Stock Audit

Introduction

In simple words, the stock audit means physical verification of inventory; it may also involve the valuation of inventory depending upon the terms of reference. An inventory audit is considered a generally accepted auditing procedure. Stock Audit or Inventory check” is a physical verification of quantities and condition of items held in warehouse. The reason behind this check is to know the position of existing stock and is independently checked.

In legal reference, a Stock audit is a statutory process which every business entity is required to perform at least once in a Financial Year. The stock audit process mainly involves the counting of physical stock present in the specified premises and verifying the same with computed stock as maintained by the company. The intention and purpose behind executing this is to rectify the discrepancies present in the booked stock when compared to physical stock by passing necessary adjustment entries.

Meaning of Stock

Inventory normally comprises of

  • Stores
  • Spares parts
  • Loose tools
  • Maintenance supplies
  • Raw materials including components
  • Work in progress
  • Finished products
  • Waste or by products etc.

Purpose of Stock Audit

An institution must perform a stock audit to:

  • Pinpoint and put aside the deadstock, stock moving at a staggering pace, deadstock and scrap
  • Identify the mismatches between calculated stocks available in books and physical stock available in reality
  • Update the records as per physical stock or change the physical stock as per book stock
  • Ensure due preservation and management of stocks

Benefits of Stock Audit

  • Identification of slow moving stock, obsolete stock, dead stock and scrap;
  • Avoidance of pilferage and fraud;
  • Instant information of value of inventory;
  • Cost reduction and bottom-line;
  • Special arrangements for third party opinion, including for Agent warehouses;
  • Reduction of gaps present inventory management process.

Important aspects of Stock Audit

According to the Guidance Note of ICAI on Stock Audit, following are the important aspects of Stock or Inventory Audit.

Evaluation of Internal Control: It is the separation of inappropriate or conflicting functions and adoption of standard methods to record the stock movement and cross-check the data generated by various departments. Under this evaluation, the auditor also checks specific controls over issues, receipts, physical stock and calculated inventory in records.

Verification: Management holds responsibility for the physical verification of stocks. Under the stock verification process, the auditor is responsible for acquiring enough & reliable audit evidence to validate the declarations made by the management about the Existence of stock, Ownership of stock and Valuation of stock.

  • The assertion about the existence of stock confirms the availability of recorded stock at the end of the year.
  • The assertion about Ownership of stock confirms that the entity-owned inventories are duly recorded and the recorded stock is owned by the entity.
  • The assertion about Valuation of stock confirms that the method of stock valuation is correct and applied properly and the condition of the stock is identified based on their valuation.

Who appoints Stock Auditor

Stock Auditor performs its audit on the behalf of the bank from which the auditee takes working capital loan. The applicant should have post-qualification practicing experience of at least 3 years with at least 2 years’ experience in stock audits in different types of industry/sector. In case of firms, the experience of the partners shall be considered as the experience of the firm. Stock auditor is quarterly audit under which auditor mainly examines the certain things:

  • Physical verification of Stock
  • Outstanding Amount of debtor
  • Outstanding Amount of creditor
  • Company should quarterly submit its Stock statement with bank
  • Purchase and sale during the period
  • Drawing power & insurance coverage of company
  • Other mandatory information

How to Perform Stock Audit?

  • Cut-off Analysis: The process where an auditor(s) examine the company’s procedures that involve the test of last few receiving and shipping transactions before conducting the physical count and transactions that follow it, making sure that they are fully accounted.
  • Physical inventory counting: The process of counting every piece of inventory assets to account them all. An auditor usually uses technology like a bar code scanner to physically count each item.
  • Inventory layers: A process taken if the company does inventory using FIFO (first-in, first-out) or LIFO (last-in, first-out) to make sure that the recorded inventory is valid.
  • High-value item inventory analysis: Another term used for ABC Analysis that refers to the grouping of a products, mid-tier is B, and low value are C. It is time-saving and helps to better manage a stockroom.
  • Inventory-in-transit analysis: An analysis to track the time between the date of shipment and the date of receipt when materials are moving between two locations or more. This audit helps to make sure that all the items are not lost and safe while in transit.
  • Freight cost analysis: A process to determine shipping costs and the costs to get products from one place to another.
  • Finished-goods cost analysis: Finished-goods means that when all of the inventory is completed and they are ready to be sold. An auditor then analyzes the value of the inventory for the current accounting period

Role of Auditor & the Stock Audit Process

Process should perform by the Auditor while conducting stock Audit:

  • Physical verification of stocks should perform and examination of records of the Auditee w.r.t the relevant basic documents such as goods received notes, material issue notes, inspection reports, bin cards & so on
  • An auditor must take attendance at stock-taking followed confirmation from 3rd parties when a considerable stock is occupied by 3rd party.
  • Auditor should check that, the valuation of stock must be done using the standard accounting principles for valuation, issued by ICAI i.e. Accounting Standard (AS) 2 Valuation of Inventories.
  • After that, an analytical review process must be carried out to procure audit evidence regarding the assertion made about inventory as discussed above. This must be followed by careful analysis of work-in-progress to confirm the relevance of valuation.
  • In the end, the auditor must obtain a written statement presenting detail and location of inventories along with methods & procedures of physical verification and stock valuation from the management team of the entity
  • After obtaining sufficient and appropriate audit evidence the stock auditor must give its audit opinion on the basis of the evidence obtain that must be true and fair.

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