Inventory Internal Audit Checklist: Stock, GRN, Issue and Valuation RCM
Inventory internal audit tests whether stock quantities, movements and valuation are controlled from receipt to issue, production, transfer, sale and write-off. The cycle matters for manufacturers, traders, retailers and e-commerce businesses because stock errors affect gross margin, working capital, insurance, shrinkage and financial reporting.
The inventory audit should connect physical stock, ERP stock, purchase receipts, production consumption, dispatch and valuation. The RCM below is an illustrative starting point and should be tailored to the entity's warehouse model, SKU volume, costing method, production process and internal-audit scope.
Inventory RCM: core risks and controls
| Sub-process | Risk | Control | Internal audit test |
|---|---|---|---|
| Goods receipt | Stock recorded without actual receipt | GRN should require receiving evidence and quality check where applicable | Match PO, gate entry, GRN, QC and purchase invoice |
| Stock master | Duplicate or wrong SKU created | SKU creation should require approval and standard attributes | Test new SKUs, duplicate descriptions and inactive items |
| Stock issue | Material issued without authorised request | Material issue should require approved requisition or production order | Match issue slips to production/order records |
| Transfers | Stock lost or misstated in inter-warehouse movement | Transfer should require dispatch and receipt confirmation | Test in-transit inventory and unmatched transfer notes |
| Physical count | Book stock not verified | Cycle count or physical verification plan should cover high-value/high-risk SKUs | Compare count sheets to ERP and adjustment approvals |
| Obsolescence | Slow-moving stock not provided for | Ageing and NRV review should run at defined cadence | Test slow-moving, expired, damaged and negative-margin items |
| Costing | Inventory valued at wrong cost | Costing method should be documented and consistently applied | Recompute sample SKU cost and overhead absorption |
| Cut-off | Purchases or sales recorded in wrong period | GRN, invoice and dispatch cut-off should be tested around period end | Compare GRN/invoice/dispatch dates around close |
| Write-off | Stock written off without approval | Write-off and scrap sale should require approval and evidence | Test write-offs, scrap proceeds and reason codes |
Inventory audit data fields to request
| Data table | Minimum fields |
|---|---|
| SKU master | SKU code, description, category, UOM, valuation method, active/inactive status, creator |
| Stock ledger | SKU, location, opening, receipts, issues, transfers, adjustments, closing quantity/value |
| GRN register | PO number, vendor, SKU, quantity received, rejected quantity, QC status, receipt date |
| Issue register | Issue number, SKU, quantity, department/order, approver, issue date |
| Transfer register | From location, to location, dispatch date, receipt date, in-transit ageing |
| Count sheets | Count date, location, SKU, book quantity, physical quantity, variance, approver |
| Ageing/NRV file | SKU, last movement date, ageing bucket, cost, expected realisable value, provision |
Fieldwork checklist
- Negative stock or backdated stock adjustments
- GRNs without purchase invoices and invoices without GRNs
- Stock transfers in transit beyond normal movement time
- High-value SKUs not covered in cycle count plan
- Physical-count variances adjusted without root-cause notes
- Slow-moving or expired stock with no provision review
- Standard cost not updated after major input-price change
- Scrap sales not reconciled to approved write-off notes
- Manual stock valuation journals posted near period-end
Inventory audit programme
| Step | Procedure | Evidence expected |
|---|---|---|
| 1 | Reconcile stock ledger to GL inventory balances | SKU/category-wise bridge from stock records to trial balance |
| 2 | Test receipts from PO to GRN to stock ledger | PO, gate entry, GRN, QC and stock posting |
| 3 | Test issues/transfers from approved request to stock movement | Material requisition, transfer note and receiving confirmation |
| 4 | Review physical-count plan and variances | Count sheet, variance approval and root-cause note |
| 5 | Analyse slow-moving, expired and damaged stock | Ageing report, NRV/provision working and management review |
| 6 | Test costing and valuation for selected SKUs | Cost build-up, overhead absorption basis and valuation policy |
| 7 | Test period-end cut-off | GRN, invoice, dispatch and stock-ledger dates around close |
Sample and population guidance
Use full-population analytics for negative stock, backdated adjustments, old in-transit transfers, no-movement SKUs, duplicate SKU masters and manual valuation journals. Use samples for physical verification, QC evidence, costing recomputation and cut-off document tracing. Give higher weight to high-value, high-shrinkage, perishable and slow-moving categories.
What to report
- Condition: 42 SKUs with no movement for more than 365 days carried book value of ₹1.8 crore. No NRV review or provision working was available.
- Criteria: Inventory policy requires quarterly ageing review and provision assessment for slow-moving stock.
- Cause: ERP ageing report is generated, but ownership for review is not assigned between operations and finance.
- Effect: Inventory and profit may be overstated, and working capital tied up in obsolete stock is not visible.
- Recommendation: Assign SKU ageing review to warehouse and finance owners, document NRV assessment and route provision entries through controller approval.
Inventory internal audit FAQ
What is inventory internal audit?
Inventory internal audit reviews controls over goods receipt, storage, stock issue, transfer, production consumption, physical verification, valuation, obsolescence and write-off.
Is physical verification enough for inventory audit?
No. Physical verification proves existence at a point in time. Internal audit should also test movement controls, GRN-to-invoice matching, cut-off, ageing, costing and adjustment approvals.
Which inventory tests should be full-population?
Negative stock, backdated adjustments, in-transit transfers, duplicate SKU masters, slow-moving ageing and manual valuation journals should be tested across the full population where data is available.
Related CORAA resources
Sources
- ICAI Internal Audit Standards Board, Compendium of Standards on Internal Audit - as on February 2026 and listed by ICAI as applicable from 1 April 2026
- Companies Act, 2013, Section 138 and Section 143(3)(i)
- The entity's applicable accounting framework and inventory policy should be used as the valuation criteria for AS 2 / Ind AS 2 testing, rather than assuming one framework applies to every company