Stock Audit Services

Stock or Inventory and physical assets such as raw materials can be said to be real assets which need regular monitoring. Stock Audit or Inventory Audit services must be conducted by a team of qualified professionals, who can help you in providing an accurate picture of the supply chain. An exact figure of stock in the supply chain is essential:

• To ensure manage channel work properly
• Correct accounting
• Maintain freshness and quality
• Also to double-check on other data reporting mechanisms

As various companies are operating across the borders through multiple locations, outlets, multiple branches, warehouses, some even with several channel partners, to monitor it is a big challenge. TAP GLOBAL offers focused Stock Audit Services to companies to keep them assured of their physical assets as well as inventories.

Stock Audits are also undertaken for Banks and other financial institutions that have extended credit to the business or entities against assets and physical goods.

What is a Stock Audit?

Inventories are a form of tangible property that is held for sale in the ordinary course of business. Stocks generally constitute a significant portion of the total assets, especially in case of manufacturing and trading entities as well as some service rendering organizations. Audit of inventories hence has got particular importance.

Stock Audit is the physical verification of Inventory. However, sometimes it may also include the valuation of the Inventory, this depends on the terms of reference or the engagement letter of the assignment. One essential thing to remember in a stock audit is the primary purpose with regard to the conduct of the audit.

Every business organization at least must perform stock audit once a year, to ensure and update that the physical stock and the computed stock match. A Stock Audit hence helps in correcting and checking the discrepancies between the physical stock and book stock.

Different audits conducted may have a different purpose, for example in some cases it is conducted to ensure that there is no pilferage (generally for smaller items) or for ensuring that the goods or assets are appropriately stored.

What is the Purpose to Conduct Stock Audit?

Stock Audit is conducted by institutions to ensure:

• Proper Preservation or Storage of Stock.
• To identify the obsolete and Non-moving stock.
• To check whether the stock is insured against all the risks.
• To verify the ownership of the borrower in stock and that finance is made only against the paid value of shares.
• To tally the Age-wise and party-wise book debts analysis to the bankers.

What is the Procedure to Conduct Stock Audit?

If your institution records its stock or Inventory as an asset and also it follows an annual audit process, then the auditors need to conduct the audit of your Inventory. Looking at the huge size of some inventories, they may engage in quite a large number of inventory audit procedures before they are comfortable that the valuation you have stated for the inventory asset is reasonable. some of the inventory audit procedures that are listed below:

• Cutoff Analysis

The Auditors will inspect your procedures for halting any further receiving into the warehouse or shipments at the time of physical inventory count so that any extraneous inventory items are excluded. Typically, they test the last few receiving as well as shipping transactions before the physical count, and also includes the transactions immediately following it, to check if you have got a proper accounts record for them.

• Observe the physical inventory count

The auditor needs to be comfortable with your inventory counting procedures. They will discuss the inventory counting procedure with you, also test count some of the Inventory themselves and also verify that all the inventory tags were accounted. In case you have multiple inventory storage locations, they might test the Inventory in those locations. They can also ask from the custodian of any public warehouse where the company is storing Inventory for confirmation.

• Reconcile the inventory count to the general ledger

The Auditors will trace the valuation accumulated from the physical inventory count to the Company's Ledger for the purpose of verification that the counted balance was carried forward into the company's accounting records.

• Test high-value items

In case there is unusually high-value inventory, the auditors will likely spend extra time counting them in Inventory, ensuring that they are valued correctly. They will also trace their valuation report that carries forward into the inventory balance in the general ledger.

• Test error-prone items

The Auditors will test the items again for specific inventory items, where they had noticed error trend in previous years

• Test inventory in transit

There is a possibility of risk if any inventory is in transit from one storage location to another while conducting the physical count. Auditors test this to review your transfer documentation.

• Test item costs

The auditors must be informed regarding the purchase costs in your accounting records so that they can compare the amounts in the recent supplier invoices to the costs listed in the inventory valuation.

• Review freight costs

You can either include the freight costs in the Inventory or charge it as an expense in the period incurred. You must be regular in your treatment so that it becomes easy for the auditors to trace a selection of freight invoices through your accounting system to see how they handled.

