Stock Count Checklist for CAs

Introduction

You know that sinking feeling when a client calls and says, "The bank needs a stock audit by next week"? We've all been there. Stock audits might seem straightforward—just count what's in the warehouse, right? But anyone who's actually done one knows it's far from simple.
Last month, I was at a manufacturing unit in Pune at 6 AM, watching workers scramble to organize their warehouse. This scene plays out across India every day because most businesses don't follow a proper stock count checklist.
Let me share what I've learned from conducting dozens of stock audits—the mistakes to avoid and a checklist that'll make your next inventory audit smooth and accurate.

Why Stock Count Checklist Matters for CAs

Stock audits aren't just about counting boxes. For CAs, they're about ensuring AS-2 compliance, detecting fraud, and helping clients understand their working capital position.
I once audited a textile trader showing inventory worth ₹2 crores in books. After physical count, we found goods worth barely ₹1.5 crores. The remaining ₹50 lakhs? Damaged fabric that should have been written off months ago.
Banks rely on stock statements for drawing power. GST authorities verify stock for input credit. Clients need accurate data for decisions. One wrong count has massive ripple effects.

Pre-Audit Preparation Checklist

The success of any stock audit is determined before you even step into the warehouse. Here's what you need to do in advance:
Understanding the Engagement
First, get clarity on why you're doing the audit. Is it for bank requirement? Year-end statutory audit? GST verification? Each requires a slightly different approach.
Get the engagement letter sorted with clear scope. Will you verify valuation? Check obsolete stock? Verify stock with third parties? Spell it out clearly.
Document Collection
Before the audit day, collect: last month's stock statement, previous audit reports, list of all storage locations (including goods in transit or with job workers), valuation method details, slow-moving items list, and recent purchase/sales invoices.
I learned this the hard way when I reached a warehouse only to discover they had stock at three different locations that weren't mentioned. We had to reschedule.
Site Visit and Planning
Visit the warehouse before the actual count. Understand the layout, see how goods are stored, and check if items are properly labeled with SKU numbers.
During articleship, we audited an automobile parts dealer. The visit helped us realize they stored similar-looking parts in different sections. Without that advance knowledge, we would have double-counted items.

Physical Stock Count Process

Now comes the actual counting. This is where your checklist becomes your best friend.
Cutoff Procedures
Timing is everything in stock audits. Conduct counts when the warehouse is least active—early morning, after hours, or on holidays.
Implement proper cutoff—no inward or outward movement during counting. Record the last goods receipt note and delivery challan numbers. Any material received or dispatched during the count creates confusion.
At a steel trading company, we started at 7 AM. By 9 AM, suppliers started delivering material without informing us. Our count didn't match books, and we spent two extra hours reconciling.
ABC Analysis Application
Not all inventory items deserve equal attention. Use ABC analysis to prioritize.
Category A items are high-value products (70-80% of inventory value but only 10-20% by quantity). These need 100% verification with double-checking.
Category B items are medium-value (about 15-20% of value). Sample checking works here.
Category C items are low-value but numerous. Basic verification is sufficient.
For example, in an electronics audit, we spent 60% time on laptops and smartphones (Category A), 25% on accessories (Category B), and 15% on cables (Category C).
Team Formation and Responsibilities
Form counting teams of two—one counter and one recorder. Independence is important; don't let the stores manager count his own stock.
Give each team a specific section. Mark sections as "counted" and "pending" using colored tape. This prevents double-counting or missing areas.
In a large warehouse audit, we used green stickers for counted sections, red for pending. Progress was visible at a glance.

Stock Count Verification Methods

Floor-to-Sheet Method
Start from physical stock and check if it appears in books. Pick items from the warehouse floor and verify against stock sheets.
This spots unrecorded or excess stock. During a chemical manufacturer audit, we found five drums of imported chemicals in a corner that weren't in any register. The purchase invoice was lost.
Sheet-to-Floor Method
Start from stock records and locate physical stock. Take the register, pick items, and find them in the warehouse.
This catches missing items or goods existing on paper but not reality. At a textile mill, books showed 200 meters of expensive fabric. Only 150 meters existed. Investigation revealed pilferage.
Use Both Methods
For thorough audits, use both methods on samples. Floor-to-sheet catches ghost purchases. Sheet-to-floor catches ghost sales.

Valuation Verification Checklist

Counting is half the battle—valuation is where the real audit happens.
Cost Determination
Verify if the client follows AS-2 consistently. Check if they're using FIFO or Weighted Average method. Ensure overheads are properly allocated for finished goods.
For raw materials, cost includes purchase price plus duties, freight, and handling (minus GST input). For finished goods, include direct materials, labor, and production overheads.
I audited a manufacturer including admin salaries in inventory cost. That's wrong per AS-2—unrelated administrative overheads shouldn't be capitalized.

