how to do stock audit

This guide explains how to do stock audit for companies, especially US-listed entities: purpose, planning, step-by-step counting procedures, reconciliation, valuation, controls, technology and a pr...

2025-11-06 16:00:00

By Lily Wong

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How to Do a Stock Audit

Quick benefit: Learn how to do stock audit to verify physical inventory against accounting records, reduce shrinkage, support correct financial reporting under GAAP/IFRS, and improve investor confidence. This guide is practical for internal teams, external auditors, and public-company finance functions.

Overview

In the context of digital currency and US equities, when people ask how to do stock audit they typically mean an inventory (stock) audit — the procedures companies use to verify physical inventory and reconcile it with accounting records. A stock audit confirms quantities, condition and valuation of goods held for sale or production, and ensures the numbers reported in financial statements are reliable.

This article shows how to do stock audit from planning through reporting, with templates, checklists, best practices and technology options. It is written for finance teams, internal auditors, warehouse managers and external auditors working with companies whose securities trade on US markets.

As of 2025-12-31, according to regulatory guidance and inspection reports from accounting oversight bodies, inventory-related misstatements remain a frequent focus area in audits of public companies and a common cause of restatements.

Importance and relevance to public companies and investors

Accurate inventory records are material for US-listed companies because inventory balances and cost of goods sold directly affect key financial metrics.

Inventory valuation impacts gross margin, net income and working capital. Errors can distort earnings and ratios used by analysts and investors.
For companies reporting under GAAP or IFRS, inventories must be measured and disclosed correctly (including lower of cost or market tests, write-downs for obsolescence, and accounting policy disclosures).
The SEC and external auditors focus on inventory because it is complex, judgmental and susceptible to errors or fraud.

Investors rely on audited financial statements. When a company’s stock audit is robust, it supports confidence in reported results and reduces the risk of restatements or regulatory comments.

Objectives of a stock audit

When planning how to do stock audit, set clear objectives. Typical objectives include:

Confirm the existence and quantity of inventory items (physical count vs system balance).
Detect shrinkage, theft, damage, misplacement or administrative errors.
Verify condition and valuation: damaged, expired or obsolete items must be identified and appropriately written down.
Ensure correct cut-off: receipts and shipments near the count date must be recorded in the correct period.
Validate accounting classification and costing layers (e.g., FIFO, weighted average) and ensure proper journal entries for adjustments.
Support statutory audit requirements, tax compliance and management reporting.

Types of inventory audits

There are several approaches when determining how to do stock audit. Choose the type that fits the company’s size, industry, and reporting needs.

Full physical inventory (annual or period-end)

A full physical inventory is a comprehensive count of every SKU at a defined point (often fiscal year-end). It is the most accurate method for obtaining a snapshot of inventory, but can be highly disruptive to operations.

Best for year-end statutory audit support.
Requires transaction freeze or carefully defined cut-off procedures.
Typically observed by external auditors for public companies.

Cycle counting

Cycle counting is an ongoing program that counts subsets of inventory on a rotating schedule. It keeps perpetual records accurate without a full shutdown.

High-frequency counting of A items (high value) and lower frequency for C items.
Less disruptive and can detect issues earlier.
Supports perpetual inventory systems and reduces year-end surprises.

Spot checks and targeted audits

Unannounced spot checks on high-risk SKUs, new product lines or suspicious locations help detect shrinkage or control weaknesses.

Useful for fraud detection and internal control testing.
Can be focused by risk indicators (variances, returns, adjustments).

Supplier/inward and transit audits

Audits of goods-in-transit, supplier consignments and inbound receipts verify that goods physically on the way or held at third parties are recorded correctly.

Important for cut-off and balance accuracy when shipments cross period-ends.
Requires coordination with logistics and vendors.

Planning and scope

Careful planning is key when you decide how to do stock audit. Establish the following before counting:

Objectives: what questions must the audit answer?
Scope: which locations, warehouses, SKUs and valuation layers will be included?
Timing: select a count date that minimizes operational disruptions and movements.
Team: assign roles (count teams, supervisors, reconciliation, IT support) and define responsibilities.
Communication: inform operations of procedures while keeping certain checks (spot checks) unannounced.
Materiality: set materiality thresholds and variance tolerance levels.
External auditor coordination: align with statutory auditors on procedures they will observe.

