Stock Audit Procedure: Process, Requirements and Practical Checklist

What Is a Stock Audit?

A stock audit is an independent examination of a company’s inventory to confirm:

• It exists physically
• It is owned by the business
• It is accurately valued
• Records are consistent and reliable

• Scope of Stock Audit
  • Physical review of stock in warehouses and stores
  • Reconciliation of stock records with accounting books
  • Valuation testing using FIFO, weighted average, NRV, etc.
  • Obsolete stock detection for unusable or slow-moving items
  • Internal control testing for inventory movement

Difference Between Stock Audit and Other Audits

Stock Audit Requirement

• Situations where stock audits are typically required:
  • Bank lending: Working capital facilities, overdrafts, cash credit limits
  • Credit renewals or increases
  • High inventory turnover or exposure
  • Weak controls over inventory
  • Fraud suspicion or discrepancies
  • Insurance verification of inventory value
  • Corporate restructuring or turnaround
• When banks typically insist on stock audit
  • Working capital limits are above a specified level, generally Rs. 5 crore in India, subject to normal banking practices
  • Stock Statements show inconsistencies
  • Inventory forms a major part of collateral
  • Borrower’s risk rating deteriorates

Stock Audit Procedure

1. Pre-Audit Planning: Define scope, audit locations, warehouses, product types, and cutoff dates.
2. Document Collection: Gather stock statements, invoices, ERP records, transfer notes, and dispatch records.
3. Process Walkthrough: Review inventory processes including receiving, storage, production, and dispatch.
4. Physical Verification: Conduct stock counts using sampling, bin cards, barcodes, and recounts for discrepancies.
5. Reconciliation with Books: Match physical counts with ERP records to identify variances and obsolete stock.
6. Valuation Testing: Check compliance with accounting standards using FIFO, weighted average, NRV, and landed cost.
7. Drawing Power & Lender Reporting: For bank audits, review eligible inventory, margin requirements, and ineligible categories.
8. Findings & Final Report: Prepare variance analysis, reasons for differences, control deficiencies, and recommendations.

Stock Audit Process Checklist

A stock audit is a critical step in ensuring accurate inventory management. Below is a practical checklist that businesses can use to prepare for smooth audits:

• Inventory records – Verify ERP entries, bin cards, and warehouse logs.
• Purchase & inward documents – Match GRNs, purchase orders, and supplier invoices.
• Production & WIP – Review material usage, semi-finished goods, and factory records.
• Sales & outward movement – Track dispatch notes, delivery challans, and invoices.
• Valuation documents – Ensure compliance with FIFO, weighted average, NRV, and landed cost.
• Exceptions & special inventory – Identify consignment stock, scrap, and obsolete items.

• Common Issues Found in Stock Audits
  • Negative inventory values in the ERP system
  • Unmatched GRNs or Pos
  • Obsolete inventory without disposal processes
  • An incorrect valuation or allocation of overheads
  • Cut-off errors at month-end
  • Undocumented scrap and waste
  • Consignment vs owned stock misclassification
  • Lack of segregation of duties around inventory handling
  • Missing or out of date bin cards
  • Incorrect WIP reporting
• Best Practices to Pass a Stock Audit Smoothly
  • Instead of waiting until annual inventory counts, record and perform cycle counts throughout the year.
  • Ensure that each inventory movement is documented accurately.
  • Use clear procedures for documenting the cutoff for all purchases and sales.
  • Utilise either a barcode system or bin labels for inventory control.
  • Prevent ERP users from entering transactions in the system that are backdated.