UNIT 16 INVENTORY STOCK VERIFICATION &

AUDIT
Structure
16.1 Introduction
Objective
16.2 Role of Inventory Management in Supply Chain
16.2.1 Significance of Inventory Management
16.2.2 Objective of Inventory Management (IM)
16.3 Stock Verification
16.3.1 Need for Stock Verification
16.3.2 Types of Stock Verification
16.4 Procedure for Stock Verification
16.4.1 Stock-Taking Sheet
16.4.2 Stock Valuation Sheet
16.5 Inventory Audit
16.5.1 Inventory Audit – Definition and Meaning
16.5.2 Evidence in Auditing
16.6 Importance of Inventory Audit
16.6.1 Inventory Audit in Manufacturing Firm or Retail Business
16.6.2 Inventory Audit in E-Commerce Businesses
16.7 Methods of Inventory Auditing
16.8 Merits of Inventory Audit
16.9 Issues and Challenges to Performing an Inventory Audit
16.10 Summary
16.11 Key Words
16.12 Further Readings
16.13 Answers to SAQs

16.1 INTRODUCTION
In the earlier units of this course, we have understood various techniques,
methods and procedures of various stages of Inventory management right from
raising purchase requisition to consuming them including maintaining,
organizing, tracking and managing the stock quantities in and out of warehouse.
Now, it is the time to know, how these inventories are maintained, organized,
tracked and managed.
Objective
After studying this unit, you should be able to
 Understand what are the objectives of inventory management and
how they can be achieved.
 Describe methods, policies and procedures of stock verification
 Discuss the ways and means of evaluating the inventory
 Understand audit procedures and features of audit

16.2 ROLE OF INVENTORY MANAGEMENT IN SUPPLY

CHAIN
In the modern days, the Inventory Management is regarded as the system
developed to procure the inventory and the process of organizing and
managing stock throughout the supply chain. It covers all steps of design to
discard i.e. from raw material stage to finished goods stage including their
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storing, and selling. It also tracks the company’s stocked goods and monitors
their weight, dimensions, amounts, and location.
16.2.1 Significance of Inventory Management
If the inventory is properly organized, the entire supply-chain management
will find its right place. Unorganized inventory management invites the risk of
committing mistakes like wrong-shipments, out of stocks, overstocks, wrong-
picks, and so forth. For example,
 Wrong-picks may be the outcomes of incorrect coding, disorganized
shelf labelling, or just a messy warehouse in general.
 Wrong-shipments are a direct result of wrong-picks at the distribution
stage of the inventory, and may also be due to lack of right quality
control procedures.
 Out of stocks and overstocks can occur when a company uses manual
methods to place orders without having a full grasp on the state of
their inventory.
 The overstock or under-stock is not a good predictor for inventory
forecasting and results in too much stock or too little for next horizon
also.
All those mentioned above add to the inventory mismanagement not only
prove costly now, but also add cost by additional wasted labour spent in
rectifying the mistakes later. The absence of management tools enhances the
risk of human errors or mistakes, which in turn may reflect in customer
reviews. The loyalty loss can miserably hit negative as well.
Therefore, effective inventory management is essentially important for
ensuring a business by maintaining sufficient stock on hand to meet customer
demand, lest it can result business in either losing money on potential sales
that can’t be filled or otherwise wasting money by stocking too much
inventory.
16.2.2 Objective of Inventory Management (IM)
The inventory management aims at minimizing the carrying costs by creating
awareness of when to replenish products or buy more materials or to
manufacture them and thus helps maintaining optimal inventory levels and
hence minimize costs. In other words, the inventory management system (IMS)
is to minimize the holding cost while keeping stock levels consistent so as to
get products into customers’ hands, at economic and faster rate. The IMS is to
set the optimal level of inventory the time and quantity to order in order to
manage inventory levels correctly.
Whether a small business or a big company using enterprise resource planning
(ERP), the inventory management objectively helps the organization in several
ways. A few of these are listed below which may be considered as the
objectives of the inventory management:
1. Avoid Spoilage
In case of perishable goods and/or low shelf-life items such as foods and
beverages, that are nearing expiry date, there’s a very real major chance of
going worse if not sold in time. Obviously, managing inventory effectively to
sell out in right time avoids unnecessary spoilage.

