Prepared by CPSP (T) ISSA B. MSINZI issamsinzi@gmail.

com 0685 94 38 38/ 0626 45 46 45

LEVEL: PROFESSIONAL STAGE V

SUBJECT: PROCUREMENT AND SUPPLY AUDIT
CODE: P17
TOPIC FOUR: STOCKTAKING AND VERIFICATION

Learners being able to:

a) Describe reasons for stocktaking.
b) Describe types of stocktaking and stocktaking documentation.
c) Describe treatment of obsolete, deteriorated, and redundant stocks.
d) Describe common errors in stocktaking.
e) State and explain purpose and objectives of verification audit.
f) Demonstrate physical verification of stocks.
g) Explain findings and report preparation.

INTRODUCTION TO STOCK AUDIT

Stores lying in the store on a given date are known as stock. Thus, stores and stock convey the same
meanings in every sense of the term. Every business organization needs to perform an audit once a year to
update and ensure that the physical stock and the computed stock match.

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. When heading
forward, it is important to remember and keep in consideration the purpose for which the audit is being
conducted because different audits may have different approach which would ultimately depend on the
aim. 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. The reason and purpose behind executing this is to correct the discrepancies present in the book
stock when compared to physical stock by passing necessary adjustment entries.

Meaning of Stock Auditing/ Audit:

Stock audit refers to the physical verification of stock based on the maintained records. Thus,
the audit used for a company’s stock involves verifying and detecting discrepancies (if any), finding
deviations, and reporting accordingly.
OR
Simply put, a stock audit, also known as inventory audit, is the process of verifying whether the physical
goods available at store’s warehouse match the results available at the stock registry.
OR
Stock auditing is the process of inspecting records related to store transactions; products bought and
sold, and related customer information for detecting any discrepancies (if any). It involves verifying stock

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 1

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

based on the company’s billing documents. The term also implies that there has been an internal or
external investigation into the financial transactions carried out by the company.

OR
Stock Audit is a process of physical verification of the physical stock maintained in the storehouse of the
company and matches the result with the stock registers maintained by the company. It is also called as
Inventory Audit.

What is Auditing Inventory?

Auditing inventory is the process of cross-checking financial records with physical inventory and
records. An inventory audit is when either you or an auditor uses analytical procedure to check a
company's inventory methods and confirm that the financial records and actual count of goods match. It
can be completed by auditors and other parties.
An inventory audit can be as simple as just taking a physical count of stock and inventory to verify a
match to the accounting records.

Inventory audits can be conducted inside the company or via the outside auditors who can ensure
maximized transparency in the results. Whether to hire a professional or to conduct a stock inventory by
yourself is entirely up to you, unless the audit is part of a regulatory or licensing procedure. In this case,
the specifics of the procedure will depend on the legislation of the country where your company and/or its
warehouse is registered. Inventory audits is also called stock audit.

The main objective of a Stock Audit

 To ensure the existence, accuracy, ownership rights and also verifies the realizable value of the
items in the company’s inventory. Accurate accounting of inventory is also essential to a robust
bookkeeping system and MIS reporting.

Types of Stock Audit

The process of auditing stock is considered one of the most challenging tasks for businesses, especially
when the business becomes bigger the more the process is. When it comes to stock audit, the process is
classified into various types depending on how auditing is performed.
Let’s have a look at the different types of Stock Audit which are in today’s demand:
 Internal Audit: This type of audit is performed by the company itself. Everything is managed by
the company internally from finding issues to resolving them.
 External Audit: This is performed by the external auditors to check and validate inventory
records with physical records.
 On-site Audit: It includes visiting the site in person and verifying the stock physically with
respect to the submitted documents.
 Remote Audit: Remote audits are performed by evaluating documents related to the inventory &
their verification simply by means scanning available inventory/stock tags.

Importance of Stock Audit/ Auditing Inventory in an Organization

 Stock audit is necessary to reduce unnecessary investments on stocks and to ensure that you have
a proper line balancing in the process.

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 2

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

 It helps to keep a track of the inventory to avoid any shortage and overstocking of the material.
Also, the process of inventory management becomes easier in case the company is dealing with
various vendors.
 In the case of a manufacturing company, through the stock audit, you can keep a check that there
is minimum wastage of raw materials in the production process and maximum output in terms of
finished goods.
 Stock audit will disclose any failure due to lack of security which results in loss, theft, or
misappropriation. It is also crucial to any sort of inventory losses resulting from wastages,
pilferage, dormant and obsolete stock.
 A high level of stock generally results in overstocking thereby affecting the cash outflows and
profit of the company. A Stock Audit at timely intervals will act as a remedy to this problem.
 Stock audit enables the true picture of the financial position of the company as the stock that
requires replacement or repairment can be worked on efficiently thereby saving the company
from any kind of financial loss.
 It also helps in finding out any discrepancies in the packaging and warehouse procedures.
 Stock Audit helps in cross verifications of the stock of the company having multiple business
locations.
 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.

Why is Stock audit Beneficial?

Every business that relies on physical goods should be familiar with conducting inventory audits. Here, a
stock audit is the only way to track and manage all the products efficiently. As you can see, stock auditing
may become one of the most important procedures carried out by a business, as it reflects part of the
current financial state of the company. More importantly, a thorough stock audit can help you solve
existing issues as well as prevent future ones.

Here are some of the key/ primary benefits of stock audits/ inventory audits:-
 Auditing inventory is directly related to your profit calculation: If some of your items are
missing or misplaced, it’s the same as if money were missing or misplaced. That’s why investing
in timely inventory is needed for accounting purposes and profit & loss statements.
 Stock audits can help you improve the financial health of your business: By conducting a
thorough analysis of the current status of your physical goods and the frequency of their purchase,
you can gain insights into parts of your inventory that sell poorly or underperform in any other
way.
 Inventory management helps you prevent or identify fraud and/or theft: If your stock audit
reveals any discrepancies between the recorded goods and their physical equivalents, it could be
the result of these unfortunate aspects of inventory storage.
 Direct impact on costs and bottom line

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 3

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

 Prevent pilferage and fraud

 Identifies slow moving stock, obsolete stock, dead stock and scrap
 Third party independent opinion, especially for agent warehouses
 Identifies gap in current inventory management process
 Enable accurate valuation of inventory

Reasons why one should look forward for the stock audit
 To update the opening stock details.
 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.