Preparation steps

Good preparation reduces counting errors. Here are essential steps when planning how to do stock audit.

Data and documentation gathering

Collect system and historical data before counting:

Inventory records and stock ledgers from the ERP or inventory system.
Open purchase orders, sales orders, receipts and ship manifests.
Location maps and SKU master data with dimensions, unit of measure and cost layers.
Prior audit reports and variance history to target problem areas.
Cut-off rules and period definitions.

Physical preparation

Prepare the warehouse to streamline counting:

Organize and label bins and racks clearly.
Segregate incoming receipts and quarantine outgoing shipments.
Remove non-inventory items from inventory locations.
Pre-count sealed items or slow-moving SKUs where feasible.

Tools and materials

Equip teams with the right tools:

Count tags, pre-printed forms or mobile devices.
Barcode or RFID scanners and mobile apps for data capture.
Printed location maps and SKU lists for manual backup.
PPE and safety signage for operational areas.

Audit procedures — step-by-step

This section explains core procedures practitioners use when they decide how to do stock audit and execute it.

Freezing transactions and cut-off procedures

Define the count cutoff precisely and control movements around count time.

Decide whether to stop inventory movements entirely or to create a controlled window.
Seal receiving areas and document inbound shipments with timestamps.
Use cut-off sheets for shipments and receipts occurring during the count period.
Have logistics teams record exceptions immediately for reconciliation.

Tagging and counting methodology

A reliable counting methodology reduces human error.

Use two-person teams: one counter and one recorder (or scanner and verifier).
Assign sequential count tags and record tag numbers to trace counts.
Apply floor-to-sheet (count on floor then record) or sheet-to-floor (read sheet then verify on floor) methods consistently.
For high-value SKUs perform blind counts where counters do not see system quantities.

Use of technology during counting

Technology increases speed and accuracy when learning how to do stock audit.

Barcode/QR scanners link physical items to ERP SKUs and avoid manual entry errors.
RFID can speed large-volume counts with fewer interruptions but requires infrastructure investment.
Mobile data capture apps sync counts in real time and can show immediate variances.
Photo evidence and timestamps help support later investigations.

Reconciliation and variance investigation

After counting, reconcile physical counts to system quantities.

Produce variance reports by SKU and location.
Investigate variances above tolerance thresholds: check receipts, transfers, sales, returns and adjustments.
Look for root causes: mispicks, mislabeling, erroneous unit-of-measure, data entry mistakes, or theft.
Document all investigations with supporting evidence.

Adjustments and authorization

Adjustments to system quantities or accounting records require strict authorization.

Establish approval levels based on variance size and account impact.
Prepare inventory adjustment journal entries with backup (count sheets, photos, investigation notes).
Ensure segregation: adjusting entries should be reviewed by someone independent of daily inventory operations.

Final reporting and sign-off

Complete an audit report that includes:

Summary of counts, variances and adjustments.
Materiality assessment and explanation of significant variances.
Root cause analysis and proposed remediation actions.
Sign-offs from inventory managers, finance and internal/external auditors.

Audit sampling and statistical methods

Sample-based audits reduce time when full counts are impractical. Use statistical sampling to gain confidence in results.

Choose sampling method: random, stratified (e.g., ABC by value/frequency), or systematic.
Define confidence levels and acceptable error rates.
Extrapolate sample variances to the population carefully, disclosing sampling basis in the audit report.
For public companies, discuss sample approach with external auditors to ensure acceptability for statutory purposes.

Inventory valuation and accounting considerations

Inventory valuation rules affect reported results. When you do stock audit, verify both quantities and valuation.

Common valuation methods: FIFO, weighted average (LIFO is not permitted under IFRS; under US GAAP LIFO is allowed but should be disclosed if used).
Test lower of cost or net realizable value where applicable; identify damaged, obsolete or slow-moving items for write-downs.
Verify unit costs in the system match purchase invoices, landed cost calculations and supplier credits.
Consider tax implications of valuation methods and changes.

Controls, segregation of duties, and fraud prevention

Robust internal controls reduce the need for corrective adjustments during a stock audit.