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2. Avoid Dead Stock
Dead stock is stock that can no longer be sold but not necessarily because it
expired. It may be obsolete or simply unsold for any other reason, it could
have gone out of season, out of style, or otherwise become irrelevant. By
adopting a diligent strategy, the company can address this before it turns out to
be costly mistake.
3. Save on Storage Costs
Warehousing is a variable cost that fluctuates by the quantity of the product
stored. Storage of too large amount of product at once or end up with a product
that’s too difficult to sell, costs will shoot up. So, obvious intuitive objective is,
to avoiding this to save on storage cost.
4. Improve Cash Flow
Not only is good inventory management cost efficient, but also raises cash
flow. Never forget, inventory is product for which you have already paid in
cash and wish to sell it for cash, but it cannot be called cash as long as it sits in
your warehouse, yes! It’s definitely not cash. So, try paying to convert the
product into cash as early as possible.
This is why it’s important factor to convert inventory into cash flow. The
inventory can ask two aspects of the company’s abilities
(i) At how much is the cost that the company can sell?
(ii) At how much cost the company can buy further?
The answer for first question depends on company’s present abilities, while the
answer of the second question is company’s running future for survival. So
finally, in short, better inventory management leads to better cash flow
management.
Thus, if the inventory is a solid, one can exactly tell how much product is there
in real time, and based on sales, and can project when to replenish. Thus, it
helps two-fold, one is how much cash flow it can make and hence being
protected by not losing from potential sales and the second is planning for
immediate futures. So, it not only does the help ensuring sales (critical for cash
flow), it also let’s plan ahead.
If we speak in terms of corporate people or business class, whatever money
spent on inventory is not on growth. So, the objective is to manage it wisely so
as to improve cash flow.
5. Optimize Fulfilment
Good inventory management is often evaluated by its order fulfilment and
tactical inventory distribution. Thus, it refers to fulfilment orders at customers’
door steps. So, at times, when the company has no stock of some commodity
that customer wanted, to keep up promise and to maintain company’s
reputation for customer retention, the company should be in a position to order
the product online, the order is shipped and sent to customer’s door step, that
too, faster delivery, saving the customer’s time and reduced shipping
costs. However, this should be limited to certain extent so that the main
business is not messed up. Because, the customer is not a fool to show mercy
of paying additional cost that you incurred for shipping and logistics. Thence,
this limiting and fixation to a certain tolerable level becomes yet another
objective of inventory management.
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SAQ 1
a) Discuss the role of Inventory management in supply chain.
b) Describe the significance of Inventory Management System in the
modern industry.
c) List and explain the objectives of inventory management.
d) How can inventory influence the cash flow in the inventory
management?
e) Write short notes on
(i) Dead Stock
(ii) Spoilage Cost
(iii) Obsolescence
ACTIVITY 1
Describe briefly the inventory management system (IMS) in an organization
where you are working or with which you are most familiar. Observe what are
its subsystems? Also discuss how the system is integrated and its outcomes.
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16.3 STOCK VERIFICATION

Stock Verification literally means the physical checking of inventory. It is
counted in numbers or number of units where a unit may be terms of pairs (e.g.
shoes), sets (e.g. cups), dozens (e.g. fruits), tins (e.g. paints) or any other
convenient unit chosen by the firm. If counting is not possible, it is measured
in terms of weight units or volume units. The results of such physical checking
are systematically recorded. Irrespective of big or small, this job is very
important for any firm for answering many questions.
16.3.1 Need for Stock Verification

Stock verification is necessary because:

 It eliminates pilferage and fraudulent practices,
 It helps inventory management system to optimize and balance stock
levels,
 It ensures accuracy and usefulness of documents,
 It prevents obsolescence and spoilage,
 It brings about a reconciliation of the stock records and documents,
 It helps production planning for revising the master scheduling
 It identifies areas for more disciplined document control
 It helps in aggregate planning decisions, and
 It backs up the balance sheet stock figures

