What is Stock Audit?

A Stock Audit is a systematic and independent examination of an organisation’s inventory to verify whether the physical stock, accounting records, inventory system, and financial statements are consistent with each other.

It goes beyond simply counting inventory. A stock audit examines:

• Physical quantity of inventory
• Stock records maintained in ERP/accounting software
• Purchase and sales records
• Goods Receipt Notes (GRN)
• Sales invoices and delivery challans
• Stock transfers between locations
• Damaged, expired and obsolete inventory
• Slow-moving and non-moving inventory
• Stock shortages and excesses
• Valuation of inventory
• Cut-off of purchases and sales
• Inventory controls and SOP compliance
• Ownership of inventory, including stock held on behalf of third parties

In simple terms:

Stock Count tells you "How much stock is physically available?"
Stock Audit tells you "Whether the stock is correct, properly recorded, properly valued and properly controlled?"

When is Stock Audit Advisable?

A Stock Audit is particularly advisable in the following situations:

1. Large Inventory Holding : When substantial funds are blocked in inventory, even a small percentage of stock discrepancy can have a significant financial impact.
2. Multiple Warehouses / Locations : Businesses having warehouses, CFA locations, distributors, branches or 3PL warehouses should periodically conduct stock audits.
3. High Stock Variances : If there are frequent non Fulfilment of Sales Order, Frequent Mismatch of Physical Stock VS System Stock.
4. Slow-Moving / Obsolete Inventory : A stock audit can identify inventory that has remained unsold for a long period and may require provisioning, liquidation or a change in procurement strategy.
5. Working Capital Monitoring : Banks and financial institutions may require stock verification where inventory forms a significant part of the borrower's working capital.
6. Change in Management / Partner / Ownership : A stock audit is useful during acquisition, merger, takeover, restructuring or change in management.
7. Fraud Risk / Internal Control Concerns : If there are concerns regarding pilferage, unauthorised movement, fake entries, duplicate transactions or manipulation of inventory records, a stock audit provides an independent verification.
8. E-commerce / High-Volume Businesses : Businesses having high-frequency inward and outward transactions should periodically reconcile physical inventory with system inventory.
9. Manufacturing Businesses : For manufacturers, the audit can also cover: Raw Material → WIP → Finished Goods → Scrap → Packing Material and verify the relationship between production records, BOM and actual consumption.

What are the Benefits of Stock Audit?

1. Identification of Stock Shortage & Excess
2. Better Inventory Control
3. Reduction in Working Capital
4. Detection of Pilferage / Leakage
5. Correct Inventory Valuation
6. Better Decision Making