Stock audit, in general usage is considered as an important auditing term which refers to the physical verification of the quantities and condition of items held in an inventory or warehouse. In other words, stock audit is a statutory process which every business institution needs to perform at least once in a financial year.

Why Should We Conduct Stock Audit?

Inventory tends to be the easiest assets to manipulate and hence it’s essential to keep a constant vigil over it. Here are some reasons why inventory audit is considered paramount:

  • Inventory audit is also required to match the actual quantity of items in stock against the accounting records while also adjusting for differences and allowing for shrinkage so that the ledger reflects accurate values.
  • Inventory audit will be able to reveal which physical goods or products are over- or under- stocked. This will allow you to properly and effectively stock your business thus helping maximize profit.
  • Inventory audit is necessary to reduce unnecessary investment on stocks and to ensure that you have a proper line balancing in the process

Auditor's responsibility to report under section 143 (11) (CARO 2016) clause 3(ii) of Companies act 2013

Whether physical verification of inventory has been conducted at reasonable intervals by the management and whether any material discrepancies were noticed and if so, whether they have been properly dealt with in the books of account. (only if the limits of CARO are crossed)

How To Perform Stock Audit?

  • Cut-off analysis
  • Observe the physical inventory count
  • Confirmations of inventory from the custodian of any public warehouse
  • Reconcile the inventory count to the general ledger
  • Test high-value items
  • Test error-prone items
  • Test inventory in transit
  • Test item costs.
  • Test for lower of cost or market value
  • Finished goods cost analysis
  • Work-in-process testing
  • Inventory allowances
  • Inventory ownership

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