Essential Stock Audit Checklist for Businesses

What is a Stock Audit and Why is it Important?

A stock audit consists of a verification of the physical inventory by comparing it to the records held within the accounting system in order to establish that the company has the correct amount of stock. Many companies perform this type of audit on a regular basis to identify discrepancies and to make the necessary adjustments to their accounting records so that the company has accurate closing stock values.

Some of the reasons for discrepancies within a company’s inventory may include:

• Theft, pilferage or shrinkage
• Damaged or out of date stock
• Data Entry Errors
• Classification errors or mislabeled items
• Errors on supplier invoices

When to Conduct a Stock Audit?

Regularly auditing your stock should be an important part of your business’ financial and operational processes. Typically, businesses will conduct the following types of audits:

• An annual audit is required in accordance with accounting standards for financial reporting.
• A quarterly or monthly audit for significant or rapidly moving inventory.
• Cycle counts are continual audits that happen often over smaller amounts of inventory, making it easier for companies with more significant amounts of inventory to manage and maintain.
• A trigger-based audit is typically done after migrating your inventory management system, moving your inventory, or if there are any illegal activities going on within the business.

A successful audit takes place frequently enough, combined with the right method for how you run your business.

Stock Audit Checklist

• Prepare Pre Audit Documentation

  Initiate your audit with complete and accurate inventories. The following are critical to retrieving necessary materials:

  • Recent Inventory Register or Stock Ledger
  • Purchase Invoices and Goods Receipt Notes
  • Sales Invoices and Shipping Documents
  • Stock Transfer or Adjustment Records
  • Inventory Reports from Enterprise Resource Planning or Material Requirements Planning
  • Prior Stock Audit Reports
  • Supplier Product Return Documentation
  • Quality Control Inspection Reports
  • Consumption Record of Produce
• Define Scope and Audit Team

  Steps to prepare for inventory counting:

  • Determine the type of count.
  • Define the area, bins or items to be counted.
  • Appoint an auditing team, either internal or external.
  • Assign inventory custodians to assist with the count.
  • Notify all parties involved of the timelines and protocols involved in counting.

  Provide clear definition of each party’s responsibility in order to keep accountability and to make counting easier.

• Physical Verification of Inventory

  Essentially, your Inventory Count Audit Checklist will include:

  • Counting stocks
  • Separately Count and Identify damaged, expired or obsolete goods.
  • When applicable, confirm all serial or batch numbers.
  • Compare your counts against the system or Enterprise Resource Planning system to determine if they match.
  • Change your Bin Location and reconcile your variance.

  If possible, use automated tools for greater accuracy in your counts.

• Reconciliation and Variance Analysis

  Compare the physical count of inventory to the number of items recorded:

  • Determine the reason for discrepancies.
  • Document the variance with a brief explanation.
  • Identify the cause of the variance

  A thorough analysis of variances will help identify issues within your inventory management processes.

• Verify Valuation and Accounting Adjustments

  When conducting inventory audits, it is important to consider both the quantity of the inventory, as well as its value.

  • The supply chain has several different methods of valuing inventory, so check that you are using the correct method.
  • Make sure the stock price you have recorded in the enterprise resource planning system matches the stock price recorded in your financial records.
  • Verify that you have adequately written off or set aside any provisions for obsolete or damaged goods.
  • If your audit reveals any discrepancies in your accounting records, make the appropriate adjustments to reflect that information.

Check Controls Around Stock Movement

By implementing access restrictions on inventory areas, verifying the appropriate level of approval for any inventory adjustments, and having a thorough review of the process related to these changes including written documentation regarding how you physically secure inventory items, you will reduce the potential for any future inconsistencies. The need to remedy poor controls usually results in consistent discrepancies being created.