Stock Verification: Purpose, Methods and Its

Reconciliation | Materials Management

1. Purpose of Stock Verification 2. Methods of Stock Verification 3.

Reconciliation.

Purpose of Stock Verification:

Physical stock verification which involves actual counting,
measuring, weighing of all items in stock is necessary for the
following four reasons:
(a) To support the value of stock shown in the balance sheet through
physical verification;

(b) To verify the accuracy of stock records;

(c) To disclose the possibility of fraud, theft or loss, or deterioration; and

(d) To reveal the weakness of the system, if any (i.e., whether the stock
is in safe custody).

Methods of Stock Verification:

There are three methods of stock verification.

These are:
(i) Periodic stock verification

(ii) Perpetual stock verification

(iii) Blind stock taking.

(i) Periodic verification:

Under this method the whole of the stock is covered at the same time at
the end of a financial year. This can be done only in a small
organisation. But this method does not suit big industrial organisations,
since complete stoppage of work for several days is not possible just for
the purpose of stock taking.

(ii) Perpetual verification:

Under this method physical stock verification is spread throughout the
year according to a predetermined programme. And each item is
physically examined at least once a year.

Advantages:
Four main advantages of perpetual verification are:
(i) During physical verification neither the stores nor the works are to be
closed.

(ii) The normal stores transaction and posting can continue without
interruptions.

(iii) Surpluses and shortages arising from time to time can be written-off
after proper investigation.

(iv) The job of stock verification can be done on time.

(iii) Blind verification:

Under this system the stock verifiers are given the location, but not
details about code numbers, description and stock record balances. The
underlying logic here is that the verifier will not have his own idea about
the stock position and he may just mention the same figures in record
without actual verification of stock.

This method is not very popular. It virtually serves no purpose when the
entire operation of stores has to be well-planned. The modern trend is
toward the application of the ABC technique for stock verification.

Who Should Do The Stock Taking:

In some of the organisations, store-keepers are required to take stock of
their own stores. This is not a correct procedure. It not only induces
them to conceal genuine discrepancies to avoid punishment but leads to
deliberate pilferage or fraud where surpluses are found.

It is in the Tightness of things to employ full-time stock verifier or internal

auditors for doing this job. However, they can take the help of store-
keepers and even engineering staff for proper identification.

Treatment of Discrepancies (Reconciliation):

Often the amounts of stock found by physical examination do not agree
with stock records. So certain discrepancies exist. Where physical stock
is more, there is surplus and where it is less than the stock records there
is shortage.

Surpluses:
Surpluses arise for the following three reasons:
(a) Where materials are not issued from the bins, but the entry of issues
is posted.
(b) Where the amount of materials issued is less than the quantity for
which entry (issue) is made.

(c) Where no issues are made but only issue entry is made in the stock
record.

Shortages:
Shortage may occur for the following six reasons:
(a) Excess physical issue than the actual issue entries posted.

(b) Issues made but corresponding entries not made in issue column.

(c) Excess quantity issued than the quantity for which entries are made
in the issue column.

(d) Issue of materials without requisition.

(e) Misappropriation.

(f) Defective instruments.

Stock Verification: Need and Types | Materials

Management

1. Need for Stock Verification 2. Types of Stock Verification.

Need for Stock Verification:

Stock Verification is the physical counting of stock. Where counting is
not possible, measuring or weighing is done. The results of such
physical checking are systematically recorded.

Stock verification is necessary because:

(a) It minimizes pilferage and fraudulent practices,

(b) It ensures accuracy and usefulness of documents,

(c) It brings about a reconciliation of the stock records and documents.

(d) It identifies areas for more disciplined document control and

(e) It backs up the balance sheet stock figures Stock verification is the
task of the materials audit department. Verification may be continuous or
periodical.

Types of Stock Verification:

1. Continuous Verification:
Under this system, verification of stock continues throughout the, year
according to plan. Different items of stores are verified according, to their
nature, importance and issue fend, etc. twice, thrice or even more in a
year. A perpetual inventory is, therefore, maintained showing all
transactions so that reconciliation can be done.

The system of continuous verification has the

following advantages:
(1) The materials audit staff can carry on their work independently.

(2) More detailed investigation is possible with regard to discrepancies

as the investigation is spread over the year.

(3) Preparation of final accounts is not delayed as the data for the final
accounts remain ready after audit.
(4) The operations of the stores continue and remain unaffected,

(5) There is no need to ‘freeze’ the operation because there are the
perpetual inventory records.

(6) It is possible for the records to remain more up to date.

According to S N Chary “the normal business of the stores can go on

as usual and more importantly the discrepancies do not come out
all at once as in the annual stock-taking, so there is time to
investigate discrepancies thoroughly.”
2. Periodic Verification:
This system of stock verification is done generally once a year — at the
close of the year. The period covers usually accounting year. Since the
whole audit work is involved, the verification takes a few days of a week
or so to complete. During the audit period, no transactions can take
place and therefore, problems may crop up.

Physical stock-taking is a matter of careful planning. Various steps are

involved. A detailed programme has to be prepared giving complete
breakdown of the process—store wise and otherwise. Several
departments are involved in chalking out programmer, particularly
materials management and finance departments.

In a periodical stock verification system, the audit staffs are instructed to

complete the work as expeditiously as possible, since the usual store
transactions remain suspended during the audit period. Verification
cards and check sheets must be prepared according to requirements.
Cards must be serially numbered for easy reference and control.
Separate provisions are made for damaged or deteriorated items. Each
member of the verification staff should have selected areas for
verification to ensure orderly compilation of the job without duplication or
omission.

Treatment and Stock: Raw Materials, Work-in-Progress and

Finished Goods

Treatment and Stock: Raw Materials, Work-in-

Progress and Finished Goods!
Treatment of Stock:
Stock requires special treatment while preparing a cost sheet. Stock
may be of raw materials, work-in-progress and finished good.

Stock of Raw Materials:

If opening stock of raw materials, purchases of raw materials and
closing stock of raw materials are given, then with the help of the
following, raw materials consumed can be calculated:
Illustration 1:
Following information has been obtained from the records of Left-
Centre Corporation for the period from January 1 to June 30, 2011:
Illustration 2:
Following extract of costing information relates to commodity ‘A’
for the half year ending 31st December, 2011.
Illustration 3:
Following figures are extracted from the Trail Balance of Go-getter
Co. on 30th September, 2011:
Illustration 4:
Following information has been obtained from the cost records of
Aditya Chemicals Ltd. for 2011:
Illustration 5:
Popeye Company is a metal and wood cutting manufacturer, selling
products to the construction market, Consider the following data
for the month of October, 2011: