Introduction
Stock audit refers to the physical verification of inventory and may also involve its valuation, depending on the terms of reference. It is a generally accepted auditing procedure, ensuring accurate stock management. Businesses are required to conduct a stock audit at least once in a financial year to rectify discrepancies between physical stock and recorded stock.
Meaning of Stock
Inventory typically includes:
- Stores
- Spare parts
- Loose tools
- Maintenance supplies
- Raw materials, including components
- Work-in-progress (WIP)
- Finished products
- Waste or by-products
Purpose of Stock Audit
Stock audits serve the following purposes:
- Identifying slow-moving stock, obsolete stock, dead stock, and scrap
- Detecting mismatches between book stock and physical stock
- Updating records to reflect actual stock levels
- Ensuring proper preservation and management of inventory
Benefits of Stock Audit Consultants
- Identification of slow-moving, obsolete, and dead stock
- Prevention of pilferage and fraud
- Real-time inventory valuation
- Cost reduction and improved financial efficiency
- Third-party verification for accuracy
- Strengthening inventory management processes
Important Aspects of Stock Audit
According to the ICAI’s Guidance Note, stock audit involves:
Evaluation of Internal Control
Assessing the segregation of duties, stock recording methods, and verification processes within the company to ensure accuracy in inventory management.
Verification Process
Management is responsible for stock verification, and the auditor must obtain sufficient evidence regarding:
- Existence - Confirming that recorded stock physically exists.
- Ownership - Ensuring that the entity owns the recorded inventory.
- Valuation - Checking that inventory valuation follows prescribed accounting standards.
Appointment of Stock Auditors
Stock auditors are appointed by banks providing working capital loans. They should have at least three years of post-qualification experience, including two years in stock audits across various industries.
Stock auditors perform quarterly audits covering:
- Physical stock verification
- Outstanding debtor and creditor balances
- Submission of stock statements to banks
- Analysis of purchases and sales
- Evaluation of drawing power and insurance coverage
How to Perform a Stock Audit
- Cut-off Analysis - Ensures accurate accounting of stock movements before and after the audit.
- Physical Inventory Counting - Verification of every inventory item using barcode scanners or other tracking technology.
- Inventory Layer Analysis - Ensures FIFO/LIFO inventory records are valid.
- High-Value Item Analysis (ABC Analysis) - Prioritizes stock management based on product value.
- Inventory-in-Transit Analysis - Tracks stock movement between locations to prevent losses.
- Freight Cost Analysis - Evaluates shipping expenses.
- Finished-Goods Cost Analysis - Determines the value of completed inventory.
Role of Auditors in Stock Audit
The auditor follows these steps:
- Physical Verification - Cross-checking actual stock with records.
- Attendance at Stock-Taking - Confirming third-party stock if applicable.
- Stock Valuation - Ensuring adherence to ICAI’s Accounting Standard (AS) 2 on inventory valuation.
- Analytical Review - Gathering audit evidence to validate stock assertions.
- Work-in-Progress Analysis - Ensuring correct valuation of semi-finished goods.
- Management Representation - Obtaining written confirmation of inventory details and verification methods.
After completing these steps, the auditor forms an opinion based on sufficient and appropriate audit evidence to provide a true and fair assessment of the stock records.