts.
|
Risk |
Effect on the financial statements |
Recommended procedure |
|---|---|---|
|
The tag exists but the item does not (tag detached, reused or cloned) |
Overstatement of inventory or assets |
Physical tests from read to item on a sample; review of controls over tag assignment and deactivation |
|
Untagged or unread items |
Understatement; unexplained differences |
Tests from item to read; analysis of the read rate by area and product type |
|
Cross-reads or duplicate reads |
Units counted twice or in the wrong location |
Review of reader configuration and middleware filtering rules |
|
Errors in the ERP interface |
Differences between physical and book inventory |
Interface testing: completeness and accuracy of the transfer, error handling and reprocessing |
|
Weak IT general controls |
Unauthorised changes to data or parameters |
Review of access, change management and activity logs of the RFID system |
|
Manual adjustments of differences |
Concealment of shrinkage or manipulation |
Review of inventory adjustments: authorisation, segregation of duties and supporting documentation |
In practice, the auditor should:
- Understand the process end to end: tagging, reading, filtering, transfer to the ERP and treatment of differences.
- Identify the key controls and decide whether to rely on them or to take a substantive approach.
- Perform physical tests in both directions: from read to item and from item to read.
- Obtain read data directly from the system, with completeness controls over the extraction.
- Document the assessment of the reliability of the information and its effect on the nature, timing and extent of testing.
In entities with complex systems it may be necessary to involve IT specialists, taking into account NIA-ES 620 on using the work of an auditor’s expert.
Inventory under control: working capital, fixed assets and cash
Beyond the audit, inventory is tied-up capital. When a company does not trust its stock, it protects itself by over-buying: it holds safety stock to cover uncertainty, re-orders what it already has and finds out too late what is not selling. All of that consumes cash.
A simple calculation gives a sense of scale. A company with €60 million in annual cost of sales ties up around €164,000 for every day of inventory. Reducing days inventory outstanding by ten days frees up close to €1.6 million in cash, on top of recurring savings in financing, storage, insurance and obsolescence.
- Less safety stock. Reliable inventory makes it possible to lower minimum levels without increasing stock-outs.
- Timely obsolescence. The actual age of each unit anticipates write-downs and avoids surprises at year-end.
- Less shrinkage and fewer stock-outs. What is controlled is lost less, and what is available gets sold.
- A clean fixed asset register. Out go the ghost assets, the depreciation of items that no longer exist, the insurance on assets that are gone and the purchase of equipment the company already had at another site.
- Faster closes. Fewer manual reconciliations and fewer last-minute adjustments.
The next level: robots and drones that take inventory on their own
The frontier is no longer the handheld reader. The trend is for inventory to take itself: continuously and without stopping operations.
Autonomous mobile robots. Robots and automated guided vehicles (AGVs) fitted with RFID readers patrol stores and warehouses outside operating hours and update stock every night. Barcelona-based Keonn, with its AdvanRobot and Robin robots (the latter deployed in Marks & Spencer stores), and Simbe, with its Tally robot at Decathlon, are examples already in operation.
Warehouse drones. In high-bay, high-density racking, where counting requires forklifts, aerial work platforms and warehouse shutdowns, autonomous drones read locations and tags without interrupting activity. In a three-month pilot run by Verity with On and Maersk in California, the drones completed more than 1,500 flights, recorded more than 80 million reads on some 1.25 million tags and correctly identified 99.9% of items. Scholl, using Verity drones in a DSV warehouse, moved from an annual count of 12,000 locations that required shutting down for several days to out-of-hours audits, at 50% lower direct cost. Dermalogica, with Corvus Robotics, scans its distribution centre 52 times a year, whereas a single counting pass could previously take two months.
Fixed infrastructure. Dock-door portals and ceiling and aisle readers complete the picture: items are read as they come in, move around and go out, with no human intervention.
For the auditor, this is a fundamental change. Year-end inventory stops being a snapshot taken on that day and becomes the reconciliation of a near-continuous record. Attendance at the count required by NIA-ES 501 changes in content: observing how the robot or drone operates, re-performing reads and, above all, testing the system’s controls. The key question shifts from “how many units are there?” to “which areas have not been read, and why?”. Coverage reports, exceptions and equipment calibration become audit evidence.
Less time counting, more time thinking
RFID shifts the auditor’s effort: less time counting and more time assessing the reliability of the data and analysing the entire population. For the entity, a well-designed system strengthens internal control over inventory and assets and reduces the cost and friction of closes.
The benefit depends on how it is implemented. An RFID project framed purely as a logistics solution tends to neglect traceability through to the accounts, controls over adjustments and the documentation the auditor will later need. Building the internal control and audit perspective into the design from the outset avoids those gaps.
If your organisation is considering an RFID project, or already has one under way and wants to know whether it will stand up to an audit, we can help: from the feasibility analysis and ERP integration to the design of controls that turn the information generated into reliable evidence from day one.
Innovación en Marketing y procesos. | Storelabs | Innovation Solutions