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Usually, stock verification is the task of the materials audit department.
16.3.2 Types of Stock Verification
Two types of Stock Verification are in practice. These are
1. Continuous Verification
2. Periodical Verification
We shall discuss about these now in the paragraphs to follow.
1. Continuous Verification
In this system, verification of stock continues according to plan throughout the
year. Various items in the stores are verified according to their nature or
importance or value or cost or any such criterion adapted by the company. The
verification activity may be undertaken twice, thrice or even more in a year. A
perpetual inventory is, therefore, maintained showing all transactions so that
reconciliation can be done.
Merits
The following merits can be derived out of the system of continuous
verification:
 The materials audit/ stock verification staff can perform their work
independently.
 Since the investigation is spread over the year, it is feasible and
possible to have more detailed investigations with respect to
discrepancies.
 Often preparation of final accounts will be delayed, but not with
continuous verification system since the data for the final accounts
can be kept ready after stock verification/audit.
 The operations of the stores can be continued, uninterrupted and
remain and unaffected,
 There is no need to ‘freeze’ or ‘stop’ or ‘pause’ the operation because
there are the perpetual inventory records.
 It is possible for the records to remain more updated.
2. Periodic Verification
This system of stock verification is carried out generally once a year usually at
the end of the year. The period is usually called ‘Inventory Horizon’ or ‘the
accounting year’. Since the entire stock verification/ audit work is involved at
one stretch, the verification takes a few days, not more than a week or so to
complete. During the verification/ audit period, no transactions are permitted
to take place and hence, certain problems may crop up.
Thence, physical stock-verification is a matter of careful planning and this
system involves several stages. First of all, a detailed programme is to be
prepared giving complete breakdown of the process either store wise or based
on some criteria. Several departments have to take part in chalking out the
programme, essentially materials management, production department and
finance departments.

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In a periodical stock verification system, the routine store transactions remain
suspended during the verification/ audit period. Therefore, the verifiers/
auditors are usually instructed to complete the work as expeditiously as
possible. Verification documents, cards, reports and check sheets, and the
suitable/appropriate formats are prepared in advance according to needs so as
to save the time of stock verification/ audit.
Cards must be serially numbered or coded for easy reference and control.
Separate provisions may be made for damaged or deteriorated items. Each
member of the audit/ verification staff chooses specific area for verification by
dividing the work accordingly and distributes the jobs among themselves to
ensure orderly compilation of the job without duplication or omission.

16.4 PROCEDURE FOR STOCK VERIFICATION

Whether it is continuous or periodic, the stock verification system usually, runs
through the procedure given below:
1. Preparation of a programme of verification.
2. Getting approval from the appropriate authority.
3. Appointment of the team of the verifier.
In continuous verification of stores, the permanent staff is assigned for
the job. In fact, if this strategy is adapted, there will be no specific
appointments of the verification team time and again, but served at the
very beginning of their recruitment, since they are recruited for the
purpose of stock verification only. But in periodic method, the staff is
usually appointed as and when it is planned. Generally, the team
consists of at least five members, three persons, one from technical staff,
another from the accounts or audit staff and the third one from the
store’s staff.
4. Providing a time table to the verifiers and also stock-taking sheets and
all other documents.
5. Taking notes on the stock-taking sheet and other details with the help of
documents made available.
6. Checking and verifying the stock physically.
7. Noting down the discrepancies if any.
8. Valuation of the stock
9. Preparation of the stock verification report
10. Despatching the necessary certificates, reports, suggestions etc.
16.4.1 Stock-Taking Sheet
Stock-taking sheet is a printed format provided to the verifiers for making the
stock verification. The stock-taking sheet should be -
 convenient and easy to fill to the verifiers
 systematic and/or sequential,
 understandable to all,
 fool proof that requires no adjustment of any kind
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After the process is completed, the findings are summed up and reports are
prepared. The total value of the stock is also calculated with the help of the
instructions given along with the stock-taking sheet.
The following is the format (proforma) of the sheet:
Stock-Taking Sheet

Sheet No. ………………….

