There are many types of audit and assurance processes that a company must undertake when doing business. One of the most important is the stock audit. But before you approach one of the auditing firms in Dubai to inquire about their stock audit services, read on below to learn more about the topic of stock audits.
What Is a Stock Audit Services?
At its most basic, the stock audit is the process of inspecting and verifying a company’s stocks. This is done to ensure that the stocks that company records say exist do indeed exist and are in the recorded and expected quantities. Stock audits also verify that the stocks are where they are supposed to be and are valued correctly.
What Are Stocks and Stock Audit Services?
There are two possible meanings of stocks in accounting. Stocks can represent equity or shares in a company, or they can mean inventory. In the context of stock audits and this writeup, stocks pertain to a company’s inventory.
Inventory or stocks mean different things to different companies.
Retailers and Wholesalers
For retailers and wholesalers, inventory is relatively straightforward. It is typically merchandise inventory or inventory that is ready to sell. For instance, unsold makeup products in physical outlets and warehouses comprise the stocks or inventory of a reseller of high-end makeup.
Service Providers- Stock Audit Services
For service providers, stocks refer to the supplies they use and sell in the course of doing business. For instance, a digital signage architect that designs customer experience centres or installs digital billboards is primarily a consultant and service provider. However, they also supply their customers with LED screens and content management software when installing digital signages. Their inventory also includes the brackets, nuts, and bolts they use to secure and install screens.
For manufacturing companies, stocks pertain to something a little more complicated. They include finished goods or those that are ready to be sold and those in different stages of manufacture or production, the so-called work-in-process or work-in-progress. Additionally, stocks also include raw materials – i.e., all the supplies or materials that will be transformed into finished products.
To illustrate, in a company that manufactures perfumes, the essential oils, alcohol, water, and bottles are part of the company’s raw materials inventory. In contrast, the perfume in vats is a work in process. The labeled and packaged bottles of perfume, meanwhile, are finished goods inventory.
In a jeans manufacturing company, the raw materials inventory includes denim, threads, and hardware. Jeans in various stages of manufacture, for instance, jeans with unsewed seams, comprise the company’s work-in-process stock. Finally, completely sewn and tagged jeans ready for shipment and selling are part of the company’s finished goods inventory.
Why Do a Stock Audit Services?
Stocks are valuable company assets, and no picture of a company’s financial position can be complete without a thorough audit of its inventory.
Unfortunately, if there are no strict inventory monitoring and auditing mechanisms in place, a company’s stocks could expire or end up damaged and wasted, and the company could be none the wiser. They could also be stolen, or those who have something to gain could “conjure them into existence” in the company’s books.
In each of these instances, the book inventory will be painting a much rosier picture of the company’s financial state than what it is in actuality. This can lead to erroneous decisions on the part of the company’s management and stakeholders.
Therefore, stock audits aim to ensure that the stocks indicated in the company’s books exist and are recorded accurately. Stock audits can also go so far as to verify the stocks’ ownership rights and the realizable value of such stocks.
Stock audits ensure that the book reflects actual inventory and vice versa. If discrepancies exist between them, then a stock audit will reveal them and the reason for such disparity.
If stocks are lost to pilferage, damage, and expiration, the company can implement measures to prevent the same issues from arising again. If stocks are overvalued or undervalued, their correct value can be determined, and the corresponding book entries may be corrected.
And if there are stocks that do not exist and have never existed in reality but are in the books, a stock audit can help uncover fraudulent practices so that the company can introduce measures that will inhibit fraud in the future.
The Benefits of Stock Audits
Through stock audits, therefore, companies can realize the following benefits.
Improve the Bottom Line Through a Reduction in Costs
Companies can reduce wastage, damage, and pilferage of stocks through improved stock storage and handling practices, thereby reducing costs and improving the bottom line. A stock audit should also reveal excess stocks and thus reduce the company’s unnecessary expenditures.
Prevent Fraud and Misappropriation
Stock audits can reveal system vulnerabilities that some people can use to steal stocks (or steal money meant for purchasing supplies) from the company. The company can strengthen these systems to prevent further losses from pilferage and fraud.
Strengthen Inventory Management Processes
A stock audit will also reveal any weaknesses in the company’s inventory management processes, including inventory tracking, monitoring, handling, and storing. Once such weaknesses are exposed, the company can close identified gaps and reinforce existing processes.
What Happens in a Stock Audit?
Stock auditing firms, at the most basic, will typically do the following.
Observe Your Inventory Accounting Procedures
For instance, they will analyze when you initiate physical inventory counts. For example, they will analyze your inventory cut-offs.
Test the Accuracy of Your Inventory Count
The stock auditors will then ask you for your physical inventory count then observe how you do the counting. Then, they will evaluate whether the figures your count shows are accurate. They are likely going to go to your warehouses and outlets to confirm your inventory count.
Check the Physical Status of Your Stocks
Stock auditors will check the actual status of your stocks to verify their condition.
They will follow your inventory counts to your ledgers to see if they are correctly accounted for and recorded.
Verify Inventory Valuation
The stock auditors will also check whether your inventory is valued correctly. Of particular interest are inventory items that have unusually high values attached to them. The valuations for these items will be tested to see if they are accurate and merited, and the auditors will also check if they are properly accounted for and reported.
Classify, Categorize, and Analyze Stocks
Stock auditors can also help classify stocks, for instance, according to their value (low, medium, and high), age, and longevity. The stock audit will also reveal expired stocks or those near their expiry dates.
Advise on Inventory Accounting
Stock auditors can also help advise you on your inventory accounting systems and procedures.
Stock Auditing: An Essential Process
A stock audit performed by a trusted auditing firm is a necessary procedure. It is one of the audit and assurance processes that keep a company and its directors, managers, and employees honest. More importantly, it is one of the ways a company can keep accurate records of its inventory, and it provides the necessary push that leads to improved inventory management processes and systems.