Inventory/ Stock Audits/ Asset Count:
In simple term a Stock Audit is the physical verification of the inventory and reconciling the same with the accounting records. It is also to ensure the ownership rights and to verify the realizable value of the company’s inventory.
Why an organisation needs Stock Audit?
There are several reasons why an organization needs stock audit including the following:
- Identifying slow-moving and obsolete stocks.
- Ensuring accuracy of stock as per books.
- Avoiding unnecessary investment in stock thus ensuring better cash flows.
- Understanding the trend in the movement of stock.
- Helps to decide whether to drop any line of products.
- Identifying any fraud or discrepancies.
- Gives an insight of the real value of inventory in hand.
When to carry out an Inventory/Stock Count?
Following are the normal scenarios where Stock Audit/Count is performed:
When bigger audit companies perform external audits of their clients, as part of their audit procedures, they need a third party to certify the stock count and ensure that there is no discrepancy. They appoint peer audit firms to carry out a physical verification and review of the same.
Another scenario where inventory count comes into picture is at the time of liquidation or winding up of a company. The management and relevant authorities (if applicable) requires such physical verification of the stock to understand the count and value of stock in hand.
Transition from Manual to Automated System
As a company moves its record maintenance from manual to automated system (Accounting software and ERPs), to integrate the information available as on the date, a physical stock count is done.
Inventory Financing: (Stock Hypothecation)
Inventory financing is an asset based loan on the value of some or all of your inventory. The lender provides a loan for a percentage or whole of your inventory’s value and the inventory itself serves as collateral for the loan. In such cases the lenders normally insist for an external certification on the inventory status and value.
Stock Count Methodologies
We use widely adopted methodologies in the industry including the following:
- Physical Counting: Counting every piece of inventory/assets available at the premises of the company.
- ABC Analysis: An analysis technique wherein inventory is classified based on their importance or value in their business. Classifying inventory with ABC analysis helps businesses prioritize their inventory, optimize operations and make clear decisions.
- Cut off Analysis: This involves pausing the operations such as receiving and releasing the inventory for a while to avoid mistakes during the audit.
- Other Analytical Procedures: This involves auditing the stock based on financial metrics such as gross margins, inventory on hand days, inventory turnover ratio and cost of inventory.
List of Documents Required for Stock Audit:
- Stock statement as on the date of audit.
- Provisional Balance Sheet & Trial Balance as on the date of verification.
- Latest audited financials.
- Stock Insurance Policy if any.
- Sample Invoices of Purchased and Sales.
A Stock Audit done with a purpose is much more than a mere physical count.
Asset Count: This process basically tracks down every fixed asset of the organization. It is a detective control to ensure no assets of the company are misplaced, stolen or unaccounted. An asset register is prepared maintained and updated to have an on-going monitoring of the permanent assets of the organization.
Asset count is carried out at the time of liquidation, as part of external audit, transition from manual to automated system, shift in the physical office, interdepartmental transfers etc.
General process and documentation as required for an effective inventory audit is required for an asset count as well.