List Of Documents Required For Stock Audit:

1. Stock Statement as on date of verification
2. Provisional balance Sheet, Trial balance as on date of verification.
3. Latest audited financials.
4. Stock Insurance policy if any
5. Invoices of Purchases, Sales
6. Stock Register
7. Method of valuation of closing stock
8. Stock list of non-moving, obsolete, dead stock.
9. Documents relating to constitution of the business
10. Debtors and Creditors list for latest 6 months.

The Stock Audit Process/procedures

While there is no one standard way to conduct an audit and the details will vary from operation to
operation, there are some stages and activities that are common to most audits:

1. Forecast demand and stock up: The worst thing that could happen to you during the inventory audit
would be running out of stock. After all, you don’t want to put your entire operation on hold while you’re
conducting the audit. This isn’t always possible and some smaller operations are in a position to actually
close down for a day but this can be a risky move. That’s why it’s essential to dig deep into the data you
have on hand to anticipate the future demand before auditing.

2. Count the physical goods: There are different approaches and methodologies here. For example, you
can go item by item and record every single thing you find on your warehouse’s shelf. To make things
easier, you can run a cut-off analysis, where you put your entire business on hold during the audit, but
there are a number of issues this can lead to.
Instead, you can try to conduct a cycle count, which doesn’t force you to count your entire stock all at
once. With a cycle count, you can choose a specific type of product you want to audit during a specific
timeframe. It may be less precise than the complete physical count, but it is much less disruptive on your
operations.
Alternatively, you can run a spot check audit, where you only verify one or two products with the goal of
identifying any issues with your recordkeeping. If no mismatches are found, you can conclude that your
sources are up to date and your stock is intact.
These aren’t the only ways to conduct an audit but are among the most common methods.

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 4

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

3. Double-check your findings: Doing everything twice may seem like overkill, but in-stock auditing
double-checking is a must. The human error factor is in play here and the scale of the job can often be too
much to be trusted to a single source. This is why it’s essential to cross-check your discoveries.
Mix and match your auditing techniques (as long as you can justify the change), assign UPC codes or QR
codes to each item to digitize the process for your future self, hire a helping hand - again, there are plenty
of options you have to choose from here, just make sure that the final count is as precise as it could get.

4. Compare your findings with the financial records: After you’ve counted all the physical products
you have, it’s time to compare your findings with the records. Any discrepancies or mismatches signal the
beginning of the separate task of tracking down the source of the problem.

Stock Audit Checklist

To make things even easier for you, here is a shortlist of questions you should ask yourself before, during,
and after every stock audit you carry out:
 Has your physical goods audit been double-checked?
 Have any shortages been discovered in your stock and how can they be explained?
 Are there any items that have become obsolete since the last inventory verification?
 Has the stock proven to be too expensive to maintain?
 Are all the relevant rules and regulations properly documented?
 Are the financial records and inventory sources regularly updated?
 Is there an adequate process for documenting all incoming and outgoing materials?
 Are there any surplus items?
 Are they properly documented in the records?
 Are there any manual auditing processes that can now be automated?
 Is the level of any discrepancies less or equal to the expected numbers?

Challenges and solutions in stock/inventory audits

Even if you follow our process step by step, there are certain procedural issues almost every stock auditor
has to face at some point. Fortunately, these tend to be minor inconveniences you need to be aware of,
rather than serious problems you should avoid at all costs by nature.
So, here are some of the most common issues with inventory audits:-
 Stock management is time-consuming, since it requires a lot of attention to detail and
manpower. That’s why the best way to ensure that you don’t fall victim to this flaw is to schedule
auditing in advance and set a reasonable amount of time for it. Depending on the size of your
operation, the procedure may take anything between several days to a few weeks.
 There is no real-time view of your inventory most of the time, so stock verification needs to be
conducted periodically. Perhaps, running weekly or monthly auditing sessions would be overkill,
yet making sure that the number of your physical items matches your sales documentation at least
twice a year could save you some serious trouble.
 Most audit procedures cannot be automated and a lot of processes still need to be done by
hand. There are certain auditing operations that can now be done with the help of dedicated
software, so our primary advice is to invest in such a solution. Other than that, following the
previous two pieces of advice should minimize the trouble from the remaining manual labor.

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 5

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

 Inventory audit often halts your other operations causing delays in shipments and generally
being inconvenient. The best way to prevent that from happening is, again, to schedule your
auditing in advance, as well as to rely on timely market research to forecast demand.

Qualities of Stock Auditor

 Integrity and should be faithful and trustworthy.
 Friendly and acceptable to the workers.
 Professional ethics.
 Qualified and registered with the PSPTB especially in the category of authorized stock verifier.

The responsibilities of inventory auditors/ What Does an Inventory Auditor Do?

As an inventory auditor, your job duties and responsibilities include:
 Counting current stock quantities,
 Reviewing inventory records, and documents
 Report any discrepancies between the two
 Compare physical inventory with inventory records to ensure the numbers match.

Difference between Stock Audit and Stock/Inventory Count

Stock audit refers to the detailed inspection of records related to store transactions, products sold,
customers’ information for detecting any discrepancies (if any). It can be carried out by an internal
auditor or an external vendor.
In contrast, an inventory count, or a stock count, is the practice of tracking the inventory items in your
warehouse that are available and awaiting sale. It is a simple checking of physical stock provided by a
company’s employees. The Inventory counts (also known as stock-takes in some countries) help you to
keep track of your inventory.

REPORTING IN STOCK AUDIT

Reporting in Stock Audit is essential to maintain a document with relevant information about the stock
availability, quality, and all other details that are gathered during the stock audit. Usually, annual audit
reports give crucial details that help businesses to overcome faults in their financial statements and
accounting systems.

Depicting the role of timeliness in Stock Audit, it is very important to maintain audit stock reports in
order to reduce unwanted investment on stocks that are available in surplus. Usually, it is observed that
many businesses have to deal with an overstocking situation resulting in poor cash flow and huge
financial loss due to the lack of on-time stock audit.

Frequently Asked Questions (FAQs)

Q1. What is Stock Audit?

Ans: 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.

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 6

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

Q2. What is Stock Audit Report?

Ans: 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.

Q3. Why is Stock Audit Required?

Ans: 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.

Q4. What is the purpose of audit?

Ans: 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.

ELEMENTS OF STOCK AUDIT

Stock auditing encompasses three aspects, that is,

A. Stocktaking is the process of actual counting, weighing and measuring the quantity of stock balances
and recording the results, which also involves the physical verification of condition of items being
counted. In other words, Stocktaking is the process of examining, counting and valuing goods held by a
store or warehouse.

B. Stock checking is the checking of the quantities of stock items regularly or at intervals as part of
control measure in executing daily duties of a supervisor. These include checking on issues, receipts or
spot check.

C. Stock verification is the auditing of records, stocks, systems or procedure being followed in
management of materials or stocks. Therefore stocktaking being a routine is a branch of stock
verification, the similar case with stock checking.

The above terms are further explained as follows:

A. STOCKTAKING
Definitions: Stocktaking is the process of actual counting, weighing and measuring the quantity of stock
balances and recording the results, which also involves the physical verification of condition of items
being counted.
OR
Stocktaking is the process of examining, counting and valuing goods held by a store or warehouse.

Reasons for Stocktaking

a) Preparation of financials statement: It is statutory for all companies and other trading organization to
prepare various financial statements to show both the performance of the company for the year ended.

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 7

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

These statements include balance sheet, profit and loss account and others. Preparation of these statement
demands a number of inputs, one of which is the correct value of stock at the financial years.
b) To enable the company compare its physical stocks with the stock records, so as to satisfy themselves
that the figure in the records match to the figure of the physical inventories.
c) To disclose the possibility of fraud, pilferage, theft, loss or any other irregularity in the handling of
items thus to enable the company taking necessary measures immediately.
d) To give an indication to management whether the stock is well managed or not i.e. revealing
weaknesses on stock handling systems if available, size and number of surpluses and deficiencies are
good indicators of whether the stocks are efficiently managed or not.
e) To keep stores staff at alert all the times, knowing that stocks will have to be counted sometime
physically.
f) Stock valuations which are not backed up by physical count have little relevance to the critical auditors
and organization`s accountants hence stock taking has to be carried on to back up the recorded figures
with physical items.

BENEFITS OF STOCKTAKING
Stocktaking involves many valuable and expensive man-hours to arrange and carry out, plus a deal of
management time needed to investigate the almost inevitable list of stock discrepancies. However, the
justified benefits of stock taking exercise are such as:
a. Stock records and control system are tested: With verification by physical counts correctness of
stock records are established performances on the control systems are checked to ascertain whether
there are any adjustments needed to be done.
b. Computerized control systems can be verified: Through stock taking computerized control system
can be tested and verified for its accuracy and efficiency.
c. Financial reports (including the balance sheet) produced by the organization`s accountants will
demand some form of physical stock verification to back up the value of stock shown within the
balance sheets. Stock valuations which are not backed by a physical count have a little relevant to the
critical auditors.
d. The security of stores management demands that regular and physical checks are made to ensure that
any possible theft fraud is quickly detected and investigations-carried out.
e. Stocktaking is an indicator of overall stores efficiency and management control. The number and
size of stocktaking discrepancies is a good indication of efficiency. A high incidence of stock
discrepancies usually warrants a close look at the personnel and systems involved.
f. Accurate stock levels shown within the stock record system backed up by a regular physical count
will ensure that all requirement of the user department are covered by existing stock levels and will be
issued promptly and efficiently. This avoids a common situation of stock shown in the records system
not physically present.

INTERNAL CONTROL AND ORGANIZATION OF STOCKTAKING

Stocktaking requires good control and organization if it is to done properly; this applies to both
continuous and periodic counts.
Therefore for stock taking to be proper the following has to be adhered to:

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 8

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

a. Segregation of duties- Staff responsible for the custody of stock, or for maintaining detailed stock
records or control account, should not be included in the stock taking exercise unless where necessary
and for some reasons.
b. Instructions
 For each stocktaking, written instructions should be issued to all centers, dealing with the
organization and conduct of all setting out with their specific responsibilities; this is to ensure that
at each stage everyone know and understands his task and appreciate its importance
 The written instructions should be reviewed and approved by a responsible official before being
issued.
c. Supervision- Competent supervisors, to whom the stock counters may refer for guidance, should be
appointed in each area. Each supervisor should make test counts and review all of his area to ensure
that all stock has been counted and the counts recorded.

d. Arrangement of stores
Matter of early consideration- Early planning of the verification of stock is necessary to ensure that the
appropriate audit step are carried out at the right time because the substantive testing procedures required
will depend upon the method by which the client determines the balance sheet value of stock therefore
particular attention should be paid to the client`s procedures for determining stock quantities since if these
procedures are unsatisfactory, it may be impossible for the stock verifier to satisfy himself at a later date
by alternative verification procedures that stock is correctly stated in the accounts.

Stock held by third parties

Consignment or other stock held for third parties should be properly identified. Normally it should be
physically counted in the same way as the client`s stock, as part of the control over such stock, but
arrangement must be made to exclude such items from the final stock sheets.

The stock verifier should ensure that appropriate arrangements are made to confirm the existence of stock
belong to the client which is held by third parties. The form that this confirmation should take will depend
upon the materiality of the stock in question and upon whether accurate records of it are maintained by
the client.
Where the stock is held by third parties is not of materials, it may be adequate for the stock verifier to:-
a. Consider the reputation and standing the custodians.
b. Review the procedures operated by the client for confirming with the custodians the quantities held;
and
c. Obtain from the custodians certificates of the balance
d. Stock items should be well arranged and conveniently stacked or binned at all times. The racks or
bins should be marked with all relevant information as to size, grade, origin and job for which
required or similar details, so as to aid identification.
e. Counting the stock
 Each team of stock takers should consist of one person with specialist knowledge able to identify
the items of stock and make the count and a second person to record the results of the count and
to check it`s accuracy by making second count.
 Arrangements should be for making the stock items as they are counted for each area to be toured
as it is completed to make sure that all stock has not been counted twice.

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 9

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

f. Stocktaking sheets
 Stocktaking sheets or cards should be in standard form and designed to show all essential
information they should be completed in ink or ball point pen and should be initialled or signed
by the persons taking and checking stock
 The issue and return of all stocktaking sheets or cards to departments must be controlled (e.g. by
pre-numbering and accounting for all numbers) held at the summarization date or inspect such
certificates obtained by the client.

On the other hand, if the amounts are significant, it will normally be necessary arrange to attend a count at
the premises where the stock is held and where reliance is placed upon stock records maintained by
custodian to evaluate records. Where stock of material amount in total, is held by a number to third parties
attendance by the stock verifier at such stocktaking may be carried out on rotation basis.

PHYSICAL VERIFICATION AND VALUATION OF STOCK

The stock verifier may be required to verify physically the stock in trade at the end of the year. In this
regard stock verifier is likely to face the following problems:-
 It is difficult to assess the stock due to its technical nature
 The stock may be voluminous and to ascertain its value may be difficult.
 The stock may be valued at selling price and stock of goods sold but not dispatched yet may be
included
 Stock cut-off procedure may be applied incorrectly
 Stock may be held at different places e.g. stock held by agents, branches etc.
 If internal control system is week then stock figure may be unrealistic.

Note! Cut-Off: There must be adequate cut-off procedures to ensure that the purchases, production and
sales records are closed at the points which coincide exactly with the stocktaking or closing of the stock
records. Movement of the stock or materials during stocktaking where production or the dispatch
department is not entirely closed down must also be controlled to prevent items being omitted from the
count or counted more than once.

Comparison with accounting records

If accounting records are kept for stock, the physical counts should be compared with such records, and if
there are any differences and discrepancies then should adjusted immediately.

Stock verifier`s duties before stocktaking

a. The stock verifier should check the previous working papers and if there are big changes in the value
of stock then he should discuss this with the management.
b. He should check the current audit file to find out the total value of stock places at which stock is held,
methods of stock valuation.
c. He should review the stock cut-off arrangements and try to obtain confirmation from third parties e.g.
agents, branch managers etc.
d. If stock is of technical in nature then he should try to seek expert advice and if need, engage an
independent expert to verify this.

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 10

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

Stock verifier`s duties while conducting stocktaking

a. He should observe the stocktaking exercise to ensure that stock has been valued in accordance with
the laid down instructions.
b. He should ensure that the items counted are correct and have been entered in the stock sheets
c. He should ensure that damaged, defective and slow moving items have not been taken in the normal
stock. These must be shown separately.
d. He should enquire and test the cut-off procedures and make it sure that are adequate and accurate
e. He should take appropriate notes and make his calculations to find out the reasonable value of stock.
Stock verifier`s duties after stocktaking
a. He should check the details of the latest movements of goods inward and outward in order to ensure
proper cut-off arrangements.
b. He should check the final stock sheets to verify and ensure that the correct amounts have been
calculated.
c. He should follow-up the pending matter and find out the answers to those questions which were
raised during the stocktaking exercise.
d. He should check the figures as regards stock and ensure that sheets have been signed by authorized
persons.
NOTE: One of the most important duties of the stock verifier or supplies auditor is to attend, arrange or
oversee physical stocktaking.

The objectives of stock taking / Stock verification Unit are as follows:-

a. To ascertain whether or not the stock records are written accurately
b. To obtain a realistic physical count to establish the number of items stocked in a period, discrepancies
and true condition of the goods
c. To support the value of stock shown in the balance sheet
d. To disclose any weakness in the whole system and procedures in materials flow , acquisition through
storage control and handling and issuing to final users
e. To disclose any possibility fraud, theft, losses etc.

METHODS OF STOCKTAKING
There are two main methods of stocktaking namely:-
i. Periodic stocktaking and
ii. Continuous stocktaking.
However, the are other two variations namely
 Blind stocktaking, and
 Spot-check or stock checking

Explanations:

1. Periodic stocktaking: This is a method of stock taking where by the whole range of stock is covered at
the same time at the end of a given period, usually the end of financial year, through at certain times, it
may be done twice a year.
OR

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 11

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

Periodic stocktaking is a process is carried out every month, quarterly, bi-annually or annually
depending on the volume of the goods your business handles. The entire stock in the warehouse is
checked in one or two days. While inexpensive items will be checked every year, expensive and sensitive
items would be checked 3-4 times a year. The physical balance that is taken at the end of each financial
year will form the inventory.

Preparation and administration of the periodic stocktaking:

When conducting periodic stocktaking the following arrangement and principles should applied.
a. One person must control the whole stocktaking operation
b. While stocktaking is in progress, do not have the warehouse open for normal business. Where this
cannot be arranged it should be at least assured that issues and goods receiving operations are reduced
to the minimum, and special records made of transaction that are essential during stocktaking
c. After the end of the working day before the operation begins no more issues should be made, receipts
recorded until the stocktaking is completed. The receipt and issue notes should be noted
d. Where commodity coding gives classifications of goods, the stock takers may be allocated to specific
coded sections. Stocktaking should proceed in an orderly manner and mark each bin or rack as it is
dealt with to avoid the chance checking any item twice and ensure nothing is missed
e. Two people should preferably be engaged for each count.
One of them should, if possible, be a member of the technical staff, the other a member of stock audit
staff. The technical man is conversant with nomenclature and can check that no technical error
occurs, while the other people look after the audit and accounting aspects.
f. Action by the stores should include:-
 Marking or segregating in advance goods which are not the property of the company
 Return to the warehouse all items issued on loan whether internally in the operating units or
externally with sub-contractors before stocktaking begins
 Making arrangements and allowance so that stores in transit at the date of stocktaking within
the works or between warehouse or where there are several widely dispersed stock holding
point are taken into account.
 Listing separately any goods which have been received but not yet taken on charge e.g. still
under inspection
 Making arrangement to include in the total list of stock all times belonging to the business
which are not in premises at the time of the check

Pros/ Advantages of periodic stocktaking

 It is not too expensive to conduct
 Time saving because it is done once and at the end of the year
 The exercise is done extensively and there is no likelihood of items remaining uncounted
 This process is a simple and convenient stocktaking method for a small storage facility or
warehouse.
 No extra staff is needed for the stocktaking process. You can allocate in-house staff to carry this
out.
 It will give the correct figure of closing stock for balance sheet purposes. Hence, your balance
sheet will be accurate with this method of stocktaking.

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 12

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

Cons/ Limitations of periodic stock taking

 There is considerable disorganization of the operations for a day, a week or even more at the end
of each financial year or twice year, as most vital operations are suspended.
 Most stock takers participating in this activity are unfamiliar with the goods to be described
accurately, hence errors are likely to arise in counting
 Discrepancy may be carried for one complete cycle when it occurs shortly after last stocktaking
and thus it becomes difficult to explain and investigate the discrepancy
 The inventory of all items is taken with the same frequency whether they are slow moving items
which remain in the warehouse from month to month against fast moving items used daily
 The discrepancies will be noticed only at the end of the accounting period. There is no possibility
of noticing any discrepancies beforehand. Hence, it might not be the best stocktaking method out
there.
 The preparation of the balance sheet will be delayed if the process isn’t completed in a timely
manner.

2. Continuous or perpetual stocktaking: This is the method where by inventory is taken continuously
throughout the year so that each item is physical verified at least once in the course of the course of the
year, or more frequently if desired. Together with this method is the perpetual inventory recording system
the system whereby stock records are written daily in such a manner that at any given time records show
the quantity of inventory available.
OR
Continuous stocktaking is a system which conducts stocktaking throughout the year under a
predetermined plan of action. The predetermined plan of action should be developed by the business
depending on what type of goods they store. The business has the freedom to decide the frequency of
stocktaking under such circumstances. Since the discovery of discrepancies is spread throughout the year,
a detailed analysis of the condition of the stock is possible with this system. On the other hand, final
accounts can be prepared and completed on schedule since continuous verification will be done as per
plan. There is no need to freeze the entire operations of the business when stocktaking since the
verification is being carried out throughout the year. The stock records of the warehouse are up to date at
any time.

Continuous stocktaking is also called Perpetual or Automatic Stock Verification

Advantage of continuous stocktaking and perpetual system

 The long and costly work of periodic stocktaking is avoided

 Detailed and reliable check on stock obtained because the exercise has ample time to completed.
 Employment of a full time and experienced person for this job is possible; such person may be
stock auditor etc.
 Discrepancies are timely discovered to enable a remedial action to be taken immediately. This is
an important advantage because one of the main weaknesses of periodic stocktaking method is
that all the discrepancies are declared at once and time to deal with them properly is necessarily
limited.

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 13

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

 It is not necessary to close up or stop and stores operations so as to carry out this type of stock
taking.
 The moral effects on the staff tend produce grater care and services as a deterrent to dishonest.
 The normal posting of receipts and issue on the stock records can continue without interruption.
 The verification extends to comparing the actual inventory with the authorized maximum and
minimum, this ensures that adequate inventories are maintained within the limits.
 The stock being kept within the limits decided upon by management, the working capital sank in
them cannot exceed amount authorized.

3. Blind Stocktaking
Definition: This can be defined as a system, which is seldom used, requires that the stock taker be given
literary no information regarding the stocks she/ he has to count or check.
He gets virtual plain stocktaking sheet without information such as code numbers, description or even
location of items in the stores.
He is not even the opportunity of having access to stock records such as bin or ledger cards.
In some instances, however, in this system, the stock taker is given all other information except the
balance of stocks as per stock records.

Advantages of Blind Stocktaking

 The obvious advantage of this system is that the stock taker has no opportunity of skimping his
work by simply accepting the quantities as shown in the stock records, thus the check is more
reliable

Disadvantage of Blind Stocktaking

 The system is difficult and slow
 It requires many people to be completed in time
 Errors are likely to arise if the stock taker are not very experienced and don`t have good
knowledge of the physical characteristics and nomenclature of the items held.

STOCK DISCREPANCIES
Definition: Stock discrepancies refer to the differences between the recorded stock and the physical
stock quantity. Discrepancies are inevitable in large and complex stores system and each must be
investigated and corrected. Thus, when the amount of stock found by physical examination, fails to agree
with the balance on the stock records, a discrepancy exists.

Types of Discrepancies
There are two main types of discrepancies, namely:-
a) Stock surplus or positive stock discrepancy: This is a situation where there is more physically
counted stock than recorded stock.
b) Stock deficiency or negative stock discrepancy: This is a situation where there the physical stock
is less the book figure.

Storekeeper`s agreement

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 14

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

Stock takers should not declare a discrepancy on any item without first giving the storekeeper concerned
the opportunity of investigation. This is a sensible precaution for several reasons:
a. There may be duplicate location of which the stock takers are not aware, but the storekeepers know of
them.
b. It expected that the storekeeper has a better practical knowledge of his stock anyone and he may be
able to correct on the part of stock takers particularly errors of identification
c. It gives the storekeeper on opportunity to explain or correct the different if he can and ensure that he
is aware discrepancies which may reflect upon the performance of these duties.

When the storekeeper has been called in and fails to explain the difference he should sign the stock sheet
to indicate his agreement that the discrepancy is genuine.

Classifications of stock discrepancies (Extent of discrepancies)

For management attention or otherwise, it is important to define discrepancies by three main
classifications, as follows:-
1) Minor discrepancies: These are discrepancies whose value in comparison to the total value available
is very small, less than 1% of the total value of the total units of that item. In this case there is no need
for the management to waste time and resources on any attempt to investigate such a minor
discrepancy.
2) Major discrepancies: These are discrepancies whose value is 1% or more in comparison with the
total value of that item such discrepancies warrant investigation.
3) Operational discrepancies: This is where though the amount concerned is comparatively little the
significance of the item for the smooth and uninterrupted operation is big to warrant a major
investigation.

INVESTIGATION OF DISCREPANCIES
After the stock taker and storekeeper have agreed that discrepancies exist, then the management has to
develop a plan to investigate the existing discrepancies. The procedure to be followed depends upon the
nature and value of discrepancy.
The following are list of steps to be taken in considerations:
a. Examine the record card since the date of the last check to make sure that there are no arithmetic
errors or obvious omissions or duplication in posting
b. See that there has been no confusion over units of issue
c. Examine store kept in neighbouring locations to see if a balancing discrepancy exists on another item
that is mixtures might have occurred
d. Check the basic documents (receipt, issues, transfer return to store note) for any exceptional large or
apparently unusual transactions.
e. Examine the results of the last stock taking to see whether there was a discrepancy on that occasion.
In odd cases it may be found that a deficiency at one stock tacking is followed by a surplus on the
next and this may be because the first check was in accurate the purpose of such an examination is
also to ascertain in if irregularities in the particular items occurs frequently and consistently
f. Enquire at user department or work centres for issues from or returns to the warehouse without
documentation
g. Check whether there has any over or under issue

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 15

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

h. Some errors causing discrepancies are such as evaporation of volatile liquids e.g. petrol
i. In serious case where theft fraud suspected, call in the police
j. Review and tighten up physical security measure and documentation procedures

STOCK CERTIFICATE
After stocktaking has been carried at the end of financial year a stock certificate is signed by a senior
member of management. This document is a declaration of the value of the stock on hand usually there is
list attached showing the amount involved in each warehouse. The certificate is further supported by all
the individual stocktaking sheets.

Handling/ Taking over the Stores

The stock verifier should see that there has been handing/ taking over the store during the period. He
should report on the certificate of handing/ taking over and ascertain whether or not there was a proper
procedure in taking/ handing over the store.

The proper procedures for handling over the stores

a) Where there is a change of responsibility for the stores, both storekeepers (the incoming and
outgoing) should physical count the stocks and record any discrepancies.
The reasons are;-
 To check that physical stocks are in agreement with the stock recorded.
 That the outgoing storekeeper will be solely responsible for subsequent discrepancy.
For these reasons it is important to conduct 100% stock check, where 100% check is impracticable, the
store manager will determine the percentage of stock to be counted. The storekeepers will be required to
ascertain that as far as they can judge the physical stocks are in agreement with the stock records.

b) Sign the proper certificate of taking over the stores and distribute to responsible persons. i.e.
 Stores manager (original),
 Office file (duplicate),
 Outgoing officer, and
 Incoming officer

STOCKTAKING DOCUMENTATION

A complete and comprehensive stocktaking involving large number of stock lines on several locations
will demand a variety of stocktaking control documentation, including the following:-
a) Stock counting sheets (stocktaking sheets): A stock-taking sheet is a printed form that is provided
to the verification team. It enables stock verification to be convenient, systematic, and foolproof.
After the process is complete, the findings are summarized and reports are prepared. The total value
of the stock is also calculated with the help of the stock-taking sheet.
In other words, stocktaking sheets are sheets produced/ designed to be used by each individual stock
taker for each type of item to be counted. The sheet must be consecutively numbered so counting of
sheet will contain a great deal of useful reference data for the stock take, and will also aid the
production of the final master stock taker document.

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 16

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

It contains the following information:-

 Stock counting sheet reference number
 Quantity of stock physical counted
 Description and code number of the item
 Unit of issue
 Date of stocktaking
 Stores area involved
 Signature of stock takers and general comments on condition of stock.

Difference between a Stock-Taking Sheet and Stock Valuation Sheet

A stock-taking sheet lists all items purchased for a specific period of time. The pro-forma includes details
such as name of the supplier, quantity purchased, price paid per unit, etc. But, a stock valuation sheet
summarizes all results from individual stock-taking sheets and calculates the total value of all items.

Sample of Stock-taking Sheet

The following is the pro-forma of the stock-taking sheet:

1.Quantity Taken by ………………………

2.Quantity Checked by ………………….
3.Prices Inserted by ………………………
4.Extension and Additions Inserted by ……………..
5.Extension and Additions Checked by …………….
6.Values of Stock Certified by ………………………….
7. Examined by……………………………………………….

Stock Valuation Sheet

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 17

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

After the completion of stock verification, a stock valuation sheet is prepared to consolidate all stock-
taking sheets. This helps to calculate the value of the materials in hand. A pro-forma of the stock
valuation sheet is given below.

b) Master stock sheet: This document is produced by collecting all the individual stock counting sheets
from each of the various locations. This is a sheet produced by collecting the data from all the
individual stock counting sheets from each of the various locations. The production of the master
stock sheet will be responsibility of the controller of stocktaking, who must ensure that all the
relevant stocktaking sheets are contained within the master stock sheet.

c) Stock Certificate: This is a formal document which indicates the total value of the stock as at the
date of the stocktaking. It is usually checked and signed by a member of the organizations senior
management, in most cases member of financial management team.

d) Internal transfer note: These are documents needed to count for stock which is in transit at the date
of stocktaking.

TREATMENT OF OBSOLETE, DETERIORATED,AND REDUNDANT STOCKS

a) Obsolete stocks refer to the inventory or stock that is at the end of its product life cycle and has not
seen any sales or usage for a set period of time usually determined by the industry. They are the
stocks which are not suitable for the company’s specific operations. They are outmoded in design or
fashion.
Obsolete stocks are the results of:-
 Poor demand forecast management
 Poor inventory management process across multiple warehouse locations
 Change of technology
 Change in demand poor quality of materials or product purchase

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 18

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

Once the inventory reaches the obsolete stage of its life cycle, it is typically too late to take actions that
will result a profitable return on that investment.

b) Redundant stocks means not necessary stock. If redundant or excess stock has been identified, sales
should be accelerated with the help of marketing and sales team before it becomes obsolete.

c) Deteriorated stocks refers to the downgraded of the effectiveness or physical characteristics of stock
due to vault packaging or abnormal storage conditions. It is a reduction in stock value resulting from
a decline in physical conditions. It can be caused by action of the elements or by ordinary wear and
tear.

Treatment or management of obsolete, redundant and deteriorated stock

 Return the materials to the supplier or contractors and this is only if there is a win-win situation.
This is not applicable for obsolete stock
 Direct sell to another firm or organization- Obsolete stock need to be sold at heavily discounted
prices or even written off as bad investments in books of financial statements, causing larger
losses for a company.
 Donate to charitable and educational institutions
 Sell by auction
 The accounting officer may decide to sell or give to the employees.
Thus, with good inventory policies in place, and a better understanding of real customer demand,
companies can avoid this type of situation.

