Inventory Stock Audit Services | N D Savla & Associates

N D Savla & Associates · Pune & Mumbai

Inventory Stock Audit

Physical Verification, Book Reconciliation & Drawing Power — for Manufacturers, Traders, Banks & Insurers

Physical Count Book-to-Physical Reconciliation Drawing Power Obsolescence Assessment WIP Audit ⚠ Bank Report Due: 15–30 Days

4Audit Pillars

70–80%Typical Advance Rate

20+ YrsStock Audit Exp.

6 MonthsSlow-Moving Threshold

8 StepsAudit Process

On this page Overview 4 Pillars Sector Expertise Process Why NDS FAQs

Why Inventory Stock Audits Cannot Be Replaced by Analytics

Inventory is invariably the largest single current asset on the balance sheet of any manufacturing or trading business, and it is also one of the most vulnerable to financial misstatement. Sources of inventory misstatement are numerous and well-documented: shrinkage through pilferage; physical deterioration due to moisture, heat, contamination, or improper handling; commercial obsolescence when products are superseded; valuation errors when cost allocation methods are applied inconsistently; and simple recording errors in the ERP that accumulate over time into material discrepancies.

No analytical review of accounting ratios, no reconciliation of purchase invoices to ledger entries, and no statistical sampling of transactions can substitute for the direct physical examination of inventory that a properly conducted inventory stock audit provides. Only a physical count — conducted systematically, documented thoroughly, and reconciled rigorously against the book records — provides the independent ground-truth verification that bankers, auditors, and management require.

N D Savla & Associates has conducted inventory stock audits for over two decades across manufacturing companies, pharmaceutical wholesalers, FMCG distributors, automotive component manufacturers, textile mills, food processing companies, retail chains, and e-commerce businesses.

The Four Pillars of Our Inventory Stock Audit Methodology

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Pillar 1 — Comprehensive Physical Count

We divide the audit area into counting zones, assign trained team members to each zone, and work through every bin, rack, shelf, floor stack, and bulk storage area systematically. High-value items receive mandatory dual counting — two independent team members count separately, any discrepancy is resolved by a third count. All count sheets are signed by the client's designated stores representative, creating a documented chain of evidence. Special attention is paid to cut-off management — ensuring no goods move into or out of the count area between the designated cut-off time and the completion of counting in each zone.

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Pillar 2 — Book-to-Physical Reconciliation

At count cut-off time, we obtain the ERP or stock system extract — a snapshot of the book inventory position for every SKU at every location. This is compared with physical count results to produce a variance schedule. For items with a surplus, the most common causes are unrecorded receipts or returns. For items with a shortage, the most common causes are dispatches not removed from the system, theft or pilferage, or system entry errors that created fictitious inventory. Every material variance is investigated with the client's stores and accounts teams, and findings are recorded in the variance investigation log.

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Pillar 3 — Quality & Obsolescence Assessment

Beyond quantity verification, our team assesses the commercial realisability of inventory on hand. During the physical count, we identify and separately document: physically damaged goods; expired or near-expiry goods (typically goods within 25–33% of their total shelf life from production); slow-moving goods (no movement for more than six months); and commercially obsolete products. For each category, we estimate net realisable value (NRV) and compare it with the book value at cost — the excess of cost over NRV is the write-down recommended in our audit report.

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Pillar 4 — Drawing Power Computation

For bank-mandated audits, the drawing power computation is the primary deliverable. Drawing power is the maximum amount the borrower can draw from the CC/OD facility, computed per the bank's credit sanction letter: eligible inventory at cost (or NRV if lower) × advance rate (typically 70–80%), plus eligible book debts × advance rate, less outstanding creditors. Eligible inventory excludes slow-moving stock, damaged or deteriorated stock, and goods stored at locations not covered by the hypothecation agreement. Our drawing power statement is formatted to the bank's exact requirements.

