Inventories denotes tangible property held for sale in the ordinary course of business or in the process of production for such sale or for consumption in the production of goods or services for sale, including maintenance supplies and consumables stores and spare parts meant for replacement in the normal course. Inventories, thus, normally comprises of:
work in process
finished goods including by-products
Waste or by-products,etc
Inventories along with the debtors, usually account for major part of assets of an entity. They also indicate health of the company. Hence it becomes essential that a proper management control and accounting exist for these items. Stock audit or inventory audit can be described in general words as physical verification of stock. Every entity needs to perform stock audit at least once in a year to ensure that the physical stock and stock as per records reconcile.
Benefits of stock audit
Reasons to perform stock audit:
Ensure preservation and handling of stock
Help in identifying,segregating and writing off obsolete stock
Tally the physical stock with stock records maintained
Prevent fraud and pilferage
Help in reaching the accurate value of stock.
Though generally stock audit is considered as just physical counting of stock but in reality, it would depend on the terms of reference in the engagement letter of the assignment. However these are some general steps which need to be followed
Auditor and client should agree on the term of agreements
Obtain information about nature of business, nature of inventory and their storage
Plan audit keeping in mind the nature of accounting, internal control system, various risks and materiality related to inventory
Report any discrepancy to the management and provide solutions to avoid such discrepancy in future.