Internal Audit

What Is Stock Audit And Its Applicability?

What Is Stock Audit And Its Applicability

The process of confirming that the tangible products available at your store’s warehouse correspond with the results available at the stock registry is known as a stock audit, sometimes referred to as an inventory audit.

Inventory audits may be carried out internally or by external auditors who can guarantee maximum openness in the outcomes. Unless the audit is required as part of a regulatory or licencing process, a company chooses between hiring a professional and conducting a stock inventory on its own. The specifics of the procedure in this situation will be determined by the laws of the nation in which your business and/or its warehouse are registered.

Why is it important?

Every company that depends on tangible items ought to be comfortable conducting inventory audits. However, given that e-Commerce companies’ products may be dispersed globally across numerous warehouses and logistical centres, stock assessments are particularly crucial for these businesses. A stock audit is the only method to effectively track and manage every product.

Here are some of the primary benefits of stock audits: 

  • Inventory audits directly impact profit estimates. It’s the same as if you had lost or misplaced money or some of your possessions went missing. Because of this, timely inventory investment is required for accounting and profit & loss statements.
  • Stock audits might assist you in enhancing your company’s financial stability. You can learn more about the components of your inventory that sell poorly or underperform in any other way by undertaking a thorough examination of the present state of your physical items and the frequency of their purchases.
  • Inventory management can be used to identify or prevent fraud and/or theft. These terrible realities of inventory storage may be the cause of any discrepancy between the recorded commodities and their actual equivalents that your stock audit reveals.

Stock auditing may end up being one of the most crucial processes carried out by a company because it provides insight into the company’s current financial situation. More importantly, a thorough stock audit can assist you in resolving current problems and averting new ones. 

The stock audit process

There is no right audit technique, and the specifics may vary depending on the operation. Nevertheless, most audits follow the same stages and activities:

  • Forecast demand and stock up: Running out of stock would be the most adverse thing that could happen to you during the inventory audit. After all, you don’t want to halt your operations while you conduct the audit. Some smaller businesses may be able to shut down for a day, but doing so can be perilous. Because of this, it’s crucial to thoroughly examine the data you now have in order to forecast future demand before auditing.
  • Count the physical goods: You can perform a cut-off analysis to simplify things by putting your entire firm on hold throughout the audit, but there are a number of problems this might cause.
READ  Advertising and Public Relations Audit Checklist

Instead, you may consider performing a cycle count, which spares you from having to count the entirety of your stock at once. With a cycle count, you may pick the kind of product you want to audit and the time period you want to audit it. Although less accurate than a complete physical count, it has a considerably smaller impact on your operations.

Alternatively, you can perform a spot check audit, in which you merely check one or two products to find any recordkeeping problems. If there are no discrepancies, you can assume that your sources are current and your stock is complete.

  • Double-check your findings: Although doing everything twice can seem excessive, in-stock auditing requires double-checking. Here, the possibility of human error is there, and the size of the task is frequently too significant to entrust to a single source. It is crucial to double-check your findings because of this.

There are many options available to you here; just make sure that the final count is as accurate as it can be. You can mix and match your auditing techniques (as long as you can justify the change), assign UPCs or QR codes to each item to digitize the process for your future self or hire a helping hand.

  • Compare your findings with the financial records: It’s required to compare your findings with the sales records after you’ve tallied all of your tangible goods. Any differences or inconsistencies signify the start of the distinct work of locating the problem’s cause.

Stock audit checklist

Here is a list of quick questions you should ask yourself before, during, and after performing each stock audit to make things even simpler for you:

  • Has the audit of your physical products been verified twice?
  • Have any supply shortages been found? If so, what can be the cause?
  • Have any things outlived their usefulness since the last inventory check?
  • Has it become too expensive to maintain the stock?
  • Are all applicable laws1 and ordinances adequately documented?
  • Are all the sources and financial data consistently updated?
  • Is the procedure for recording all entering and leaving materials sufficient?
  • Exist any surplus items here?
  • Do the records accurately reflect them?
  • Are there any surplus items? 
  • Are they properly documented in the records? 
  • Are there any manual auditing processes that can now be automated?
  • Is the level of any discrepancies less or equal to the expected numbers? 
READ  Effective Steps of Performing an Internal Audit Successfully

Challenges and solutions in inventory audits

There are several procedural concerns that practically every stock auditor needs to deal with at some point, even if they follow our approach step by step. Fortunately, these are typically minor discomforts you should be aware of rather than significant issues you should avert at all costs.