CAUSES OF STOCK DISCREPANCIES

The store manager/stock auditor must be aware of each of the possible causes until the stock discrepancy
is isolated.
A large percentage of all stock discrepancies are accounted by one or more of the causes listed below:-
i) Original incorrect stock take
ii) Mathematical errors within the stock record card may produce an in correct calculated stock for
comparison i.e. wrong recording regarding movement of stock
iii) Units of issue in a large stock take can become confused or changed without notification to the
stock take and therefore miscount can occur
iv) Misplacement of stocks into the wrong shelf, cupboard, bin etc. can result in stock being counted
but recorded against the wrong stock count sheet.
v) The issue/receipt of stock which is different in types or quantity from that recorded on the
voucher
vi) The basic store documents (e.g. issue notes delivery notes transfer notes etc), that carry the data
needed to adjust stock record and stock control systems may become lost or incorrectly entered.
vii) Some material evaporate even at room temperature and hence causing deficits during stocktaking
e.g. petrol
viii) Over issuing or under-issuing of stock items
ix) Inaccurate measurement of quantities being issued e.g liquids

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 19

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

x) Stock taken from store without proper documentation or notification to the stores will result in
stock deficiencies
xi) Unreported damage to or deterioration of stock for example, is a single glass break down in the
warehouse keeping fragile items this means that approximately 30 glasses will be lost monthly
without being noticed
xii) Theft or fraud may have occurred.

DISCREPANCY PREVENTION
The following are the methods of preventing discrepancies:-
a. The existing system of control should be closely studied to ensure that any faults can be
eradicated.
b. Improve staff training and status which may provide good organization and methods
c. Stores documentation must be closely examine to ensure that all the data needed to control the
stock is provided, clearly, quickly and accurately.
d. Improved supervision of store routine operations and others
e. Consultations should be held between the store and the other departments whose actions can
affect the accuracy of stocktaking (i.e. transports, purchasing, distribution, production and other
user departments) so as to ensure that they realize and appreciate the role their actions play.
f. Change the stock location i.e. high value and fast moving items should be segregated.
g. Reshuffle the store staff
h. A complete review and overall check of security system should be carried out if the theft or fraud
id suspected with the aim of improving and tightening it.

Control to prevent computer fraud

As with all controls in systems, the three areas to examine are prevention, detection and correction.
Key controls are likely to include the following:-
 Access to computer terminals and to other parts of the computer should be restricted.
 Access to sensitive areas of the system should be logged and monitored.
 Error logs and reports should be monitored and investigated on a regular basis.
 Staff recruitment should include careful vetting, including taking up all references.
 Expert system software may be used to monitor unusual transactions.

Adjustment of stock records and store accounts

Once a real discrepancy has been found and isolated then both stock record systems and stores account
have to be adjusted to balance the books. Adjustment of stock cannot be made without the authorization
of stores manager or the senior member of the management. Obviously, only the most high- ranking
members of the staff should be able to write off valuable stock in order to avoid possible fraud.

Stock Adjustment Report

Definition: This document is used to list items involved and the quantity and value of materials
concerned. It is an official document and must be signed by the said senior member of staff. The stock
adjustment report will contain all the relevant data needed by the stores accounts, stock records and stock
control to enable them to write-off the amount of stock involved.
This data will contain the followings;-

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 20

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

 Calculated stock (as per stock record card)

 Full description and code number of the item
 Physical count to stock found
 Total discrepancy
 Value of discrepancy
 Unit of issue and unit price.

SUPPLIES RELATED FRAUD

Fraud may be penetrated by staff of the buying organization (PE) in collusion with that of the supplier.
Independent fraud may also be perpetrated by the staff of the purchaser or of the supplier

Some examples of supplies related fraud are as follows:-

a. Buyer/supplier collusion leading to approval for payment of fictitious charges
b. Presentation of false invoice – typically the offender will set up a fictitious company with impressive
stationary and invoice the buying company for goods not supplies.
c. Re-presentation of genuine invoices that have been cancelled at the time the cheque was signed for
signed for first payment
d. Loss of audit trail in computerized system due to destruction of printouts or documents or
cancellation of disc information
e. Abstraction of tender or arranging for the lowest tender to come the desired sources
f. Omission of credit notes for goods returned to the supplier
g. Premature scrapping of assets in return a `kickback’ from the scrap dealer

Methods of preventing supplies related fraud

Fraud does not lie necessarily with buyers. It can be practiced by accountants, engineers, salesmen and
procurement personnel, stores staff etc.
The following methods of preventing supplies related fraud are recommended:
a. Educate the purchasing staff regarding the possibility of fraudulent practice and the need for high
ethical standard
b. Authority to sign purchase order must be carefully controlled.
c. Deviations from the original order should be evidenced by an official amendment to the order form.
d. Careful checking of invoices for unexplained price increases
e. All documents should be numbered to reduce the possibility of introducing fake documents
f. Goods inward is best established at the factory gate by having goods received notes raised there.
g. Keep a look out for obvious tell-tale sign e.g. unexplained affluence, too many orders to one supplier
etc.

FINDINGS AND REPORT FINDINGS

After having done with the stock taking, the stock verifier (procurement auditor) should assemble his
findings and prepare the report.
The report should have the following contents:
 Title
 Executive summary
 Introduction

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 21

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

 Conclusion
 References and appendices

B. STOCK CHECKING

Definition: Stock checking is the process of systematically checking the quantity of the inventory. It
gives the ability to understand the quality of stocks that a company currently has on hand if a company
will meet the required production number and the demand of the customers.
OR
Stock checking/ spot check refer to the checking of stocks randomly at unspecified and irregular
intervals by senior officer of the warehouse. This is used in connection with the security and anti-theft
aspects of the stores management.

The main objective of conducting such a check is mostly as part of supervisory duty of control and
secondly as a means of precaution against irregularities. This move assist in removing predicament
situation in any storehouse for example senior stores may decide at any time and without notice and check
an item in the warehouse as part of supervision and check the accuracy of work being done by his
subordinates.

Spot check is designed to verify the stock held without a prior warning which could provide time for
stock to be replaced illegally. During issue also, the officer in charge may conduct checks to avoid
deliberate wrong issues, under issue or over issues.

Stock checking or spot-check cover mostly the high value which tie up the greatest part of organization`s
capital. This also aims at detecting and checking mal-practices on those who contemplate theft, and fraud
knowing that a sudden check cannot be done.

Difference between stocktaking and stock checking

Although stocktaking and stock checking are about calculating the inventory stock, the main objective is
different as follows:
 Stocktaking is the process of checking the quantity and condition of the inventory stocks. It is
about ensuring that the inventory is in good condition and meet the demands of the customers.
Whereas; Stock checking is the process of systematically checking the quantity of the inventory.
It gives the ability to understand the quality of stocks that a company currently has on hand if a
company will meet the required production number and the demand of the customers.

