The most important assets of a business are inventory. It has a direct influence on financial reporting, efficiency of operation, and customer satisfaction. To be more accurate, the businesses should perform frequent examinations to make sure that inventory records are correct and in line with real stock. This is referred to as physical verification of inventory and is used to determine deviations, avert fraud, and transparency. Different approaches may be followed by companies based on their size, industry, and the necessity of their operations. We will take look at the most important techniques of physical verification.
Periodic Physical Verification
In this traditional approach, verification is done at the expiry of a financial year or accounting period by businesses. The counting of all the inventory items and comparison with the books of accounts is done. Although it is entirely accurate, the negative side is that the business activities might have to stop in the meantime. Notwithstanding this, a lot of companies are inclined to use periodic verification to prepare annual reports.
Continuous or Perpetual Verification
Continuous verification is checking stock on a rolling basis as it comes through the year. Businesses choose alternative parts of the inventory to check on a regular basis instead of halting operations. This approach is more viable in case of large organizations and makes sure that records are kept current. Among the benefits of such a form of physical check of inventory, there is the fact that wrongful records and discrepancies are detected promptly, which reduces the risks.
Cycle Counting
A common method is the cycle counting which involves the verification of inventory items in smaller batches on a planned basis. As an illustration, there are some goods that can be inspected on a monthly or weekly or even daily basis. This is an effective way as it will share the burden and prevent significant interference with the functioning. It also assists businesses not to lose accuracy until a stock check after every one year.
Surprise Verification
This procedure, as the name implies, is unannounced inventory inspections. It is highly applied as a check-in system to unearth fraud, pilferage or abnormalities. Surprise checking may be very effective since the employees would not know when the checking is going to take place and therefore are less likely to be manipulated. This type of physical checking of inventory is an essential protection in industries of items that are costly or delicate in nature.
Third-Party Verification
Other companies have assumed the use of external auditors or companies to perform physical verification. This increases credibility and impartial reporting, particularly where the investors, regulators or any stakeholders require assurance. The technique is typical of businesses that have complicated supply chains or where transparency is a key factor.
ABC Analysis Verification
According to the Pareto principle, ABC analysis separates the inventory into three groups: A (high-value items), B (moderately valuable items) and C (low-value items). Items are then subjected to physical verification more often, closely followed by B, then rarely by C. This is a direct strategy that maximizes resources and focuses the resources on the most vital assets.
This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.
Also Read: 8 Crucial Steps for Effective Inventory Verification