What Is Stock Audit? Why Is It Done and What Are the Stock Audit Processes?

Stock Audit

The process of auditing is done through a set of rules and regulations as per the companies' act 2013. It examines the financial statement of a company to determine the prepared statements to be true and fair in terms of company affairs.

Similarly, a stock audit is a process that refers to physical verification of the inventory which includes evaluation of inventory items based on the reference of the assignment.

The stock audit process is necessary to reduce the avoidable investment on stocks or inventory to ensure proper balance in the process. As high levels of stock result in overstocking which may result in the poor value of cash flows and financial losses.

The auditor's task is to check the statements during the process of examination. If he/she comes across with any fraud or discrepancy by the management of the company, then the auditor should mention those in his report. The auditor cannot perform an audit on assumption that management of the company might have committed fraud.

The main reasons for executing the audit are to correct the discrepancies that are present in the stock record when verified with the physical stock bypassing necessary adjustment entries. Following are the reasons why it is looking forward to performing a stock audit:

  • To update the starting stock details.
  • To identify the discrepancy between stock records also known as computed stock and physical stock.
  • To update actual physical stock as a stock record.
  • To ensure proper handling of stocks.


The objective of conducting a stock audit is to ensure the security of funds that are lent by the bank, being safe and valued correctly.

Inventory Audit also known as stock audit where the evaluation is done for raw materials that gets converted to finished goods. It is important to keep the information updated about the quantity and the quality of raw materials in stock.

Procedure of Stock Audit

According to a stock audit process of a software, there are certain steps that are in need to be followed, such as:

  • Report Flash
  • Scheduling Stock
  • Location Barcoding
  • Global Counting
  • Scanning
  • Uploading of Scans
  • Variance Analysis
  • Sign Off

These steps are involved in the process from the whole year, or from the starting when stock was entered in the system.

Whenever the new stock arrives in the premises it is registered, barcoded (labelled/marked), and entered in the system for its acquisition or use. These barcodes are now scanned every time the item is removed from the stock for any purpose. Also, the purpose is required to be entered in the provided field, so that to know afterwards and verify it.

After the stock ends and new stock is demanded its variable use is analyzed for its requisition, and this process continues.

When stock audit is performed you can verify your stock with these entries and its consumption.

The process is very easy when you perform all the activities in regular. Just follow all the mandatory steps from barcoding the item to scan and upload, whenever it is shifted or consumed. It helps you in verifying the data and details when the audit is performed.

Importance of Stock Audits

There are several key reasons why there is a need to perform a stock audit, it includes:

  • Identification of the slow-moving stock, deadstock, obsolete stock, and scrap.
  • Find discrepancies between recorded stocks and physical stock.
  • Update the physical stock that matches the recorded stock.
  • Proper preservation and handling of stocks.

The stock audit is an important factor in determining the benefits offered to an organization. These are the benefits:

  • Reduced cost and bottom-line improvement.
  • Prevention of pilferage and fraud.
  • Accurate information on inventory value.
  • Reduced gaps in the inventory management processes.
  • Special arrangements for third party opinion.
  • The great control mechanism in running the business.

Stock Audit Checklist

Inventory is one of the important field for any business where chances for fraud are more prone. So is, its department where thefts and damages occur more often.

That's why, it is good to have strong control over all the processes, checklists, and regular stock audit for efficient functioning. Following is the checklist for the audit of Inventory.

  • Stock audit software is used to keep records of inventory, mostly it is integrated with accounts.
  • The stock evaluation process, components of cost of inventory, method of valuation.
  • Frequency of verifying of stock record with physical stock.
  • Stock related MIS format and contents.
  • Physical security of Stock, CCTV, Firefighting equipment.
  • Insurance of stock.
  • Categorization of inventory in the high, medium, and low-value stock.
  • Inventory lying with third parties.
  • Old stock, expired stock, stock near expiry dates, perishable inventory.
  • Inventory levels, inventory age analysis.
  • Inventories having duplicate codes in software.


Asset management software provides an efficient program to verify stock or perform the internal stock audit, with the help of an application. Here are some of the advantages of the stock audit with asset management software:

  • Helps to identify the weakness in the accounting system so, enable the officials for improvement suggestion.
  • Assures directors about smooth running business with all the required information. Also, helps to reduce the risk of fraud and poor accounting.
  • Helps in financial benefits on how the business is running, expected margins, and how they can be achieved.
  • Enhance the credibility and reliability of the figures being submitted to prospective investors.

Frequently Asked Questions (FAQs)

What is Stock Audit?

Stock audit or inventory audit is a term that refers to physical verification of a company or institution's inventory assets. Every business organization needs to perform an audit once a year to update and ensure that the physical stock and the computed stock match.

What is Stock Audit Report?

A stock audit report is used to document the details or information about the existing stocks of the business that has been gathered during a stock audit. Annual audit reports provide important details that are used by businesses in their financial statements.

Why is Stock Audit Required?

The stock audit is necessary to reduce unnecessary investment on stocks and to ensure that you have a proper line balancing in the process. High levels of stock generally result in unnecessary overstocking thus resulting in poor cash flows and financial loss.  

What is the purpose of audit?

The purpose of an internal audit is to ensure compliance with laws and regulations and to help maintain accurate and timely financial reporting and data collection. It also provides a benefit to management by identifying flaws in internal control or financial reporting prior to its review by external auditors.

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