Inventory Audit

Inventory audit is not governed by a standalone statute; it is performed as part of the statutory audit under the Standards on Auditing issued by ICAI, specifically SA 501, "Audit Evidence — Specific Considerations for Selected Items," applicable to audits of financial statements for periods beginning on or after 1 April 2010. Where inventory is material to the financial statements, SA 501 requires the auditor to obtain sufficient appropriate audit evidence regarding its existence and condition, ordinarily by attending management's physical inventory count — inspecting inventory, performing test counts, and evaluating management's count instructions and procedures — unless attendance is impracticable, in which case the auditor must perform alternative audit procedures.

For companies, this obligation is reinforced by Clause 3(ii)(a) of the Companies (Auditor's Report) Order (CARO), 2020, which requires the statutory auditor to report whether physical verification of inventory has been conducted by management at reasonable intervals, whether the coverage and procedure of such verification is appropriate, and whether discrepancies of 10% or more in the aggregate value of any class of inventory (against book records) were noticed and properly accounted for. As a standalone engagement (distinct from statutory audit), an inventory audit applies the same SA 501/CARO-derived procedures — physical verification, cut-off testing, valuation review against Ind AS 2/AS 2 — but is typically commissioned by management, lenders under working-capital covenants, or insurers, rather than mandated by a dedicated inventory-audit statute.

Inventory audit is the verification of a business's stock — the physical counting, the valuation and the reconciliation of the inventory records with the actual stock on hand. The audit is part of the statutory audit under the Companies Act 2013 and the auditing standards, which require the auditor to obtain sufficient appropriate evidence about the existence and the condition of the inventory — typically by observing the physical count and testing the valuation, the cut-off and the ownership. The valuation follows the accounting standards: the inventory is carried at the lower of cost and net realisable value.

The inventory is the largest asset on most trading and manufacturing balance sheets, and it is the easiest to get wrong. The records say one number, the warehouse holds another, and the difference — the shrinkage, the damage, the obsolescence, the slow-moving stock — is a hole in the balance sheet until the audit finds it. The count is where the records meet the reality.

The cost of an unverified inventory is the mis-stated balance sheet and the audit qualification: the stock that does not exist counted as an asset, the obsolete stock carried at cost, the cut-off errors that mis-state the purchases and the sales — each a finding that either adjusts the profits or qualifies the audit report.

This service is for businesses that want their inventory verified properly. We plan the count with the business, observe and test the physical verification, test the valuation at the lower of cost and net realisable value, check the cut-off and the ownership, reconcile the count with the records, and report the differences with the adjustments so the inventory is a true asset on the balance sheet.