What is a stock audit and what are its advantages?

Stock Audit: Benefits & Checklist

What is Stock Audit

Auditing refers to an official examination of the present state of something, especially of one’s financial records. The Auditing process follows a set of rules and regulations by the Standards on Auditing. It includes examining the financial statements to determine that the prepared statements are correct and fair in terms of company affairs.

Similarly, a stock audit is a process that refers to physical verification of the inventory, which includes the evaluation of stock items based on the reference of the assignment. Some assignments also include the valuation of the stock. The valuation depends upon the terms of reference or the engagement letter of the assignment.

The objective of conducting a stock audit is to ensure that the security of funds lent by the bank is safe and valued correctly.

The Benefits of a Stock Audit are as Follows:

1. A Stock Audit is necessary to reduce unnecessary stock investments and to ensure that you have proper line balancing.
2. It helps to keep track of the inventory to avoid any shortage and overstocking of the material. Also, the inventory management process becomes easier if the company deals with various vendors.
3. In the case of a manufacturing company, through the stock audit, you can monitor that there is minimum wastage of raw materials in the production process and maximum output in finished goods.
4. A Stock Audit will disclose any failure due to a lack of security which results in loss, theft, or misappropriation. It is also crucial for inventory losses resulting from wastages, pilferage, and dormant or obsolete stock.
5. A high stock level generally results in overstocking, affecting cash outflows and company profits. A Stock Audit at timely intervals will act as a remedy to this problem.
6. The Stock Audit enables a clear picture of the company’s financial position. It helps find the stock that requires replacement or repair, which can now be worked upon efficiently, thereby preventing any financial loss.
7. It also helps in finding any discrepancies in the packaging and warehouse procedures.
8. Stock Audit helps in cross verifications of the stock of the company that has multiple business locations.

Stock Audit Checklist:

Inventory is one of the most critical assets for any business, where chances of fraud are high, as it is the department where thefts and damages occur more often. That’s why it is good to have control over all the processes and checklists and conduct regular stock audits for efficient functioning.

Following is the checklist for Inventory Audits:

1. Stock audit software to keep records of inventory. Mostly it is integrated with the accounts.
2. The stock evaluation process, components of cost of inventory, and a valuation method.
3. Frequency of verifying stock records with physical stock.
4. Stock-related MIS format and contents.
5. Physical security of Stock, CCTV, and Firefighting equipment.
6. Insurance of stock.
7. Categorization of inventory in the high, medium, and low-value stock.
8. Inventory lying with third parties.
9. Old stock, expired stock, near-expiry stock, and perishable inventory.
10. Inventory levels, inventory age analysis.
11. Inventories having duplicate codes in software.