A stock-taking or physical inventory performed in a quality manner gives the heads of all units in a company assurance that financial statements and databases present a true and fair view of assets and inventories in stock. Periodic stock-taking is also quite effective for preventing fraud.
Thus, a physical inventory is one of the most important control procedures in the internal control toolbox and it is an endeavour that should be approached carefully.
Stock-taking can reduce risk of fraud
Stock-taking can also successfully be used as a part of internal control on a recurring basis, not just once a year. Random inventory checking exerts a disciplining effect and current warehouse accounting will likely become higher in quality. It is also good to sometimes use out-of-house partners to perform physical inventory in order to avoid conflicts of interest or resolve concerns over insufficient resources.
Counting mistakes is reduced by automating the process as much as possible. To keep the stock-taking results from being in the domain of the accountants and management alone, the establishment of financial incentives can also be considered. Proprietary liability for deficits or, the other way around, rewarding employees if there are only minimal discrepancies in unannounced inventory checks may prove very effective. Incidents of fraud can be established by constant analysis of stock-taking results and current accounting.
Physical inventories generally expose any theft
If warehouse accounting and physical inventories are performed correctly, any discrepancy will generally be traced to foul play. Discrepancies can stem from thefts of goods (including in small quantities) and recording of deficits to cover for skimming of goods. Even what appear to be minimal differences can conceal fraud if the inventory results have been manipulated or the goods have been falsified or counterfeited. For example, boxes might be empty or liquids may turn out to be ordinary tap water.
Fraud may or may not always be revealed in the course of an inventory. Thus, one should not rely solely on inventory – other internal control systems are also important for detecting fraud.
Condition of assets/goods in stock must also be assessed
When taking inventory, the condition of stored assets/stocks must also be evaluated. If the shelf life has expired, and this was not noticed during the stock-taking and the company’s logistics unit lacks information about this for whatever reason, these goods will end up being recognized on the balance sheet at the incorrect value.
Another important risk in production is the lack of high-quality raw material, although the company’s records indicate that there are materials in stock. Such a situation may lead to a production stoppage. Still, one should not forget the possibility that rodents, water damage and other factors may also worsen the value of goods in the warehouse or even contribute to a total loss of goods.
If the condition of goods is not carefully inspected in the course of a stock-taking, such incidents may go unnoticed. There is a very clear requirement in the state sector – assets and inventories not used must be written down and written off.