S.No. Description Qty./Weight/Unit Value Value Value of Remarks

per of Deficienc
Actual Stock Surplus Deficiency unit Surplus y
Stock as per
Ledger

1 2 3 4 5 6 7 8 9 10

Action by Date Signature

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

Signature & date

Remarks of Chief Verifying Officer CHIEF VERIFYING OFFICER
With Seal

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16.4.2 Stock Valuation Sheet
After the completion of stock verification, a stock valuation sheet is prepared
to consolidate all stock-taking sheets. This helps in computing the value of the
materials in hand.

A format (proforma) of such sheet is given below:

Stock Valuation Sheet
For the period ending …………………… 20………..

S.No. Description Qty./Weight Rate Value Remarks

Unit Q.W.M $ $

1 2 3 4 5 6 7

….…………………….. ….…………………….. ….……………………..

Store Incharge Chief Verifier Accounts Officer

SAQ 2
a) Distinguish between stock verification and audit?
b) What is the need for stock verification in an industry or a retail store?
c) Discuss the significance of stock verification in an industry or a retail
store.
d) What are the types of stock verification? Explain.
e) What are the advantages of continuous verification over periodic
verification?
f) Distinguish between periodic and continuous verification systems.
g) What are the contents of a stock taking sheet and stock valuation
sheet? Draw an example sheet.
h) Describe the step-by-step procedure for stock verification.
i) Write short notes on
(i) Inventory management system
(ii) Continuous verification
(iii) Periodic stock verification.
ACTIVITY 2
In an organization where you are working or with which you are most familiar,
obtain the recent stock verification report. Observe what type of system
(periodic/continuous) is followed? Discuss how the system is working and
what are the problems associated with it?

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16.5 INVENTORY AUDIT

Any transactions in financial records must fairly represent the
organization’s financial position and actual operating activities. Auditing is
the process of verifying that the financial records of an organization are
correct, accurate and are fairly represented.
As financial documentation and records are produced internally, there is a
probability and high risk that the records can be manipulated by inside
people. Insiders can make mistakes inadvertently or intentionally alter
information while preparing financial records, which is considered
fraudulent behaviour. Auditing ensures that these mistakes are prevented.
Audits also ensure that entries in the records are compliant with relevant
accounting standards such as the International Financial Reporting
Standards (IFRS), Generally Accepted Accounting Principles (GAAP), and
other relevant standards of accounting.
16.5.1 Inventory audit – definition and meaning
An inventory audit is defined as the process of cross-checking a company’s
financial & inventory records against actual inventory levels to ensure all
physical goods are recorded accurately.
Inventory audits need not have to be done by specialized auditors. It can be
performed by internal staff or a third party. However, it helps the company
by having an experienced auditor run through the finances to confirm the
stock counts are accurate.
An inventory audit in small and medium scale enterprises (MSME) can be
as simple as a spot check (i.e., counting physical stock to check if it
matches the expected or projected), while in large scale industries it
involves a third-party auditor with certain procedures. Whatsoever, finally,
inventory audit deals with verification and validating of stocks and
authenticating the transactions of materials and can be performed in-house
or by a third party.
Let’s now drive into this auditing, one of the most valuable assets i.e.,
inventory!
Audits of any kind are time-consuming and involve manual work. They
provide an insightful depth into different accounts of business and/or
financial situation. In the case of selling goods and e-commerce businesses,
the auditing of inventory may be done for tax purposes annually or to
simply verify units on hand. Whereas in case of production units, the stocks
are checked for getting an insight of the stocks in hand, consumption rate,
and value of the materials.
16.5.2 Evidence in Auditing
Evidence is needed to determine whether financial statements or records
have been prepared in accordance with standards and free from material

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error. The inventory audit requires possessing the following three important
characteristics to promote the business in fair way.
 the autonomy,
 the accuracy and
 the transparency.
In a single sentence, the auditor should have autonomy to check the evidences
provided to prove the accuracy of entries in the records with transparency.
Thus, the above three characteristics are required by auditors to verify the
validity of financial records. It can either verify or provide support for the
financial information that is presented. On the other hand, the evidence can
contradict the financial information, which indicates errors or fraudulent
behaviour.

