An inventory audit confirms that the stock in the books exists, belongs to the company, is counted at the right quantity and is valued correctly. The core is a well-run physical stock count, followed by tests on cut-off, records and valuation. This guide covers the count, the audit steps and the checks for a statutory auditor or an internal team.
Last reviewed: 17 October 2026. Facts checked. We searched for SA 501 and for CARO 2020 clause 3(ii). Search results summarised the ICAI Handbook text on SA 501 and secondary notes on CARO. We could not open the ICAI Handbook PDF because of a certificate error, and we did not open the CARO order itself. The 10 per cent and Rs 5 crore figures below match several secondary commentaries (BCAS Journal, ICAI-hosted material) but not the notified text, so confirm them in the order. This guide is not a statement of the Standards. Read SA 501 before applying it.
What the auditor needs to establish
For stock, the main assertions are:
- Existence. The stock is physically there.
- Condition. It is saleable, not damaged or obsolete.
- Ownership. It belongs to the company, not to a customer or supplier.
- Completeness. All stock is on the list.
- Valuation. It is carried at the lower of cost and net realisable value.
SA 501 in plain words
According to the ICAI Handbook text summarised in our search, SA 501 says that when inventory is material, the auditor should attend the physical count unless it is impracticable. Attendance includes:
- Evaluating management's count instructions and procedures
- Observing the count
- Inspecting the stock
- Performing test counts
- Checking that final inventory records reflect the actual count
If attendance is truly impracticable, for example because of a safety threat, the auditor performs alternative procedures. General inconvenience is not enough. If the count is not on the balance sheet date, extra procedures cover the movement in between. For stock held by third parties, the auditor can ask for confirmation or inspect it.
Step 1: Plan the count
Management plans the count. The auditor reviews the plan.
- Pick a date and freeze stock movements during the count, or record them tightly.
- Issue written instructions: who counts, how, in what order and how to tag.
- Use teams of two, with one counter and one recorder. Do not let storekeepers count their own stock alone.
- Separate areas with tape and number the count tags in advance.
- List stock held at third parties, and stock held for others on your premises.
Step 2: Run the count
- Count by area. Tag each pile or bin after it is counted.
- Record item code, description, unit and quantity.
- Mark damaged, slow-moving and obsolete items on the sheet.
- Hold back goods in transit: record the last receipt and last dispatch numbers.
- A second team re-counts a sample, and differences are settled on the spot.
Step 3: Auditor's test counts
Attend the count and perform two kinds of test.
- List to floor. Choose items from the count sheet and find them in the warehouse. This tests existence.
- Floor to list. Choose items on the shelf and find them on the sheet. This tests completeness.
Note the last receipt and shipping numbers. Observe whether instructions are followed. Record your own test counts so you can trace them to the final stock list later.
Step 4: After the count
- Reconcile the count sheets to the stock records and investigate differences.
- Check that book adjustments match approved differences.
- Trace your test counts into the final list.
- Test cut-off with the last few receipts and dispatches before and after the date.
- Compare count results with the stock ledger and with the general ledger.
Step 5: Valuation tests
- Recompute cost on a sample, including freight and duties capitalised.
- Check the costing method is applied consistently.
- Compare cost to selling price after year end for net realisable value.
- Review ageing and the basis for provision for slow-moving and obsolete items.
- For manufactured goods, test overhead absorption and standard cost variances.
Step 6: Statutory reporting angle
Under CARO 2020, clause 3(ii), secondary sources say the auditor reports whether management verified inventory at reasonable intervals, whether coverage and procedure are appropriate, and whether discrepancies of 10 per cent or more in aggregate for each class were properly dealt with in the books. The same clause covers quarterly returns or statements filed with banks or financial institutions for companies with sanctioned working capital limits above Rs 5 crore in aggregate, secured on current assets. Our bank stock audit guide covers a lender's stock audit. For control testing, use the inventory internal audit checklist and the inventory audit workbook.
Checklist
- Written count instructions issued before the count
- Stock movement frozen or controlled
- Pre-numbered tags, all accounted for
- Independent counters, with recount of a sample
- Third-party stock confirmed
- Damaged and old stock flagged
- Auditor test counts in both directions
- Cut-off documents noted
- Count reconciled to books, with differences approved
- Valuation, ageing and provision tested
Common findings
- Counts done by the storekeeper alone
- Tags lost or unused tags not accounted for
- Stock received after the count included in the books
- Obsolete stock carried at full cost
- Stock at job workers or consignment agents not confirmed
Frequently Asked Questions
What is an inventory audit?
A review that confirms stock exists, is complete, is owned by the company and is valued properly.
Must the auditor attend the physical stock count?
Under SA 501, if inventory is material, yes, unless it is impracticable. Where impracticable, alternative procedures are needed.
What is a stock count cut-off test?
It checks that goods received and dispatched around the count date are recorded in the right period.
What if the count is done on a different date?
The auditor performs procedures on movements between the count date and the balance sheet date.
How is inventory valued for audit?
At the lower of cost and net realisable value, with cost computed consistently.
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