Internal Audit

Stock Audit Checklist 2023

What is a Stock Audit?

The inventory is being physically checked. But occasionally, depending on the assignment’s terms of reference or engagement letter, it also involves inventory value. The reason why the audit is being undertaken is crucial to keep in mind when performing a stock audit. Depending on the objectives, different audits can take a different approach. For instance, some audits might check for theft (usually for smaller items), while others might check for adequate storage for larger or breakable objects.

Why is a Stock Audit Conducted?

The purpose of a stock audit is to make sure that stock is stored and preserved properly.

1. Has outdated and non-moving stock been recognized separately?
2. How effectively protected is stock against all risks?
3. Does the value of the physical stock match the value on the bank stock statement?
4. Whether the borrower owns the stock and whether financing is only made available against the paid value of the shares.

Documents Required

(A) From the bank branch staff:

1. Sanction Letter
2. Stock Statement for the previous month, certified by a CA.
3. The most recent three-month bank statement.
4. Specifics of the Collateral Security that will be examined.
5. Copies of Forms No. 8 and 32 for the formation and modification of Charges in the instance of the Company.
6. Total Outstanding Balance on All Bank Accounts.

(B) From the Borrower

1. Stock Statement as of the Verification Date
2. Trial balance or pro forma balance sheet as of the verification date.
3. Copy of the most recent audited balance sheet.
4. Insurance Policy, which includes a clause allowing banks to hypothecate both main and secondary collateral.
5. Purchase and sales data for the previous six months as well as for the current month through the date of verification.
6. Purchase and sales invoices, stock registers, and other corroborating documents for internal control verification.
7. The inventory valuation method is used with thorough working.
8. Copy of the most recent Excise/GST returns submitted.
9. Division of sales into domestic and export.
10. Information on outmoded and non-moving stock, as well as stock kept for longer than six months.
11. ABC analysis of stock prices using annual consumption figures for big-ticket products. (Only when offered)
12. Goods produced with information on authorized, installed, and actually used capacity.
13. Month-by-month breakdowns of stock, debtors, and creditors for the last six months n. a copy of the entity’s constitution.

The value of an inventory audit

• If there are discrepancies between the quantity of inventory on hand and the accounting records, you can determine what needs more investigation to be done to fix the problem.
• When you audit your inventory, you can find out which items are running low on stock and which are hanging out on the shelf for too long. From there, you can take the appropriate steps, including providing a discount to move expired goods more quickly and making more purchases of goods with a greater profit margin.
• Any theft, damage, and obsolescence-related losses. Losses frequently point to an underlying problem with bad management practices. For example, some fraudulent actions took place or your expensive merchandise was positioned too close to an unattended exit.
• Analyze the effectiveness of your warehouse and logistics processes. Inventory shortages can happen during the logistical process, such as when transferring things from the container to the warehouse and finding them missing.

The procedure of stock audit inventory

Count of physical inventory

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. To assist you in physically counting the objects, you can utilize a barcode scanner. This is practical for companies that compute their economic order quantity on a regular basis or use the just-in-time inventory strategy.

Cutoff evaluation

Cutoff analysis refers to stopping all activities while conducting a physical inventory count. No products will be received or shipped during this process in order to prevent errors due to uncontrollable factors. All transactions that occurred before the cutoff time must be accurately reported in the financial period. To ensure that the documented stock movement is accurate, auditors will examine the papers of receipt and shipping.

Analysis of the finished goods inventory

A cost analysis of finished goods is ideal for producers and manufacturers. Inventory transforms into a “finished good” that may be sold after completing the production process. The finished product inventory value can then be calculated to ensure that the financial statements are accurate and to manage inventory better.

Analysis of freight costs

Analysis of freight costs quantifies the costs associated with carrying goods from one point to another and the likelihood that goods will be lost or damaged while in transit. Additionally, it takes into account any losses and harm sustained in transit.

Cost-benefit analysis

The business costs known as overheads, such as rent, power, or other “hidden” costs related to inventory, are those that do not directly involve the primary goods. In order to correctly manage your budget, you need to consider how overhead charges impact the entire cost of inventory.

Analysis of merchandise in transit

You must monitor the time for the products to arrive when transferring supplies between several places. This audit study will make sure that nothing is misplaced or harmed in transit. Inventory auditors will look over the transfer paperwork to find any issues.

Tests on valuable stocks

The ABC analysis, also known as the high-value inventory item testing, involves categorizing your products according to their profitability. High-value goods are in group A, mid-range goods are in group B, and low-value goods are in group C. You can put some of the Group C products near the door to speed up journeys to the sales floor if they have a high selling volume. In contrast, group A’s high-value, low-volume items need to be kept properly locked up to avoid expensive theft.

Direct analysis of labour

The cost of labour required to make a particular product is known as direct labour. It can be viewed as the price of an employee’s working hours, shift differences, and overtime hours. To complete the image, include payroll taxes, bonuses, and any benefits-related expenses paid for employees.

Inventory counting and balancing

You must verify that the physical count and your Company’s books agree at the conclusion of the process. Cycle counting requires inventory reconciliation, which is a crucial step. When conducting an inventory count, look into any problems further to reconcile products. You can track any SKU numbers that are prone to errors in the future using this method.

The reason for any discrepancies between the inventory records and the actual number of shelves in your warehouse must be identified, and the records must be changed to reflect this analysis.

Checklist for stock audit

An inventory audit comprises three stages: planning, implementation, and analysis. Let’s examine the stock audit checklist.

• Decide which audit items to examine: High-risk inventory items should be evaluated more regularly. SKUs and barcodes can be used to organize and rank your products.
• Schedule the internal audits of your business: You should pick periods that are not too busy but still have a good frequency to get the high-value things into the audits in order to reduce the disruption to your business flow. It needs to be kept in mind that your audit timetable may also be impacted by your shipping practices, particularly if you guarantee quick delivery to clients.
• Gather the required paperwork: Gather all crucial documents in advance and make sure they can be securely and easily evaluated.
• Perform the audit: As previously indicated, audits come in a variety of forms. Depending on the type of your business, you determine which is crucial. Additionally, ensure that your internal auditor is objective and that you are familiar with the auditing process.
• Identify the weaknesses: The goal of audits is to identify weaknesses and look for solutions to enhance operating procedures. As a result, you must document what occurs during the audits and monitor the outcomes from year to year or cycle to cycle.
• Present your findings: After the audit is finished, write a report that highlights the important conclusions and recommendations. You can verify the previous report again in subsequent audits to determine if anything has changed.

Conclusion

Businesses must use the stock audit checklist in 2023 to guarantee the correctness of their inventory records, uphold their financial integrity, and adhere to legal obligations. Organizations can spot discrepancies, track stock movements efficiently, and reduce risks related to stock management by integrating physical verification, rigorous documentation and record-keeping, and strong internal controls. A thorough stock audit checklist is a useful tool for enhancing inventory management procedures, increasing operational effectiveness, and fostering financial reporting transparency.

Frequently Asked Questions