Key Aspects for Inventory Stocktake
SMEs (small / medium enterprises) might have their compliance requirement to get year-end numbers audited / reviewed by a professional accountant which may either be part of fulfilling bank covenant conditions or for taxation purposes. As owners, we are our best judge when it comes to value of inventories in the financials. Any error or anomaly in the inventory values at year end will have a direct impact on the results and the financial position of the business.
Businesses need to ensure that the assertions listed below are considered and adhered to before dollar values are assigned to the inventories.
An important criteria for a proper stock take is to provide documentary evidence of an adequate set of procedures being followed with supporting work papers. This will provide an audit trail for future reference.
If you hold inventory in your books adherence to the following procedures will result in an efficient and reliable stock take and address the assertions listed below:
- Issue written stocktake instructions and brief staff involved.
- Assign a person to be “in-charge” of stocktaking who will be the first point of contact during and after the stock taking.
- Organise the stocks to facilitate complete and accurate counting.
- Ensure that no item is left out or counted more than once.
- Calibrate the instruments to be used for stock take such as weighing machines, counting devices or measuring gauges.
- Have adequate procedures in place to cover inventories not on the premises – outside warehouse, depots, third parties (consignment stocks)
- Identify third party stocks within the premises for elimination.
- Identify slow moving, redundant or damaged item for valuation adjustment.
- If practical “freeze” movements of all stocks during stocktaking to ensure proper cut-offs.
- As part of segregation of duties “count stocks in the presence of a person who is independent of the person normally responsible for stock”.
- Incorporate adequate supervision of the process and arrange test check of the counts by a third person.
- Investigate differences if any between stock sheets and main inventory records
- Authorise write off differences after analysing the causes and adjust the books
- Value the inventories preferably on First in First Out (FIFO) basis and make provision for slow moving, redundant and obsolete stocks
With an efficient inventory check and proper valuation the owners of the business can be confident that the final inventory valuation incorporated into the financial statements is correct and thereby the results for the year and financial position at year end can be relied upon not only by the business owners but by the compliance authorities.