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The Inventory Verification exercise is undertaken by most of the companies at the year-end i.e. by 31st March each year. This verification is very important for the companies having stored their stock at various locations at depot or at various branches. Many a times this task of inventory verification is given to the chartered accountant or an independent agency. There may be a single agency that will carry out the verification at all the locations and give their consolidated report to the company, or there may be different agencies, chartered accountant firms at respective locations who carry out the verification and submit their report to the company. It may also be possible that, at some locations which are having majority of the stocks at the year end the company will appoint the agency and for all other locations the report by the company offices will be taken.

The company then consolidates at their end. Many companies give very much importance to this audit exercise of inventory verification because these companies will not able to get inventory verification done properly during the year. The statutory auditors of the company can also mostly reply on the inventory verification carried out by the company at the yearend by an independent agency. When such type of exercise is carried out as on the last day of the year i.e. 31st March on the single day, the huge resources and well advance planning, & monitoring is required. In such a case, the consolidation and its rectification for the day is a difficult task as the companies will get very little time for getting the issues, qualifications in the report to be rectified from various locations depots, or branches.

This exercise may not be helpful to carryout in-depth verification of the inventory. The other way out is to have inventory verification during the specific period at the end of the year. Most of the companies mainly decide last week or last fortnight for the inventory verification & requiring submitting all the inventory verification reports in the third week at the year end. The object behind this is that, the reification will be done before the year end and correct picture of the inventory is reflected as on 31st March. Till last year, the said exercise of inventory verification was carried out on or before the yearend i.e. 31st March and hence whatever stock verified as on the date should be get corrected by 31st March.

However, this year the said exercise of inventory verification will be carried out after the year end i.e. in next financial year. Due to this, the stocks as per books and as per physical verification if shows any shortage or excess that has to be corrected to the back date of 31st March. This can be understood by example as follows. Say Inventory Verification was carried out on 01st May, 2020, for item X, then, Sr. No. Name of the Item Qty as on 31st March, Qty as on 01st May, Qty physically verified as per Books as per Books as on 01st May 01 X 100 80 70 Excess/Shortage 10

In this case the Qty as on 31st March, to be taken as 90 (100-10), if there is no shortage during the period 01st April to 01stMay. Generally, till last year, it was possible that the stock records was kept closed for a specific period of inventory verification exercise but during this year it may not be possible as the next financial year has already begin and there will be rush for the stocks inwards as well as our wards for the close down period.

Inventory Verification Issues Due to COVID 19

As such the inventory verification has to be carried out with running books, and the agencies should take date and time on which the verification is carried out. The updating of the stock records may have unknown difficulties due to lock down in some areas and half or full working in another locations. We have to ensure that, the updating of the stock records is done properly ascertaining all such difficulties before we begin the inventory verification exercise. In my view, while calculating the slow moving or non moving inventory we should exclude the period of lockdown plus additional buffer period of fortnight before and after the lockdown.

The regular exercise of inventory verification has to be carried out as follows:

Selection of the Sample to be verified: The sample size should cover at least 60% of the value of the stock to be verified. Some of the items having small value but large quantity should be selected. This year our sample should not include any item enter in the inventory after 01st April. In my view it is better to have small size but 100% verification than larger size with test-check.

 

Stock Records: We have to endure that; the records will be updated as on the date of verification.

Date & Time of Physical verification: The date and time of the stock records of list on inventory should be specifically seen, we have to state that at a particular time and based on the list at specific time we have carryout the verification. Records of Variations: In case of excess/shortage is noticed and proper records of the same is available, we should obtained the same and mention the nature of record in the remarks column against the particular item.

Items where actual count is not possible: The facts will be specifically mentioned against the said items and we can say that, the existence of the said item is seen at the location and the actual physical count is not possible. In case we calculated the actual quantity by some method than count mention the method adopted for tanking count. Items not in Records: The inventory verification is not only including the verification of the items as per the stock records but also include the inventory existed at the location but not in the records. Generally, this is possible for the items of the scrap, kept for a while, destination in between. All such stock should also be verified and included in the inventory verification report.

Location & Persons Details: The correct location along with the land mark and the person in charge of the inventory, their name designation should also be recorded.

Various MIS and reports: The reports of inventory forwarded to the controlling office, before, during and at the end of the lock-down is any should be looked in to arrive at the correct stock as per books as on the date. These reports also help on the movement of the items, if any as well as they should not be contradictory to the inventory records as on the date of verification.

 

Other Records: Obtain the authentication from the persons present from the auditee side at the time of verification. The MRL (Management Representation Letter) should also be obtained as a part of verification process. The confirmation letter also should be obtained for the third party stocks at the location.

To arrive at conclusion: After the said inventory verification exercise is completed, we should able to conclude that the verification is done properly, the records are update. And all variations are either explained properly or reported. The inventory verification exercise has some additional care to be taken this year and hence the above note will guide to some extent the issues arising due to COVID 19


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Category Audit, Other Articles by - CA Satish Badve 



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