Sector-Specific Inventory Audit Experience

Sector	Key Audit Challenges	Our Approach
Manufacturing	Full range of inventory categories simultaneously — raw materials, packaging, WIP in production, and finished goods, each requiring a different counting methodology	Manufacturing audit teams work alongside the production team to count WIP accurately without disrupting the production process. BOM cross-check for WIP to identify systematic recording errors.
Pharmaceutical Distribution	Batch-level reconciliation with the drug register (Schedule H, Drugs and Cosmetics Act); expiry date tracking; controlled substance security	Batch-level count for every product; reconciliation with drug register; expiry date assessment with specific flagging at 3, 6, and 12 months; temperature storage compliance check for cold-chain products.
FMCG / Consumer Goods	High velocity of goods movement, multiple distribution levels, importance of expiry date management, complexity of promotional schemes	Factory, depot, and distribution centre levels each addressed. Scheme goods correctly identified and excluded or separately included. Near-expiry inventory quantified and valued.
Textile & Apparel	Different counting units (weight for yarn, meterage for fabric, pieces for garments); count method varies by product type and stage	Calibrated scales for yarn, meterage wheels for fabric, barcode scanners for labelled finished goods. Cut parts reconciled with fabric consumed and cut plan.
Automotive & Engineering	Largest SKU count of any manufacturing sector; BOM complexity for every component manufactured	Part-number-level counting facilitated by barcode scanning. BOM-based cross-check: raw material consumption in ERP verified against BOM for each production batch in WIP.

Step-by-Step: What Happens During Your Inventory Stock Audit

Engagement Planning & Pre-Audit Preparation

Two weeks before the audit date, we conduct a planning meeting with the client's finance and stores teams to confirm scope, locations, count date, and cut-off time. We obtain an advance copy of the ERP inventory master to understand the SKU count, units of measure, and value profile. We prepare customised count sheets for each location and agree on the movement freeze protocol.
Pre-Count Verification and Cut-Off Management

On the audit date, before counting begins, we verify that all inward receipts before the cut-off time have been entered in the system; all dispatches have been recorded as system issues; goods in transit between locations are identified; and any goods being received or dispatched at the time of the cut-off are separately documented and correctly treated in the subsequent reconciliation.
Systematic Zone-by-Zone Physical Count

Our counting teams work through each designated zone systematically, recording all items found. High-value items receive dual counting. All count sheets are signed by the client's representative for each zone. Any items found in non-standard locations are separately documented.
ERP System Extract and Count-to-Book Comparison

Immediately after the count is completed in each zone, we obtain the ERP stock snapshot as of the count cut-off. Physical count results are compared with the ERP data to produce the variance schedule by SKU and location.
Material Variance Investigation

Every variance above the materiality threshold is investigated with the client's stores and accounts teams. Transaction logs are reviewed for the affected SKUs. Root cause is identified and documented. Recount is conducted for any variance where counting error is suspected.
Quality and Condition Assessment

During or immediately after the count, our team assesses the condition of all significant inventory categories — identifying damaged, expired, near-expiry, slow-moving, and obsolete goods. Write-down recommendations are computed at the excess of book cost over estimated NRV.
Drawing Power Statement Preparation (Bank Audits)

For bank-mandated audits, the drawing power statement is prepared using the verified physical stock values, applying the advance rates and eligible stock definitions from the sanction letter. The statement is formatted to the bank's exact requirements.
Stock Audit Report Finalisation and Delivery

The comprehensive stock audit report is prepared covering: physical stock summary; total book-to-physical variance analysis; quality and obsolescence findings; drawing power statement; internal controls observations; and management recommendations. The report is delivered within the timeline agreed at planning.

⚠ Bank Reporting Obligation For bank-mandated stock audits, the audit report must be submitted to the bank within the period specified in the sanction letter (typically 15 to 30 days from the audit date). Late submission can result in the bank classifying the account as irregular and freezing drawdowns until the report is received. N D Savla & Associates guarantees delivery within the timeline specified in the sanction letter, without exception.