• Test for lower of cost or market

The Auditors need to follow the lower of cost or market value rule. They can do this by comparing the selected market prices to their reduced costs.

• Finished goods cost analysis

If a significant portion of the inventory valuation is comprised of finished goods, the auditors will have to review the bill of materials for a selection of finished goods items. They must also test them to see if the compilation is accurate of the components in the finished item, as well as correct costs.

• Direct labor analysis

If in cost of Inventory, a company includes direct labor, then the auditor needs to trace the labor charged during the time of production on the time cards or labor ratings to the cost of Inventory. They also need to investigate whether payroll records support the labor costs listed in the valuation.

• Overhead analysis

 If in case you apply overhead costs to the inventory valuation, then the auditors need to verify that you are consistently using the same general ledger accounts for purpose of source for your overhead costs. It is to check whether overhead includes any abnormal costs and test the validity and consistency of the method used applies to overhead costs for Inventory.

• Work-in-process testing

 If you have a major amount of work-in-process (WIP) inventory, the auditors, in this case, will test how you determine the percentage of completion for work in-process items.

• Inventory allowances

The Auditors need to determine whether the amounts that are recorded as allowances for obsolete Inventory or scrap are adequate. It is based on your procedures for doing so, historical patterns, where used reports and also reports of inventory usage. If you do not have such allowances, they will ask you to create them.

• Inventory ownership

The Auditors review the purchase orders to check the ownership of the Inventory in your warehouse.

• Inventory layers

The Auditors will check the inventory layers that you have recorded to verify that they are valid. In case the organization uses cycle counts instead of physical counts, the auditor can still use the physical count procedure. They perform this during one or more cycle counts and can do so at any time. Their tests evaluate the frequency of cycle counts and also the quality of investigations conducted.

What are the Documents Required for Stock Audit?

The documents required for stock Audit are listed below:

From the Bank Branch Officials

• Sanction Letter.
• Stock Statement duly certified by a CA. for the previous month.
• Bank Statement for the last three months.
• Particulars of Collateral Security need to be checked.
• In case of Company, Copy of Form No. 8 & 32 for creation or modification of Charge.
• Outstanding balance in all accounts with the Bank.

From the Borrower

• Stock Statement as on the date of verification.
• Trial balance or Provisional Balance Sheet as on the date of verification.
• Copy of the latest audited balance sheet.
• Insurance Policy.
• Figures of Purchase and Sales for last 6 months as well as for current month till date of verification.
• Invoices of Purchases & Sales, Stock Register, & other supporting Documents for verifying internal controls.
• Method of valuation followed for Inventory with detailed working.
• Copy of latest Excise or GST Returns filed.
• Break up of Sales into export and domestic.
• Details of non-moving and obsolete stock and also stock held for more than six months.
• ABC analysis of stocks based on the value of annual consumption of major items. (Only if Available).
• Products manufactured with details of licensed capacity, installed capacity and actual utilized capacity.
• Month-wise details of purchases and sales, stock, debtors and creditors for the previous six months.
• Copy of Incorporation of the Company.

What are the Aspects that must be Looked While Performing a Stock Audit?

The following aspects must be taken care of while performing a stock audit:

Reviewing all the cut off procedures and also scrutinizing the follow up.

• Physical Stock Verification.
• Stock Register Verification.
• Reports regarding Stock Pilferage or Damage reports.
• Comparison of Financial Records with others such as stock register
• Reporting, matters related to the discrepancy.
• Valuation and verification of stocks that are in transit.
• Verification of Stock Valuation.

How can TAP GLOBAL Assist You in Performing Stock Audit?

The team in TAP GLOBAL can assist you to:

• Identify Inventory locations.
• Find out from your client where it stores Inventory (If there are multiple locations involved).
• Review the Bank Agreement Letter.
• Get a copy of the client agreement with the Bank.
• Check out the warehouse or other storage areas before the physical inventory count so that you know the layout of the land.

How can TAP GLOBAL Help You?

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