Auditing returns and write-offs

An online shoe shop gets 1,200 orders a month and 18 percent come back, mostly because the size was wrong. A returned box arrives at the warehouse, an employee opens it and writes the pair off as "defective". Who follows what happens to that pair next? The paperwork is in order: there is a return, a write-off certificate, a signature. Only the goods are missing. Returns and write-offs are two places where a shortage can be neatly covered up, so the auditor examines them separately.

Why these spots are risky

• A document explains the shortage: a write-off entry "legalises" an empty shelf.
• The physical goods often cannot be looked at again: they are said to have been destroyed or sent away.
• Returns run in two directions: from the customer to the warehouse and from the warehouse to the supplier. Both must be tested.

The returns chain

For each return the auditor checks six links:

1. The original sale exists: an order number and date.
2. The reason is coded: size, defect, changed mind. The share of "other" should be small.
3. The goods really reached the warehouse: receiving time, scanner or signature.
4. The condition was assessed: resale, repair or reject.
5. The money refunded matches the sale amount.
6. The goods were booked back in the system.

An example: 216 returns in a month. The auditor picked 30 and walked each through the chain. In 3 cases the customer was refunded and the return document opened, but there is no receiving record at the warehouse: the goods were lost on the way or never arrived. At 420,000 so'm a pair, that is 1.26 million so'm. Three out of 30 is no accident: the other 186 returns must be tested in full.

The particulars of online selling

When goods are sold through a marketplace, part of the returned stock sometimes goes back to the marketplace's warehouse: it is not on your shelf, yet it may still be in your records. So reconcile the returns in the marketplace report with your own goods-in each month. In sales through Telegram, a return often stays in the chat and no document is opened: that the courier brought the goods back is known only by word of mouth. A return needs its own template too: date, order number, who received it and photographs.

Testing write-offs

For write-offs the auditor looks at four things:

• Reason: damage, wear, expiry, loss. A large share of "other" is a warning sign.
• Approval: a committee of at least two or three people, one of whom is not the storekeeper; a certificate and photographs exist.
• Physical destruction: whether the goods were truly destroyed or left the waste area. Where possible, the auditor watches the destruction personally.
• Trend: write-offs as a share of turnover by month and by employee. A sharp jump needs explaining.

An example: in one month 14 pairs of shoes were written off as "damaged" on separate certificates, all with the same signature and no photographs. 14 × 380,000 = 5.32 million so'm.

A company should have its own write-off norm, for example a share of turnover set in an internal document. In a month when the norm is exceeded, management reviews the write-offs separately and the reason is explained in writing. Without a norm, talk of "a lot" or "a little" remains a personal opinion.

Where the two processes meet

The most dangerous scheme: returned goods are written down as "defective" without assessment and written off at once. The test is simple: what percentage of returns was written off, and what is the share of returns made because of a defect? If 40 percent of returned goods are listed as defective while returns for a defect are only 5 percent, the difference must be explained.

Common mistakes

• "Other" as the reason in over 30 percent of cases.
• A certificate dated several weeks after the return.
• Returns to a supplier: goods dispatched, but the supplier's refund document (a credit note) never received.
• Written-off goods not removed from the warehouse and still on the shelf.
• No separate place for returned goods: they get mixed into the main racks.
• Both accepting returns and writing off are in the hands of one employee.

Conclusion

Returns and write-offs are a normal process, but a document cannot be trusted without seeing the goods behind it. OmborAudit tests these two processes along the chain, with a sample count and a comparison of certificates, and shows where a shortage is hiding.