Stock Verification- Chemico Case

 What is Stock Verification?

 It is the process of physically counting, measuring or weighing
the entire range of items in the stores and recording the results
in systematic manner
• Objectives of Stock Verification
• (i) It is statutory necessity. Since the inventory figures appear
in the Assets column of a company’s Balance Sheet, the Auditors
must certify that the bock figures reflect the value of the
physical stocks actually held by the company

• (11) To reconcile the stock records and documents for their

accuracy and usefulness and to identify areas which require
more disciplined document control

• (iii) To minimize pilferage and fraudulent practices

 Objectives of Stock Verification
• (iv) To back-up the balance sheet stock figures
• (v) To enable better control of inventories

• Purposes served by Stock Verification:

• The number of shortages or surpluses revealed by
stocktaking is a good criterion to judge the efficiency
of the store keeping system
• In every enterprise, even in the ones with the best of
systems, discrepancies occur between physical stocks
in the Store and those indicated in the stock cards
 Objectives of Stock Verification
• Reasons for discrepancies found during stock
verification
• In every enterprise, even in the ones with the best of systems,
discrepancies occur between physical stocks in the Store and
those indicated in the stock cards
• Discrepancies in stock arise for various reasons. Some of them
are as follows :
• (i) Incoming goods placed on the bin but GRN or Materials
Return Note not posted in the stock card.
• (ii) Materials issued but stock card not posted
• (Iii) Incorrect quantities issued, i.e. Issue of more quantity or
less quantity than indented or noted in the bin card or stock
card,
• (iv) Errors in quantity posted. For example, 21 feet is posted as
21 inches, or 709 is posted as 790
 Objectives of Stock Verification
• (v) Posting done on wrong stock card
• (vi) Errors in posting i.e. entry of receipts made in ‘issue’ column.
• (vii) Errors in addition or subtraction while posting
• (viii) Actual shortages due to human error in receipts and issues.
e.g. in bulk handling
• (ix) Pilferage : This is a very common reason, especially of
attractive items or costly material like brassware etc.
• (x) Natural phenomena like evaporation
• (xi) In some engineering industries it is often a practice to store
the heavy finished components purchased from outside on the
shop floor instead of in the Store. The objective is to save
double handling. When the shop floor uses the item, the
operators or their Supervisor do not regularize the paper work
by sending an indent to the Store
 Methods of Stock Verification

• There are three methods

• Periodic stock verification

• Perpetual stock verification

• Blind stock-taking
 Methods of Stock Verification
• Periodic Verification
• In this system, the entire cross-section is verified at
the end of the accounting period

• Usually, several days are taken to complete this task,

particularly in big organizations

• Since no transactions can take place during

verification, this could pose some problems

• This type of verification can be done only in small

organizations
 Methods of Stock Verification
• The stock checking is done by a team usually consisting of
Accounts, Stores and Engineering or other staff.
• As per statutory requirement each item must be physically
checked and counted and the auditor must be satisfied that the
physical checking has been satisfactory carried out.
• A preliminary planning and preparation for stocktaking is usually
done.
• The drill is as follows:
• (i) The Stores personnel literally do a spring clearing in the
Store by dusting and cleaning up all the bins and rewriting the
bin numbers on the bins, shelves, racks, tote boxes etc. where
they are not legible or have been partially erased
• (ii) In regard to small items, e.g. nuts, bolts, fasteners, ball
bearings etc. they are put into convenient pouches with a
standard number in each, say 25 or 100 in each pouch. This
makes counting easy
 Methods of Stock Verification
• (iii) Bin cards must indicate the right code number of the
material, where this is not written, the material or carton or
container must have a tag with the code and name of the
material written on it. In other words the inventory checker
should not waste time to identify the material
• (iv) Lists should be prepared stock wise or aisle wise or row
wise, listing the code numbers in the same serial order as the
materials are kept. The location code should be indicated against
each material.
• The list will have the following columns on a horizontal spread-
sheet:
• i) Date of checking
• ii) Material code No – To be filled by Store clerk prior to
checking
• iii) Brief description
 Methods of Stock Verification
• iv) Location
• v) Quantity counted – checker to enter
• vi) Quantity as per bin card
• vii) Discrepancy - Store clerk to enter along with the checker
• viii) Discrepancy after reconciliation
• ix) Signature of checker/store clerk – Stores Manager to
endorse
• x) Final action taken
• Disadvantages of this method are:
• (a) It necessitates closing down the Store for a few days.
• (b) The errors in the Stores come to be known only at the end
of the year. This will have repercussions on proper inventory
control.
• c) Since the entire process is carried out in a few days, a
through checking is usually not possible
 Methods of Stock Verification
• Perpetual verification: (also called the
rotational system of stock checking or cycle
counting)
• Under this system, verification is done throughout
the year as per a pre-determined plan of action

