Important Reasons for doing Stock Audit

A stock audit is a process whereby every year an auditor or management does physical verification of inventory to determine whether actual is matching with books.

Accordingly, it is essentially a verification of inventory and therefore, also called an inventory audit.

However, it is not essential that every time scope of such audit is relating to physical verification of stock only and depending upon the requirement of management, it may also involve verification of whether a value of inventory is properly computed in books of accounts.

Stock Audit report

We, at Ezybiz India, provides expert stock audit service to our clients overall India. We have an experienced team of chartered accountants and management consultants with more than 15 years of experience specializing in aforesaid service.

Some of the reasons why a stock audit is done are given as under:

  • To determine whether stock shown in books are actually present and matching and there is no discrepancy in the same.
  • To ensure that physical inventories are stored and preserved in a proper manner
  • To make an ABC analysis of stocks which are high value, obsolete, dead, slow-moving and scrap items.
  • As part of the reporting requirement under CARO and Income tax, it is necessary to have physical verification of stock.
  • Since inventory has a direct impact on cost and profit, therefore, it is essential to have its correct picture in books.
  • Regular inventory audit helps in prevention of loss, fraud, and pilferage.
  • To analyze any discrepancy in inventory management and storage procedure.
  • For providing assurance to the third party like bankers, financial institutions, shareholders etc
  • To assist in the proper valuation of inventory as per applicable accounting standards and auditing standards.

Therefore, the importance of such verification is manifold. First of all, stock audit report provides assurance to shareholders and management that proper management and storage system is in place in a company. Secondly, it also provides assurance to statutory auditors who need to report about the existence of robust internal control in the company relating to inventory management, also whether physical verification is done by top management on a periodical basis.

Further, He also has to report about whether the valuation of inventory has been done properly as per applicable accounting and auditing standards. Thirdly, it also provides an assurance to bankers and financial institutions whether a value of a hypothecated stock is sufficient to guarantee a continuation of the existing loan or any future loan and whether there is any need to revise the lending limit or ask for further security to secure their lending. Lastly, it provides an assurance to tax authorities that proper books of accounts are maintained which may be relied upon while passing their assessment order.

Thus, from above, it may be inferred that physical verification of stock is a very important process which needs to be undertaken by every company on a yearly basis.  Further, in order to have desired results, it is essential to adopt inventory audit procedures and conduct verification in a professional manner. Some of the procedures which may be helpful in a stock audit are like cut off analysis, actual counting of stock, testing of high-value items, testing goods in transit etc.

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Author: Anil Agrawal
EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.
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