16.6 IMPORTANCE OF INVENTORY AUDIT

Every business entity would like to prove their honesty, truthfulness,
trustworthiness in their business process and strive toward this. So, they
conduct inspection, and introspection is also the part of this process. But this
will not suffice to convince the public. So, it needs somebody to certify, often
called auditing, may it be internal or external personnel who can work with
transparency, accuracy and autonomy, because an independent auditor can
only issue a frank opinion on whether the financial records of inventory
accurately represent the physical inventory being carried.
16.6.1 Inventory Audit in Manufacturing Firm or Retail Business
More or less the inventory patterns will be same in manufacturing unit and a
retail business unit. Auditing inventory becomes an important aspect of
collecting evidence, particularly for manufacturing firm or a retail business.
Furthermore, it can represent a large balance of assets or capital.
Auditing inventory verifies the inventory not only by quantity but also by
quality and conditions to see whether the value of the inventory is fairly
represented in financial records and statements.
16.6.2 Inventory Audit in E-commerce Businesses
Inventory in e-commerce will be entirely different from general inventory
patterns that are found in a manufacturing unit or retail business outlet because
sales can take place anywhere across the globe and are thus more unpredictable.
In e-commerce business, an efficient inventory management process can help
reducing the frequency, length, and complexity of audits.
In a digital world, the inventory audit methods must match. Using technology
that keeps inventory counts synced in real-time rather than using something
static methods.
SAQ 3
a) Distinguish between stock verification and stock audit?
b) Define and explain inventory audit.
c) What is the need and significance of inventory audit?
d) Distinguish between inventory audit process of retail business to that
of e-commerce business.

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 e) What are the characteristics that an evidence should contain in an
inventory audit process?
f) Write short notes on
(i) Inventory audit programme in MSME
(ii) Inventory audit programme in production unit
ACTIVITY 3
In an organization where you are working or with which you are most familiar,
obtain the recent inventory report. Observe what types of methods are followed?
What are the deficiencies mentioned in the report? Prepare a compliance report
for the same.
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16.7 METHODS OF INVENTORY AUDITING

