Since profit is generated from circulation of current assets proper control and management of inventory and receivables play an important role in the success of any business. Maintenance of desired level of stock for each item of inventory is a must for any business. Since the management have neither the time nor the expertise in stock management hiring a competent Stock Auditor is the best option.
What is Stock Audit
Stock Audit / Inventory Audit refers to the physical verification of inventory. It may or may not involve monetary valuation depending on the terms of engagement. Inventory is a major item of working capital for many of the business entities especially those engaged in manufacturing and trading activities. Considering the chances and occurrence of fraud, theft, damages and obsolesce being very high in Inventory Section it is advisable for any business entity, irrespective of its size and nature, to perform stock audit minimum once or twice a year. This practice ensures that the inventory physically held is totally in agreement with the books of account.
Objectives of Stock Audit
- Reduction in wastage of inventory
- Minimisation of Risks associated with Stock
- Optimisation of stockholding
- Evaluation of the efficiency and effectiveness of Inventory controls
- Efficient use of working capital
Importance of Stock Audit
Significance of Stock audit is becoming more relevant considering factors such as businesses getting multi-locational, inventory being kept at different locations, size of inventory, huge amount of working capital facility availed from banks, complexity in ascertaining the value of inventory etc.
Stock Audit may be conducted either voluntarily by the business entity itself or by appointment by a lending institution.
- Stock Audit conducted voluntarily by the business entity
- Identification of Slow-moving, obsolete and dead stock
- Ensures accurate and reliable information on stock
- Reduction and early detection of pilferage and frauds in inventory
- Helps to identify whether any variation exists between physical stock and recordical stock and if so to set right the same.
- Possibility for probing and identifying significant variation between physical & recordical stock
- Identification of weaknesses in Inventory Management
- Reduction in working capital fund blocked in inventory
Normal Inventory Controls
- Periodical physical verification of inventory
- Age-wise analysis of inventory to avoid obsolescence
- ABC Analysis of Inventory
Key Performance Indicators (KPIs) of inventory
- Stock Turnover Ratio : Number of times stock turned over in a given time period
- More the stock turnover the better it is
- Average Inventory : Amount of stock during a particular time period
- Holding Costs : Cost involved in maintaining the unsold stock.
- Stock-out : Number of times demand for a particular item could not be met
- Rate of Returns : Number of times goods sold once returned for various reasons
Some issues in connection with Stock Audit
- High-tech stocks- Having regard to the nature of stock items to be verified there are occasions where the normal Stock Auditor may need to avail the assistance of experts for conducting an effective stock Audit. For example, an entity which has jewellery or high-tech products auditor may not be competent enough to differentiate between fake and genuine items. In such cases the auditor has no other option but to avail the assistance of a technical expert.
- Multiplicity of locations
- Stock Audit initiated by lending institution for their borrowers
Stock Audit is initiated by lending institution for its borrowers for the following reasons:
- To ensure proper and adequate preservation / storage of inventory
- To check whether obsolete and Non Moving stock has been separately identified
- To check whether stock is adequately insured against all perils
- To check whether the Physical Stock Value confirms with the Value shown in Stock Statement submitted to Lending Institution and Stock Records
- To check whether the stock held by the borrower is fully paid & there is no double financing
- To check whether the periodical statements of inventory & receivable submitted to Lending Institution are in agreement with the books of account and stock records, both in quantity & value.
There is no doubt that maintenance of accurate inventory is a cornerstone of any business. While transacting with hundreds and thousands of products regularly, failure to keep track of stock accurately can lead to potentially distressing situations for business and may also lead to much graver problems. In order to prevent such misfortunes conducting of Stock Audit at regular intervals is highly advisable.
Stock Auditors who are associated with a team of experts in various industries can provide insights into maintaining desired levels of inventory to meet the demands of customers and to foresee future demands as well.
Though inventory, receivables & liquid funds form part of working capital and have equal importance, many a time businessmen do not bother to give the same importance to inventory & receivables as they give for liquid funds inviting avoidable problems.
Author – CA. Ajith Kumar FCA