• A-items may be verified thrice a year, B-items twice

a year and C-items once a year

• It presupposes that a perpetual inventory record for

each item is maintained showing all transactions so
that reconciliation can be done
 Methods of Stock Verification
• The drill is as follows:
• There is usually a team of two or three stock verifiers who take
up a few items each day and check the stocks.
• Discrepancies are recorded and immediately investigated.
• The stock check should be planned in such a way that all the
items are checked at least once in a year and the important
items checked two, or three times a year
• Advantages of this system are:
• (a) Usually, the direct cost of perpetual inventory checking is
lower than in the annual inventory checking method.
• (b) The work is done by a specialized staff. In the annual
stocktaking method, inexperienced people have to be in detailed
to do the checking and quite often, they do so in a very routine
manner because the work is usually boring
 Methods of Stock Verification

• (c) Losses due to production stoppages during the year end

stock taking period are virtually eliminated.
• (d) Unlike in the case of annual stock taking, the discrepancies
can be detected and solved more often.
• (e) It acts as an effective deterrent to malpractice as pilferage
is detected quickly. There is also a greater inducement to keep
records up to date than in the case of annual stock verification.
• (f) Deteriorated and obsolete are more easily detected.
• (g) The checking extends to comparing maximum/minimum stock
levels and this ensures adequate stocks provision.
• (h) Facilitates the preparation of annual accounts expeditiously.
• (i) The job of stock verification can be done on time
 Methods of Stock Verification

• Some companies adopt a system of checking the balances every

time a receipt or issue is made.
• In a small organization this would be adequate, but it would be
very difficult where a large number of items are stocked.
• Immediate reconciliation of discrepancies is vital to this system.
A Stock adjustment in various records should be entered after
obtaining sanctions from the proper authority.
• During physical verification neither the store nor the works are
to be closed
• Surpluses and shortages arising from time to time can be
written off after proper investigation
 Methods of Stock Verification
• Blind Verification
• Under this system, the stock verifiers are given the
location, but not details about code numbers,
description, and stock record balances
• The logic here is that the verifier will not have his
own idea about the stock position and hence he will
not just mention the same figures in record without
actual verification
• This method is not very popular
• It virtually serves no purpose when the entire
operation of stores has to be well planned
• The discrepancies are immediately scrutinized and necessary
corrective action is taken
 Who should do the stock taking?

• In some organizations, store keepers are required to

check stock of their own stores
• This is not a correct procedure
• It not only induces them to conceal genuine
discrepancies to avoid punishment but leads to
deliberate pilferage or fraud where surpluses are
found
• It is only proper to employ full time stock verifier or
internal auditors for doing this job
• However, they can take the help of store keepers and
even engineering staff for proper identification
 Procedure for Stock Verification

• The various steps involved in physical

verification are:

o Detailed program should be chalked out giving

complete breakdown of the process store-wise and
item-wise
o Stock verification cards and check sheets must be
prepared
• All audit personnel must have clear-cut instructions
• During verification process, all transactions must be
stopped
o All audit personnel must have clear-cut instructions
on their jobs and schedules for proper accountability
o During verification process, all transactions must be
stopped
o All stock verification cards must be serially numbered
for easy reference and control
o Separate provision must be made for items which are
damaged or deteriorated
o It will be necessary to separately verify items which
are under inspection, items sent out to suppliers for
processing, and stocks at various stockyards
• A typical stock verification card is shown below:
• Such sheets are prepared for each item and values
are worked out for different classifications
• The total of such values gives the value of the stock
on hand as verified
• This is then tallied against the book figures or stock
records
• Discrepancies, if any, are noted down
• Minor discrepancies are settled by correcting the
stock records
• Any major discrepancies need further analysis so that
causes can be identified and remedied
• Top management’s sanction can be sought for writing
off deficiencies or valuing surplus
 Procedure for Stock Verification