To audit the inventory, the company needs to choose the method that makes
the most sense for the purpose it serves and who is performing the audit. Here
are a few of the most common inventory audit analyses and procedures used.
1. Cut-off Analysis
The cut-off analysis includes pausing operations such as receiving and
shipping of inventory while making a physical count to avoid mistakes. This
means when operations such as receiving and shipping are paused at the time
of the physical count, this audit process ensures nothing is being handled and /
or goes unaccounted for.
2. Physical Inventory Count
This is the most common method of auditing that is performed by counting
each unit. The physical inventory count is to ensure the numbers read in the
system matches with the physical stock. The use of product barcodes and
devices like inventory barcode scanners can help keep track electronically.
3. Analytical Procedures
This method involves comparing inventory based on financial metrics of
present year with previous years. Some of these inventories based financial
metrics are –
 gross margins,
 days inventory on-hand,
 inventory turnover ratio,
 costs of inventory.
4. ABC Analysis
This is applied when inventory is of items of different value and volume
together, such as high-value items or A-class products, mid-tier or B-class
products, and low-value or C-class products. Even it can be chosen to store
these items accordingly any way which can make it easier for an auditor who
pays attention to mainly the high-value, high-cost inventory items. The
auditing focus differs with high-value, mid-value, and low-value inventory.
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5. Freight Cost Analysis
Freight cost analysis includes determining the shipping or freight costs for
transporting inventory to different locations. Generally, freight costs are
included in the value of inventory, so it is important to track the freight costs as
well. This determines the costs of getting things from one place to another,
often referred to as freight shipping costs and tracking the time between the
date of shipment and the date of receipt. This documentation accounts for any
units that are in transit and also in case anything is lost or damaged in transit.
6. Finished Goods Cost Analysis
Finished goods cost analysis applies to manufacturers and includes valuing
finished inventory during an accounting period. This is ideal for the
organizations who manufacture the products on their own as it demonstrates
when product is ready to be sold, so an auditor can immediately value the
inventory for the current accounting period. Auditors may test this inventory to
ensure financial statements are accurate.
7. Overhead Analysis
Knowing indirect costs of doing business will help with budgeting. Outside of
direct materials and labour, this looks at “hidden” expenses. Rent, utilities, and
other costs can be regarded as part of inventory costs and if these are recorded
under overheads, the overhead analysis uses these indirect costs of the business
for auditing inventory.
8. Reconciling Items
If any discrepancies are found in the inventory audit, the company may wish to
do reconciling items by investigation to know the root cause. This is to track if
there are certain error-prone Stock Keeping Units (SKUs) and keep a watch on
them in the future. Reconciliation includes solving discrepancies that are found
in an inventory audit. Errors may be re-checked and reconciled on financial
records.
9. Match Invoices to Shipping Log
Auditors may conduct matching to verify that the right amounts were charged
at the right time. This is done by verifying the invoices if match with the
quantity of items and cost of inventory shipped from warehouse. This may be
done at random or total by an auditor and checks if the right amount was
charged to the right customer at the right time. Matching also involves
matching the number of items and the cost of inventory shipped with financial
records.

16.8 MERITS OF INVENTORY AUDIT

A good inventory audit can provide the following merits.
1. Estimates Profits Accurately
Inventory audits help estimating profits accurately. And the accuracy in
the inventory accounting can visualize the bottom line of the business.
Tracking and accounting for the variation in the value of inventory over the
horizon as it relates to manufacturing and costs of goods sold can drastically
impact accounting records. Inventory audits can prevent inventory
shrinkage and identify costly and slow-moving products.

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2. Budgets with Accuracy
If there is no accurate method for keeping track of inventory value, it is highly
difficult to budget for the next batch of inventory required to purchase.
Inventory audits can help budgeting better and more precisely when the exact
inventory count running through is known, and thus it can be understood how
much the safety stock is to be kept.
3. Finds Deficiencies and Inefficiencies
Audits can help finding deficiencies and inefficiencies, and also tells us which
inventory is selling quickly and which is not. It also gives us an insight
of Stock Keeping Units (SKUs) that are selling out more and causing frequent
stock-outs, inaccuracies with storage or inventory tracking techniques, and
other operational errors. This information can also be used to improve the
financial health of the business by discontinuing unsuccessful products,
doubling down on what’s working, and optimizing other areas of supply chain
from manufacturers to warehouse locations.
4. Optimize Carrying Inventory
We know that holding costs are the sum of all costs related to carrying
inventory including warehousing, labour, insurance, and rent, combined with
the value of damaged, expired, and out-of-date products. The longer the
inventory held and the more unusable inventory, leads to the more money we
need to pay for. Inventory audits can help controlling these factors.

