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Physical Verification

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Physical Verification




Introduction



Every business institution at least needs to perform a stock audit once a year to update and ensure that the physical stock and the computed stock match.

A stock audit helps correct discrepancies between the physical stock and book stock can be corrected.

Stock audit, in general usage is considered as an important auditing term which refers to the physical verification of the inventory.

However, at times, it may also involve the valuation of the inventory but it would depend on the terms of reference or the engagement letter of the assignment.


overview

In other words, stock audit is a statutory process which every business institution needs to perform at least once in a financial year.

As far the stock audit process is concerned, the process mainly involves the counting of physical stock presenting the specified premises and verifying the same with computed stock maintained by the company.



Documents



 

The documents required for stock Audit are listed below:

From the Bank Branch Officials:

  • Particulars of Collateral Security
  • Outstanding balance in all accounts with the Bank.
  • Stock Statement duly certified by a CA. for the previous month.
  • Bank Statement for the last three months.
  • Sanction Letter.

documents

From the Borrower:

  • Copy of the latest audited balance sheet.
  • Stock Statement
  • Insurance Policy.
  • Method of valuation followed for Inventory with detailed working.
  • Invoices of Purchases & Sales, Stock Register, & other supporting Documents for verifying internal controls.
  • Sales break up into export and domestic.
  • Details of non-moving and obsolete stock
  • Month-wise details of purchases and sales, stock, debtors and creditors for the previous six months.
  • Copy of Incorporation of the Company.

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Objective



  •  To identify the discrepancy between book stocks also known as computed stock and physical stock.
  •  To update the actual physical stock as book stock.
  •  To ensure proper preservation and handling of stocks.
  •  Identify the slow-moving stock, deadstock, obsolete stock, and scrap



Procedure used in stock audit



In performing stock auditing, there are several procedures that could occur, which include the following:

Cut-off Analysis - This involves the test of the last few receiving and shipping transactions before conducting the physical count and transactions that follow it. This makes sure that they are fully accounted for.

Physical inventory counting - It involves the process of counting every piece of inventory assets to account for them all. An auditor usually uses technology like a bar code scanner to physically count each item.

Inventory layers - The process undertaken to find out which inventory methodology is used (such as LIFO, FIFO etc.) and whether it is valid.

Inventory-in-transit analysis -  An analysis to track the time between the date of shipment and the date of receipt when materials are moving between two locations or more. This audit helps to make sure that all the items are safe and are not lost while in transit.

Finished-goods cost analysis - the inventory which have been completed and are ready to sell is known as finished goods. An auditor then analyses the value of the inventory for the current accounting period.

ABC analysis - An ABC analysis includes grouping different value and volume inventory. For example, high-value inventory, mid-value, and low-value products can be grouped separately. The items can be tracked and stored in their separate value groups as well.

Overhead analysis - Overhead analysis includes analysing the indirect costs of the business and overhead costs that may be included in the costs of inventory. Rent, utilities, and other costs can be recorded as part of inventory costs in some cases.

Reconciliation - Reconciliation includes solving discrepancies that are found in an inventory audit. Errors may be re-checked and reconciled on financial records.
 




Importance



Observation of inventory is a generally accepted auditing procedure, where an independent auditor issues an opinion on whether the financial records of inventory accurately represent the physical inventory being carried.

Auditing inventory is an important aspect of gathering evidence, especially for manufacturing or retail-based businesses. It can represent a large balance of assets or capital.

Auditing inventory must verify not only the amount of inventory but also its quality and condition to see whether the value of the inventory is fairly represented in financial records and statements.




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