Why N D Savla & Associates for Inventory Stock Audit

Two decades of experience — Over 20 years of inventory stock audit engagements across manufacturing, pharmaceutical, FMCG, textile, automotive, e-commerce, and trading sectors
Dedicated stock audit teams — Not simply accountants who count goods as a side task, but dedicated professionals specifically trained and experienced in physical counting methodology in bulk storage, cold stores, hazardous material areas, production environments, and third-party locations
100% coverage guarantee — Our physical count methodology is designed to achieve 100% coverage of all inventory items at all locations with no double-counting

Bank-formatted drawing power statements — Empanelled with multiple banks; drawing power statements formatted to the specific requirements of each bank's internal credit risk management framework
Multiple commissioning parties — We deliver to banks, statutory auditors, management, due diligence clients, and insurance companies — each use case receives its specific scope, methodology, and reporting format
On-time delivery, without exception — All bank-mandated stock audit reports delivered within the timeline specified in the sanction letter; no exceptions, no late submissions

Frequently Asked Questions — Inventory Stock Audit

What is the difference between a full physical inventory count and a cycle count programme?

A full physical inventory count is a complete count of all inventory items at all locations conducted on a single date. It gives a comprehensive, point-in-time picture of the inventory position but requires significant operational disruption — goods movement must be frozen during the count, which can take anywhere from one day (for a small single-location operation) to several days (for a large multi-location manufacturing group). A cycle count programme counts different segments of the inventory on a rotating basis throughout the year — so that every item is counted multiple times annually, but the count of any particular segment covers only a portion of the warehouse and takes only a few hours. N D Savla & Associates designs and implements cycle count programmes for clients as an alternative or supplement to full physical counts.

How does the audit handle inventory at third-party locations — job workers, consignment stock at customers?

For each category of third-party-held inventory, we use appropriate alternative procedures: for job work inventory, we obtain a job work confirmation certificate from the job worker specifying the quantity and description of goods held, and reconcile this against the client's job work register under Section 143 of the CGST Act; for consignment stock at distributors, we obtain a consignment stock confirmation from each significant distributor; and for goods in transit, we verify the quantity against transport documents and confirm receipt by the destination location after the audit date. All third-party inventory is disclosed separately in the stock audit report, with the verification method used for each category clearly documented.

How does the inventory stock audit handle high-value items that require special verification?

High-value inventory items — precious metals, active pharmaceutical ingredients (APIs), electronic components — receive enhanced audit procedures: mandatory dual counting by two independent team members, with immediate recount for any discrepancy; weight-based verification using calibrated laboratory or commercial scales; serial number or lot number capture for every individual item; photographic documentation of high-value items in situ; and reconciliation with any third-party custody records. For businesses with significant holdings of precious metals or other very high-value commodities, we recommend that high-value counts be conducted in the presence of independent witnesses.

What happens if the ERP inventory records are found to be significantly inaccurate?

Significant inaccuracy in ERP inventory records — where the count-to-book variances are material in aggregate and distributed across multiple SKUs and locations — is a finding that requires both immediate and longer-term management action. In the immediate term, the book inventory must be adjusted to reflect the verified physical count results, with a write-off entry for net shortages charged to the profit and loss account. In the longer term, the root cause of the ERP inaccuracy must be diagnosed and addressed — common root causes include inadequate documentation of goods movements, unauthorised user access to the ERP inventory module, lack of periodic reconciliation between physical and book records, and inadequate training of stores staff in ERP transaction procedures. Our stock audit report includes specific, priority-ordered recommendations for addressing these root causes.

Can the inventory stock audit also cover stores and spares used in machinery maintenance?

Yes — stores and engineering spares are a category of inventory that is frequently overlooked in standard stock audit engagements but can represent significant value in capital-intensive manufacturing industries. Our audit of engineering spares covers: physical count of all spares by part number and quantity; reconciliation with the spares register maintained in the ERP; identification of slow-moving or obsolete spares (parts held for machinery that has been scrapped or sold); and verification that spares are classified appropriately — consumable spares should be expensed when purchased, while capital spares (those expected to have a useful life of more than one accounting period when placed in service) should be capitalised.

How is WIP inventory audited in a manufacturing environment?

WIP requires the auditor to understand the production process and the stage of completion of each batch or lot. Our manufacturing audit teams work alongside the client's production team to count WIP accurately without disrupting the production process — a critical constraint in continuous process industries where stopping production to count WIP would be operationally and financially unacceptable. For each batch in WIP, we identify the physical location, the stage of completion, and the materials consumed versus the BOM standard — the BOM-based cross-check is a powerful tool for identifying systematic errors in the production recording, for example where actual material consumption differs from the standard BOM quantity due to excessive scrap or unauthorised material substitutions.