16.9 ISSUES AND CHALLENGES TOPERFORMING AN

INVENTORY AUDIT
Inventory audits can be an incredibly challenging task to perform. And as the
business grows, it becomes more complex. Here are few major challenges
often we may encounter.
1. Time-Consuming
Auditing physical inventory is of course, very tedious job. Suppose, we have
100 Stock Keeping Units (SKUs) and when we need to check actual inventory
levels against the listed inventory on hand in an inventory sheet, it can take
some days to complete.
So, using an electronic scanner and computerized data sheets with inventory
reports can save time, and can provide up-dated information across locations
via internet (or LAN if smaller areas).
The problem of time-consuming nature in manual system was solved with
advent of computers, scanner and internet. But the new challenges have
popped up with internet connectivity, particularly with remote areas. Further,
updated versions of software, data corruption, reliability, data verification,
technology obsolescence is some of the new challenges posed in the
modernized system. Now the time-consuming nature is turning out to be from
the other side i.e., for learning, training and networking issues.
2. Difficulty in Scaling
As the organization grows bigger, the more strategic it needs to act with
inventory systems. Perhaps! Spot checking can be a better manageable way to
keep inventory audits under control. For entire range of product, this checking
should include -
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  choose a specific product,
 count the number of units on hand, and
 compare the number of units with listed in the system
Inventory management technology can help simplify inventory methods by
prompting a spot check but different products have different scales of
measurements. And for growing organization or outlet, it becomes more and
more complicated.
3. Halt Operations
If the conduct of inventory audit, is paused, every operation halt,
including order fulfilment and in turn it raises the customer dissatisfaction.
Similarly, the online availability of the product poses another challenge by cut-
throat competition.
4. Goal-Shift
The main goal of inventory management in the modern days is to increase the
visibility and organization of inventory activity via automated and streamlined
pick/pack/ship features, whereas the inventory audit focuses on the sales and
their recording. More than striving for increasing the sales, the objective of the
inventory is shifting toward making it more visible.
This goal-shift empowers the small business sometimes to grow with
confidence and puts it in forefront. This shift may give a short-term gain, like
skim the cream, because of the changing trends, models and designs. So, the
stores managers should act smart with such materials.
5. Manual Errors
To err is human, so the often-found errors such as mis-shipments, mis-picks,
out of stocks, dead stock etc. always disturb the managers’ attention time and
again and certain time they may even turn out to be more serious if it occurs
while auditing. So, to see better customer reviews, improved customer loyalty
these manual errors should be completely eliminated. Zero Defect, Zero Error,
Zero Maintenance, Zero Inventory, systems have to be observed while
implementation.
6. Overall Effectiveness
Putting ‘all hands together’ approach can only be way inventory management
effectiveness. The purchasing team is responsible for making sure not over or
under purchasing, and are closely monitoring each purchase order. The
merchandising team to ensure the inventory is properly listed, promoted, and
priced to move. The warehouse manager and his team along with inventory
specialists are responsible for handling and consumption of inventory. This
ensures less shelf wear on packaging. Thus, warehouse team is also
accountable for the inventory management tasks – managing proper receiving,
correct picks, and correct shipments to create an ease of movement throughout
the pick/pack/ship process. So, inventory effectiveness can be obtained with
contribution of everyone of the organization. Uniting all is a challenging task,
but success always stands on the side of unity.
7. Inventory Warning Bells (Alarms)
There are a few alarming signs around a warehouse that cautions by signalling
of inventory manager cannot do their job properly. And they all have to do
with improper inventory management.
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Here are a few signs:
 Undersold inventory
 There is a hot item somewhere hidden in the back-stock that is not
listed in time for the season
 Inventory levels are creeping up, but aren’t in line with sales levels
 Increased dead stock
 The amount of shelf wear on packages forces to mark down the price.
 Stocking inventory incorrectly
 Stock sitting too long and becoming dead stock.
 The inventory manager is still using a manual spreadsheet.
 This inventory management leading to huge amounts of manual
errors like mis-shipments and mis-picks.
SAQ 4
a. List and explain any five methods of inventory audit.
b. Define inventory audit and explain various methods of inventory audit.
c. What are the merits of a good inventory audit?
d. List out the issues and challenges of inventory management and audit.
e. List out some signals which can be considered as the warning bells
for inventory mismanagement?
f. Write short notes on
(i) Manual errors in inventory management.
(ii) Halt Operations in inventory management,
ACTIVITY 4
In an organization where you are working or with which you are most familiar,
interview the inventory/materials manager. Discuss how the system is working
and what are the problems and issues with it. What are the challenges before
the organization? What are the plans and strategies to encounter?
Issues and Problems:
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Strategies and plans to encounter:
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16.10 SUMMARY
In continuation with the earlier unit (unit-15), the inventory management
system is reviewed for understand the role if inventory in the valuation and
audit. The significance and basic objectives of IMS are recalled to review. The
final and important part of IMS is composed or the stock checking, verification,
valuation and audit. These are detailed in this unit. The need and types of
Stock Verification are described. The procedure for Stock Verification
including the exemplary documents such as Stock-Taking Sheet and Stock
Valuation Sheet are given. Then the definition and meaning Inventory Audit
and the its characteristics are explained for both, manufacturing firm or retail
business and in E-Commerce Businesses. Various method of Inventory
Auditing is enumerated. Further, the merits of Inventory Audit, the issues and
challenges to performing an inventory audit are explicated.