• Treatment of discrepancies (Reconciliation)

• Often the stock figures found on verification do not

agree with stock records

• So, certain discrepancies exist

• Where the physical stock is more, there is surplus

and where it is less than the stock records, there is
shortage
 Procedure for Stock Verification
• Minor Discrepancies:
• There are limitations to the accuracy of stock taking,
particularly where large numbers or quantities are concerned,
whether the checking is done by counting, weight or by
measurement.
• For example, in measuring 100 steel bars of random length no
two people are likely to get the same result to the nearest inch.
• If, therefore, discrepancies of small proportions appear to be
found in such circumstances, it is advisable to leave the book
balance unaltered unless the value involved is significant.
• Storekeeper’s Agreement:
• Stock takers should not declare a discrepancy on any item
without first giving the storekeeper concerned the opportunity
of investigation. There are several reasons for this.
 Procedure for Stock Verification
• (i) Often there are duplicate locations of which the checkers are
not aware, but which the storekeeper knows.

• (ii) The storekeeper usually has a better practical knowledge of

the stock than anyone else and may be able to correct errors on
the part of the stock verifiers, particularly errors of
identification.

• (iii) It gives the storekeeper an opportunity to explain or correct

the difference if possible. It also creates an awareness of
discrepancies which may reflect upon the performance of duty.
When the storekeeper is unable to explain a discrepancy, the
stock sheet should be signed to indicate an agreement that the
discrepancy is genuine.
 Investigation of Discrepancies
• After the stock taker and storekeeper have agreed that
discrepancy exists, the procedure to follow depends upon the
nature and value of the discrepancy.
• The following steps should be taken in regard to investigation of
discrepancies.
• (i) Examine the stock record since the date of the last check to
make sure that there are no arithmetical errors, obvious
commissions or duplications in posting etc.
• (ii) Scrutinize the records to see that there has been no
mistake over units of issue.
• (iii) Examine the items kept in neighboring bins to find out if a
balancing discrepancy exists in another item.
• (iv) Check the basic documents (i.e. receipt, issue, transfer,
return-to store notes, etc) for any exceptionally large or
apparently unusual transactions.
 Investigation of Discrepancies

• (x) In serious cases where theft or fraud is suspected, the

matter should be immediately brought to the attention of top
management for necessary action
• (xi) Where necessary, review and tighten up physical security
measures and documentary procedures.

• After investigation, both the stock record and the accounts will
require adjustments in regard to the discrepancies.
• For any reconciled losses, write-off should be done (after
obtaining approval of competent authority) and stock records
adjusted accordingly.
 Investigation of Discrepancies

• Surpluses

• Surpluses arise due to following reasons:

• Where materials are not issued from the bins but entry of
issues is posted

• Where the amount of materials issued is less than the quantity

for which entry (issue) is made
 Investigation of Discrepancies
• Shortages:
• Excess physical issues than the actual issue entries
posted
• Issue made but corresponding issue entries not made
in the issue column
• Excess quantity issued than the quantity for which
issue entry is made in the issue column
• Issue of materials without requisition
• Misappropriation
• Defective instruments
 Process of Verification
• By counting
• By measuring
• By weight
• However, when large stocks of items such as sand,
scrap etc. need to be verified, it is based only on
estimates, as exact measurement is ruled out
• Audit staff must work in close coordination with
stores personnel, some items may be located in many
places
• Discrepancies must be discussed with stores so that
any omissions may be rectified before reporting to
top management
• Major discrepancies may require re-verification

• Such discrepancies may be due to pilferage on a large

scale, wrong posting of records and loose documents
control

• They require careful analysis and immediate

corrective measures

• After discrepancies are noted, stock adjustments

must be made using standard stock adjustment
documents duly signed by appropriate authority
• A typical stock adjustment form is shown below:
 STORES PRESERVATION