Since inventory valuation directly impacts financial statements and disclosures under Ind AS and AS-2, developing deeper clarity in financial statement interpretation is essential—especially for those preparing for advanced roles in audit, which I cover extensively in Master Blaster of Ind AS 

Net Realizable Value Check
Some items need valuation at NRV (Net Realizable Value), not cost—damaged goods, expired products, obsolete items, or goods where market prices fell below cost.
Walk through the warehouse and look for damaged items. Don't rely on what the client tells you. At a retail audit, we found water-damaged goods hidden behind pallets. The client knew but hadn't adjusted books.
For finished goods, check recent selling prices. If NRV is less than cost, value at NRV.

Special Considerations for Stock Audits

Goods with Third Parties
Verify goods with job workers, on consignment, or at customer locations. Get written confirmations—don't just accept client records.
For excise bonded or customs bonded goods, verify proper registers are maintained.
Stock in Transit
Goods in transit need attention. Verify GRNs, dispatch documents, and transporter challans. Ensure goods are in the correct period's stock.
Condition and Quality
Don't just count—observe condition. Are packages intact? Is there dust indicating slow movement? Are expiry dates maintained?
At a food distributor's audit, we noticed cartons with faded printing. Products were near expiry but wouldn't sell at full price. The client needed to make provisions.

Stock audits often reveal deeper control weaknesses in inventory systems, which is why a strong understanding of internal audit frameworks becomes critical—something I’ve explained in detail inside my Master Blaster of Internal Audit  for CAs who want to move beyond compliance and truly evaluate business processes.

Documentation and Reporting

Maintain Proper Audit Trail
Keep detailed working papers showing count sheets signed by teams, reconciliation statements, investigation notes for discrepancies, and photos of warehouse sections for high-value items.Stock Audit Report Format
Your report should include an executive summary with key findings, methodology and scope details, comparison of book vs physical stock, valuation method verification, discrepancy analysis with reasons, and recommendations for improvement.
Be specific. Instead of "some discrepancies noted," write "Category A items showed 2.3% variance in Item Code XYZ due to recording errors."

Common Mistakes to Avoid

From my experience, here are errors that even experienced CAs make: not verifying last GRN and invoice numbers before starting, accepting client explanations without investigation, ignoring small-value items where frauds sometimes hide, not checking for damaged stock, and failing to verify goods with third parties through independent confirmations.
Last year, a CA friend had to redo an entire audit because he didn't verify goods with job workers. The client claimed ₹30 lakhs of material was with vendors. When banks asked for confirmations, those vendors denied receiving anything.

Technology in Stock Audits

Modern audits benefit from technology—barcode scanners speed up counting, mobile apps allow real-time recording, and RFID tags help track high-value items.
However, don't over-depend on technology. I've seen ERP systems showing wrong data because of incorrect entries. Always do physical verification—no software replaces that.

Final Thoughts

A proper stock count checklist transforms a chaotic day into a systematic, efficient audit. Your clients will appreciate the professionalism, banks will trust your reports, and you'll sleep better knowing you've done thorough work.
Stock audits aren't just about numbers—they're about understanding your client's business. That textile trader I mentioned? After our audit, he implemented monthly cycle counting and stopped accepting damaged goods. His inventory management improved dramatically.
Next time you get a stock audit assignment, pull out this checklist, plan properly, and execute systematically. You'll deliver a report that adds real value.
There's something satisfying about seeing warehouse workers respect your process and your client thanking you for catching issues they didn't know existed. That's what good stock audits do—they solve problems, not just document numbers.

Reference Links
Forensic Audit Case Study on Inventory Manipulation in India
How to Conduct Stock Audits: A Step-by-Step Guide from Practical Experience

Frequently Asked Questions

1. What is a stock count checklist in an inventory audit?
A stock count checklist is a structured guide used by CAs and auditors to conduct systematic physical inventory verification. It includes procedures for cutoff checks, ABC analysis, valuation under AS-2, reconciliation of book vs physical stock, and documentation requirements to ensure accuracy and compliance.

2. Why is physical stock verification important during a statutory audit?
Physical stock verification ensures that inventory recorded in books actually exists and is correctly valued. It helps detect fraud, pilferage, damaged goods, overstatement of assets, and compliance issues. Since inventory directly impacts profit and working capital, incorrect stock figures can materially misstate financial statements. 

3. How do auditors verify inventory valuation under AS-2?
Auditors verify whether inventory is valued at lower of cost or net realizable value (NRV) as per AS-2. They check cost calculation method (FIFO or Weighted Average), proper inclusion of production overheads, exclusion of unrelated expenses, and ensure damaged or obsolete stock is written down appropriately.

Abhishek Asalak
BBA Graduate | Emerging Business Professional & Freelance Digital Creator