16.11 KEY WORDS

1. Inventory Management (IM): Setting the optimal level of inventory in
terms of the time and quantity to order in order to manage inventory
levels correctly.

2. Dead Stock: Stock that can no longer be sold but not necessarily
because it expired.

3. Storage Cost: The variable cost that fluctuates by the quantity of the
product stored.

4. Stock Verification: The physical checking of inventory by counting in

numbers or number of units where a unit may be terms of pairs, sets,
dozens, tins or any other convenient unit chosen by the firm.

5. Continuous Verification: A system in which verification of stock

continues according to plan throughout the year.

6. Periodic Verification: A system of stock verification is carried out

generally once a year usually at the end of the year.

7. Stock-Taking Sheet: It is a printed format provided to the verifiers for

making the stock verification.

8. Stock Valuation Sheet: After the completion of stock verification, a

stock valuation sheet is prepared to consolidate all stock-taking sheets.

9. Audit: The process of verifying if financial records of an organization

are correct, accurate and are fairly represented.

10. IFRS: International Financial Reporting Standards

11. GAAP: Generally Accepted Accounting Principles

12. Inventory Audit: The process of cross-checking a company’s financial

& inventory records against actual inventory levels to ensure all physical
goods are recorded accurately.
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 13. `MSME: Micro, Small and Medium Enterprises

14. Characteristics of Inventory Audit: The autonomy, the accuracy and

the transparency.

15. Cut-off Analysis: The cut-off analysis includes pausing operations such
as receiving and shipping of inventory while making a physical count to
avoid mistakes.

16. Physical Inventory Count: Auditing performed by counting each unit

to ensure the numbers read in the system matches with the physical stock.

17. ABC Analysis: The analysis applied when inventory is of items of

different value and volume together, such as high-value items (A-class),
mid-tier (B-class), and low-value (C-class).

18. Freight Cost Analysis: Determining the shipping or freight costs for
transporting inventory to different locations and documentation accounts
for any units that are in transit and also in case anything is lost or
damaged in transit.

19. Finished Goods Cost Analysis: Applies to manufacturers and includes

valuing finished inventory during an accounting period.

20. Overhead Analysis: Knowing indirect costs of doing business will help
with budgeting.

21. Reconciling Items: If any discrepancies are found in the inventory audit,
the company may wish to do reconciling items by investigation to know
the root cause.

22. Match Invoices to Shipping Log: Done by verifying the invoices if

match with the quantity of items and cost of inventory shipped from
warehouse.

16.12 FURTHER READINGS

[1] N.V.S.Raju. (2013), Industrial Engineering and Management, Cengage
Learning India Pvt. Ltd, New Delhi, ISBN-13: 978-81-315-1948-6
[2] Buffa; E.S. ,(1990): Modern Production/Operations Management, Wiley
EasternLimited.
[3] Everett E. Adam, Jr and Ronald J. Ebert (1986) : Productions and
Operations Management: Concepts, Models and Behaviour, Prentice Hall
International.
[4] Hadley G. and Whitin, T.M.(1963): Analysis of Inventory System, Prentice
Hall, N.J.,U.S.A.
[5] Peterson R and Silver, E.A. (1979) : Decision Systems for Inventory
Management and Production Planning, Wiley, New York.

16.13 ANSWERS TO SAQs

Refer the sections of the respective SAQs.
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