what is retail merchandise recovery audit

A retail merchandise recovery audit is a process where a specialist third-party recovery audit provider audits all your supplier agreements and transactions to identify billing errors and recover lost revenue. Let’s learn about what a retail merchandise recovery audit is in detail.

What is a Retail Merchandise Recovery Audit?

A retail merchandise audit is a process conducted by an external third-party audit firm to identify supplier billing errors, transaction discrepancies, and misapplied agreements that may have led to lost revenue. 

These audits examine supplier agreements for things like promotional activity, purchase prices, annual rebates and marketing lump sums to match them against the retailer’s financial records. The goal is to find mismatches, overpayments, underpayments, missed billing, or other calculation errors that were not identified before and recover the lost money.

Why is a Retail Merchandise Recovery Audit Important? 

There are a few key reasons why a retail merchandise recovery audit is essential for retailers.

Large retail operations have a high volume and complexity of transactions every day, which makes errors more likely. Even small mistakes, when multiplied, can result in significant losses. The following is a list of a few mistakes that can occur:

Transaction errors: Mistakes made during the processing of invoices, bills, credits, refunds, etc., can result in undercharges or overcharges. Examples include wrong item prices, quantities, and discounts applied incorrectly. 

Overpayments: Suppliers are paid more than what is actually owed due to errors in invoice pricing, duplicate payments, and unclaimed credits. 

Missing credits: Failing to claim or apply valid credits from suppliers for things like returns, allowances, and rebates to which the business is entitled.

Human error: This is inevitable and unavoidable. Existing internal processes and teams may make mistakes due to a lack of independent oversight and a fresh perspective. 

A third-party audit involves an independent expert analysis of all financial transactions from an outside viewpoint. This can help uncover patterns of errors, anomalies, and inefficiencies that retailers may overlook.

On average, a recovery audit identifies 1-2% of annual sales that were lost due to unnoticed errors. For a large retailer, this percentage point recovery has high monetary value. The audit process also helps identify internal control weaknesses where errors may have occurred. This allows retailers to tighten processes and prevent future revenue leakage.

How Does a Retail Merchandise Recovery Audit Work?

The retail merchandise recovery audit process involves several key steps:

5. Data Collection

  • The recovery audit firm requests transactional data from the retailer covering a set time period, up to 6 years. 
  • This data includes payable and receivable invoices, EPOS, promotional data, stock on hand, returns and supply agreements or emails. 

4. Data Analysis

  • The recovery audit firm loads the transaction records into specialised recovery audit software.
  • The software analyses the records, comparing details like retail prices, cost prices, and promotional funding to the retailer’s invoices.
  • It looks for discrepancies and anomalies that could indicate potential underpayments, overpayments or missed billing. 
  • The analysis is done programmatically using the recovery audit software to find patterns across large datasets.

3. Auditors

  • The data results are then reviewed by specialised audit teams 
  • They follow a thorough audit process to convert the data anomalies into potential recoveries for the retailer.
  • Senior members of the team review the potential recoveries to ensure they are of a high standard for potential recovery

2. Claims

  • A report of potential claims is provided to the retailer.
  • The report contains a list of all confirmed errors and losses found in the transaction records. It provides supporting documentation and evidence for each discrepancy.  
  • Once the report is approved by the retailer, the claims are ready to be recovered

1. Recovery

  • The claims are sent to the suppliers to review and confirm their validity
  • Specialised recovery personnel help the supplier review the claims and negotiate on the retailer’s behalf.
  • Once agreed, the audit firm raises the agreed claims so the funds are returned to the retailer
  • Feedback is provided to improve ongoing processes to prevent future errors and ensure accurate payments.

Types of Errors Found in a Retail Merchandise Recovery Audit

Some common types of errors in a retail merchandise recovery audit include

  • Overpayments to suppliers

Paying a supplier invoice for $5,000, but the correct amount owed was only $4,500 due to a pricing error

  • Missing or delayed cash discounts

Failing to pay an invoice within 10 days of receipt and missing out on a 2% cash discount costing the retailer an extra $200

  • Inaccurate chargebacks for returns, allowances, etc

Being charged by a supplier for 20 defective items returned but only deducting the cost of 15 items from payment

  • Incorrect deductions or pricing errors

Deducting a 3% volume rebate from a supplier invoice, but the contract only specifies a 2% rebate

  • Erroneous short/over shipping discrepancies

Shipping records show only 900 units received, but the supplier invoice and POD say 1000 units

  • Duplicate or unauthorised payments

Paying the same supplier invoice twice due to a processing error

  • Failure to invoice for services or shipments

The supplier performed $5,000 of setup work, but no invoice was created to pay for the services

  • Incorrect billing or quantity discrepancies

Supplier invoices for 15 pallets of goods, but delivery records show only 10 pallets received

Get the Best Retail Recovery Audit Services with Audit Partnership.  

Audit Partnership is one of the leading providers of merchandise recovery audit services. We can customise recovery audits for retailers. Our technology-driven approach and industry expertise help identify maximum recoveries. We offer engagement structures with zero upfront costs and share recoveries with our clients. 

Conclusion

Hence, we know the answer to the question, What is a retail merchandise recovery audit?’

Retail merchandise recovery audit is a process for retailers looking to identify previously unnoticed transaction errors and billing issues. It helps recover significant lost revenue, plug leakage points, and strengthen accounting controls. By engaging with experienced audit firms like Audit Partnership, retailers of all sizes can benefit from this valuable exercise. Regular audits should be part of best practices for optimising profits and returns over the long run.

FAQ

1. What is a retail merchandise recovery audit?  

An audit conducted by a third party to identify errors that resulted in lost revenue for retailers.

2. Why are these audits important?

They help uncover hidden revenue leaks, recover significant lost profits and provide feedback to improve internal controls. 

3. How does a recovery audit work?  

It involves data collection, analysis to find discrepancies, review by specialist auditors, identifying claims and recovering these from suppliers.

4. What types of errors are commonly found?

Overpayments, missed discounts, chargeback errors, pricing/deduction mistakes, shipping issues, duplicate payments, and unbilled services.