 So, the following are a few of the most typical problems with inventory audits:

  • Since stock management needs a lot of attention to detail and labour, it takes time. The simplest approach to prevent falling prey to this error is to plan auditing in advance and allot a suitable amount of time for it. The process could take a few days to a few weeks, depending on the size of your organisation. 
  • There is no real-time view of your inventory most of the time, so stock verification needs to be conducted periodically. Perhaps, running weekly or monthly auditing sessions would be overkill, yet making sure that the number of your physical items matches your sales documentation at least twice a year could save you some serious trouble. 
  • Many operations still require manual labour, and the majority of audit procedures cannot be automated. Our main recommendation is to spend money on a solution like this because there are some auditing tasks that can now be completed with the aid of specialised software. The problem caused by the remaining manual labour should be reduced to a minimum if the previous two pieces of advice are followed. 
  • Inventory audit frequently stops your other operations, delaying shipments and generally being a pain. Again, scheduling your auditing in advance and relying on current market research to estimate demand are the greatest ways to avoid that from happening.

Conclusions

To verify the correctness and dependability of stock records, a stock audit is the systematic inspection and verification of a company’s physical inventory, including raw materials, work-in-progress, and finished goods. To discover potential losses, theft, or supply chain inefficiencies, it seeks to find differences between real stock levels and the information in the accounting books. Stock audits are widespread, especially in areas like manufacturing, retail, and distribution that deal with large inventories. Businesses can improve inventory management, reduce financial risks, increase operational efficiency, and maintain regulatory compliance by regularly auditing their stock. This will ultimately result in greater financial control and overall business performance.

Frequently Asked Questions (FAQs)

  1. What is the applicable limit for stock audits?

    Bankers appoint chartered accounting firms on a regular basis to conduct stock audits, significantly when the exposure exceeds the predetermined threshold limit (typically over Rs. 100 Lacks), to verify the authenticity and accuracy of such statements. Stock and debtors are the primary security, so bankers appoint these firms to ensure that the statements are true and accurate.

  2. What is the minimum limit for a stock audit?

    1 to 5 billion rupees. Cooperative banks often use stock audits for exposures over $1,000,000, and Nationalised banks typically use stock audits for directions over $5,000,000. Some banks are more cautious when it comes to stock audits.

  3. Is it compulsory to audit stocks?

    A stock audit must be performed at the borrower’s location for obvious reasons. However, it is necessary to study the organisation, its banking activities, and its financial concerns before visiting the borrower.

  4. Who is required to get the stock audit done?

    Every corporate organisation must undergo stock auditing at least once a year as a regulation requirement. The foremost step in the stock audit technique is to count the actual stock that is shown in the specified areas and compare it to the computed store that the company has.

  5. What is a stock audit?

    A stock audit, which can also be addressed as an inventory audit, is the procedure used to confirm that the items actually present in your store’s warehouse match the data recorded in the stock register.

  6. What is the purpose of a stock audit?

    A stock audit’s main objective is to compare financial data with actual counts, as was already said. Auditors monitor the inventory counting procedure when conducting a stock audit to ensure it is carried out effectively.

  7. How is a stock audit done?

    Taking physical counts of the inventory in your warehouse and comparing the results to what is displayed in your system constitute the inventory count audit procedure. You can use a barcode scanner to assist you in physically counting the objects.

  8. What is a stock audit in banks?

    The stock audit entails a review of the borrower’s most recent stock and debtor information, and the report should preferably include the stock and debtor position as of the visit date.

  9. Who is required to do a stock audit?

    Every company must conduct a stock audit at least once a year to confirm and update the physical and computed stock’s accuracy.

  10. Who is responsible for stock audit?

    To ensure the accuracy of the listed information, inventory auditors check and validate inventory data. In order to identify any discrepancies, they examine and analyse inventory documentation before comparing it to actual stock or other data. They might use a handheld scanner or another technology to physically count the supply of objects.

  11. Who can do the stock audit in India?

    The auditor should be a qualified member of the Institute of Chartered Accountants of India, the Institute of Cost Accountants of India, or a firm of such members.

  12. What is the mandatory limit for stock audits?

    Bankers hire empanelled chartered accounting firms to conduct stock audits when the exposure (credit facilities) exceeds the predetermined threshold limit, which is typically over INR 5 Crores. This is done to ensure the authenticity and accuracy of the statements made in relation to stock and debtors, which are the primary security.

  13. What is the applicability of audit reports?

    If a person is in business and their annual revenue surpasses Rs. 1 Crore, they must undergo an audit.

  14. Who is applicable for the audit report?

    The following individuals must have their accounts audited under clause 44AB: A person is considered to be in business if their annual gross sales, turnover, or gross receipts (as applicable) total more than Rs. 1 crore.

  15. What is the applicability of statutory audit reports?

    Every corporation must perform a statutory audit, even if there is no revenue. Contrarily, every organisation whose yearly revenue exceeds $1,000,000 and/or whose gross receipts exceed Rs 25,000 lakh must conduct a tax audit.

READ  Internal Audit Performance

Read Our Article: Stock Audit: Objective, Importance, and Best Procedure

References

  1. https://en.wikipedia.org/wiki/Wikipedia:Applicable_law

Trending Posted