• Materials often deteriorate in storage making them useless for

intended purpose
• As such they require preservation
• Preservation helps to keep the materials in fresh and serviceable
condition
• Some of the main reasons for deterioration are:
• (i) Inherent nature of the material. There are many items which have
relatively short storage life (e.g. fruits, vegetables, certain chemicals)
• (ii) inadequate storage conditions (temperature, humidity etc.)
cement gets damp and solidifies Steel lying in the open can corrode
• (iii) Damage arising from accident, bad handling etc. e.g. metal
articles may be dropped and become dented
 STORES PRESERVATION
• Causes of damage in storage:
• (i) Biological: White ants, cloth moths, etc.
• (ii) Non-biological: corrosion, cracking or hardening
• (iii) Mechanical: i.e. damage caused by machines or equipment
• (iv) Miscellaneous: e.g. foodstuffs eaten by rats, infested by insects
• Broadly, for the purpose of preservation, materials are
divided into two categories:
• (i) Organic substances and items fabricated from these like cotton,
silk etc. these are susceptible to damage by biological agents
• (ii) Processed materials and manufactured goods like metal items,
electrical equipment, optical instruments etc. these may deteriorate
through non-biological phenomenon
 STORES PRESERVATION

• Stores Hygiene

• (i) Cleanliness of storerooms as a deterrent to insects and

other pests. Dust and dirt should be removed regularly
• (ii) Ventilation: Air must be allowed circulate freely in storage
area (except rubber articles). It helps to keep the materials dry
• (iii) Segregation of infested materials
• (iv) Disinfestations of godowns
• (v) Dunnage and top cover: “dunnage” refers to any material
or structure placed between the ground and material or
storage equipment. This prevents white ants and other
insects from crawling from the ground into the stack
 Preservation Measures
• Preservation measures for materials vary from item to
item

• A good understanding of the material is therefore

essential

• However, to illustrate the problem, measures of

preservation adopted for some materials commonly
found in most Stores are discussed here
Preservation Measures
• (i) Acids
• These are usually stored and transported in glass or
porcelain jars and require extreme care in handling.
Storage should be in well ventilated cool room. Porcelain
jars are best kept in crates. Keep acid containers in
separate areas

• (ii) Brushes
• Small brushes are best kept in their original cardboard
packing boxes. When purchased without cardboard
boxes, it would be desirable to store in small wooden or
plastic boxes. While issuing brushes, FIFO principle
should be adhered to
 Preservation Measures

• (iii) Chemicals
• The enemies of chemicals are heat, light, and moisture.
Chemicals should preferably be stored in their original
packages in a cool, dry, and well ventilated room.
Different chemicals should not be mixed

• (iv) Finished and Part Finished Machined Items

• Machined items should be kept under proper cover. The
finished areas should be properly greased frequently. It
would be advisable to lubricate the machined parts at the
time of receipt before they are stored. Delicate and
important minor assemblies should be protected from
dust and dirt
 Preservation Measures
• (v) Foodstuffs
• These should be properly packed in closed bags and
stored on dunnage. Measures should be taken to
prevent rats
• (vi) Gases
• These are stored in cylinders fitted with tight caps.
Should be handled carefully. These should not be stored
in places where greases or oils are stored
• (vii) Glass Sheets and Plates
• These should be stacked horizontally. It is best to keep
them standing upright and slightly slanting
 Preservation Measures
• (viii) Metal Items
• Articles which do not require further process can be
painted. For other items, temporary preservation can be
done by spraying with oil, treating with anti-rust solution,
etc.
• (ix) Storage in Drums
• Oil drums should preferably be provided with covered
accommodation and should be separated from other
items.
• (x) Paints
• Paints should be kept in a cool place. The containers
should be air-tight, leak-proof, and rust-free. To prevent
hardening and crust formation, the containers should be
inverted periodically
Preservation Measures

• (xi) Paper and Stationery

• Storage should be in a weather-proof, and, preferably,
fire-proof building. The store should be dry, moisture free
and well ventilated.
• (xii) Petroleum Products
• These are highly inflammable and as such require
extreme care in storage and handling.
• (xiii) Rubber Goods
• Rubber goods should be stocked in cool dark places,
with little circulation of air. Ventilation should be
restricted and doors and windows should be painted
black
 Preservation Measures

• (xiv) Timber and Bamboo

• These are susceptible to damage by pests.
Preservatives include oil of low volatility and slightly
water-soluble preservative, chemicals, organic solvents
etc.

• (xv) Tools
• Tools should be protected from coming in violent contact
with any harder material. Dust and dirt, though not
actually harmful, are undesirable. Best to store in original
packing. When original packing is disturbed, some
suitable lubricant, like petroleum jelly or ordinary
machine grease, may be applied