The Significance Of Physical Verification Of Inventory

As per definitions given in several  textbooks,  inventories are defined as tangible property held for sale in the ordinary course of business, or in the process of production for such sale. Furthermore, inventories can be summed up as consumption in the production of goods or services for sale, including maintenance supplies, consumable stores and spare parts meant for replacement in the normal course. Inventories  also include stock of  goods like raw materials including components, work-in-process, finished goods including by-products, maintenance supplies, stores and spare parts, and loose tools. Inventories are of major importance in terms of value because they constitute a significant portion of the total assets, particularly in the case of manufacturing and trading entities as well as some service rendering entities. Hence, the significance of inventory verification in India cannot be undermined.

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Procedure of conducting physical verification of inventory

Examination of Records: All the records at the time of physical verification can be compiled, and recorded on the basis of relevant basic documents available in regard to the  goods received notes, reports of investigation, material issue notes, bin cards, etc. These facts weigh in the circumstances of each case. It is likely that the physical verification team may come across cases where the entity does not maintain detailed stock records other than the basic records relating to purchases and sales. For such cases, the Inventory management in India would have to suitably extend the extent of application of the audit procedures.

Attendance at Stock Taking: An auditor’s need for attendance at stock taking would depend upon his assessment of the efficacy of relevant internal control procedures. The entire process of stock taking is dependent upon the stock-taking  method followed by the entity (i.e. Periodic or continuous method). The auditor has to ensure that a neat process of physical verification is adopted by the stock-taking personnel so that the instructions issued by the auditor are duly followed. Physical verification also has to examine whether the entity has instituted appropriate cut-off procedures.

Confirmation from Third Parties: Where significant stocks of the entity are held by third parties, the physical verification of inventory must ensure that the third parties are not such that cannot be entrusted with holding the stocks of the entity. It is also necessary that the auditor gets a written confirmation from the third parties for the stocks held.

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.

Posted by:

CA Mitika Batta

AKGVG & Associates

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