C. STOCK VERIFICATION
Definition: Stock verification means checking and verifying (if any) discrepancies related to products
kept in store, sales information, etc. It involves finding deviations between what was actually sold/
transacted and what was recorded. The result of stock verification may or may not reveal the existence of
frauds.
OR
Physical stock verification is also called stock audit/ stocktaking which include counting, calculating
and weighing all items in stock. Physical stock verification of assets is a process conducted by auditors to
ensure that the assets of a business exist.

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 22

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

In other words tallying the up-to-date book balance with the actual physical balance of the material is
called “Stock Verification”.
In any business, its assets are essential as they represent that organization's financial condition and
position in the market. Thus, the physical assets of any business also act as a plan B in case the company
has to or decides to dissolve. These assets can be sold to clear debts and reconcile the pending bills (if
any).

How do you conduct a stock verification? / Stock verification procedures

The standard procedure for stock verification is as follows:

1. Prepare a program of verification.

2. Receive approval from the appropriate authority.
3. Appoint the verification team.

Note: In continuous stock verification, the staff is permanent and, in fact, under this method, there is no
appointment of the verification team. However, under annual stock verification, the following staffs are
appointed to the verification team:

 Technical staff member,

 Staff member from accounting or auditing, and
 Staff member from the stores department

4. Provide the verifiers with a timetable and stock-taking sheet, which is usually serialized and dated.
5. Record notes and other details on the stock-taking sheet with the help of available documents.
6. Physically check and verify stock.
7. Note any discrepancies.
8. Value the stock.
9. Dispatching the necessary certificates, reports, and recommendations.

The importance of Physical Verification of Assets

 It is legal compliance that organizations need to comply with
 It ensures the existence of assets of an entity
 Enables valuation and rectification for any accounting inconsistency
 To oversee internal compliances of the entity
 It is essential in order to maintain continuous customer service

Purposes of Stock Verification

Physical stock verification is the process used to ascertain the correctness of goods (e.g., in terms of
quality and quantity) in the store on a given date.

In physical stock verification, emphasis is laid on the verification of quantity by counting or weighing (or
adopting any other suitable means).

The following are the main purposes of physical verification of materials lying in the stores:

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 23

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

 To examine the correctness of the stock records

 To examine the correctness of the values entered in the stock record
 To detect discrepancies, if any
 To find weaknesses, if any, and to suggest improvements
 To safeguard against staff abuses

Methods of Stock Verification/ stocktaking

There are three main methods of conducting physical stock verification, and they are as follows:

1. Periodic verification: This method is opted by small or establishing organizations as, under this
method, the whole of the stock or all the assets verification is covered and processed together at the end of
a financial year. The reason this is done only in small organizations is that small organizations have fewer
assets as compared to large firms. Besides, the periodic verification method is not suitable for big
industrial organizations since to complete work for several days to conduct the physical stock verification
process.

2. Perpetual verification: Apart from all the other methods of stock verification, under this method,
physical stock verification is stretched throughout the year according to a preset programme. And each
item is physically assessed at least once a year.
Advantages:
The perpetual verification process has the following four advantages that you must know of:
 The best part about this verification method is that neither the stores nor the employees have to
stop or pause their day-to-functions.
 The usual store transaction and posting can continue without any hindrance.
 Excesses and shortages arising from time to time can be written-off after proper assessment
during this verification process.
 This method enables all the verifications to happen on a timely basis.

3. Blind verification: When the stock verifiers have only given the location but not other details such as
the code numbers, description and stock record balances, thus, the basic logic here is that the verifier will
not have his opinion about the stock position, and he only has to mention the exact same figures in the
record without actually verifying the stocks.
This is not one of the most popular methods of stock verification since it practically serves no purpose
when the entire operation of stores has to be well-planned.

Difference between Stock Audit and Stock Verification

Stock audit and stock verification are two terms that convey the same meanings. As such, in most
accounting dictionaries, the two terms are used interchangeably. Their differences are as follows:-
 Stock auditing refers to a more detailed process that includes physical verification of products
kept in store, sales records, etc. It can be carried out by an internal auditor or an external vendor
(including employees). On the other side, Stock Verification means to verify that the material is
as per the details, specifications and balance quantity as mentioned in the material register/record.
However, stock verification needs to be carried out by an independent and impartial person. Also,
in case of stock verification, the process also includes checking if there are any discrepancies
related to billing documents, etc.

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 24

Prepared by CPSP (T) ISSA B. MSINZI [email protected] 0685 94 38 38/ 0626 45 46 45

Difference between Stock Verification and Inventory Count

Inventory count means calculating the total number of products in store by consulting the physical
records provided by a company’s employees.
On the other hand, stock verification refers to an in-depth investigation into products kept in store and
sales data for detecting any discrepancies (if any). It can be carried out by an internal auditor or an
external vendor (including employees).

Review Questions!
Q1: Why do materials require verification?
Ans: All organizations should have a system in place to check and verify stock on a regular basis
according to local conditions and requirements. For example, if a company receives a monthly
consignment of materials, then it will have to physically verify that all goods have been received by the
last day of the month. If the verification is not carried out on time, then any goods received after that date
will not be included in the actual quantity of materials on hand.

Q2: What should be the basis for stock verification?

Ans: A physical stock count needs to be completed on a regular basis, usually monthly or quarterly. The
physical quantity of stores should be checked against the number of items recorded in the store ledger and
order records. A thorough review should also involve checking current stock against the previous year's
valuation to ensure that there are no major discrepancies.
Q3: Who should carry out stock verification?
Ans: Verification is usually carried out by a member of the accounting or auditing team, who can review
all records and compare them with an actual physical count. The audit department could be used if the
company has one in place. If the company does not have an audit department, then a staff member from
accounting or purchasing could be asked to carry out stock verification.

Q4: What do we need to check while carrying out physical verification?

Ans: The entire process of inventory counting should take place in a well-lit and clean environment that is
free of dust and other contaminants. All items should be checked one by one and the count should match
with data from records such as invoices, packing slips, delivery dockets, etc.

Thanks!
Issa B. Msinzi
0685 94 38 38
[email protected]

KIBWANA PROFESSIONALS INSTITUTE OF BUSINESS STUDIES (KPBS-UBUNGO DSM) Page 25