Segregate custody (physical handling), recording (ERP data entry), and authorization (approvals for adjustments).
Limit write access to inventory master and adjustment screens.
Use periodic reconciliations, system logs and exception reporting.
Physical security: locks, restricted access, CCTV and visitor controls help deter theft.
Investigate anomalies promptly and escalate to management when fraud is suspected.

Technology and automation

Technology plays a major role in how to do stock audit efficiently and accurately.

ERP and inventory management integration

Perpetual inventory in an ERP provides real-time balances and audit trails.
Ensure proper configuration of costing, unit-of-measure conversions and multi-location flows.
Use transaction logs and audit reports to reconstruct inventory movements around count dates.

Barcodes, RFID, and handheld/mobile apps

Barcode scanning dramatically reduces manual counting errors and speeds counts.
RFID benefits high-volume or palletized environments but needs tags and readers.
Mobile apps allow supervisors to monitor count progress and flag discrepancies for immediate review.

Audit and counting software

Look for software with features such as:

Count scheduling and team assignments.
Real-time discrepancy reporting and ERP synchronization.
Multi-location coordination and consolidated reporting.
Photo capture and digital signatures for evidence.

Common issues and challenges

When learning how to do stock audit, teams commonly encounter recurring problems:

Human error from manual counts and data entry.
Master data problems: duplicate SKUs, wrong units of measure, or poor labeling.
Unrecorded transfers and goods-in-transit that cause timing differences.
Expiry or obsolescence not recorded promptly.
System mismatches from intermittent synchronization or wrong mapping to GL accounts.

Mitigation strategies include improved data hygiene, automation, cycle counts and root cause remediation programs.

Best practices and recommendations

Follow these best practices when deciding how to do stock audit:

Implement continuous cycle counts with ABC prioritization: count A items frequently, B items periodically, C items less often.
Maintain master-data hygiene: accurate SKUs, descriptions and units.
Use technology (barcodes/RFID and mobile apps) to reduce manual entry errors.
Enforce segregation of duties for adjustments and approvals.
Track and trend variances and run root-cause analysis to eliminate recurring issues.
Document procedures and train warehouse staff on count techniques and cut-off rules.

Audit checklist (practical step checklist)

Use this concise checklist to guide execution when you do stock audit:

Planning: define objectives, scope, materiality and timing.
Prepare: gather ERP extracts, SKU maps, prior reports and tools.
Freeze/cut-off: agree on transaction freeze or cut-off procedures.
Count: assign teams, use tags/scanners, complete counts and capture evidence.
Reconcile: produce variance reports and investigate exceptions.
Adjust: prepare authorized journal entries with backup.
Report: create audit report with variances, materiality, recommendations and management sign-off.
Follow-up: implement corrective actions and track outcomes.

Role of internal vs external auditors

Understanding the different roles helps coordinate efforts:

Internal audit and operations teams perform ongoing counts, cycle counting programs and internal control tests.
External auditors (CPAs) typically observe year-end counts or perform substantive testing for financial statement audits of public companies.
External auditors evaluate whether inventory counting procedures and management’s adjustments are reliable and consistent with accounting standards.

Coordination between internal and external teams reduces duplication and improves audit efficiency.

Regulatory and reporting considerations

When you do stock audit for a US-listed company, be aware of applicable reporting frameworks and regulatory expectations:

GAAP (US) and IFRS (international) require measurement, disclosure and impairment testing of inventory.
Material misstatements in inventory can lead to SEC comments, restatements and reputational damage.
Public companies should document audit trails, accounting policy choices and disclosure of significant judgments (e.g., obsolescence reserves and valuation methods).

As of 2025-12-31, regulatory inspection reports have emphasized the importance of documented cut-off procedures and evidence for inventory adjustments when assessing financial statement reliability.

Case studies and examples

Here are brief examples that illustrate common findings and improvements from stock audits:

Retail chain: repeated shrinkage in a geographic region traced to mislabeling at a distribution center. Implementation of barcode scanning at goods-in and monthly cycle counts reduced shrinkage by 40% within six months.
Manufacturing company: significant variances due to incorrect unit-of-measure conversions between warehouse and ERP. Cleaning master data and standardizing UOM eliminated recurring write-offs.
E-commerce business: goods-in-transit near year-end caused material cut-off differences. Introducing a transit reporting routine and timestamped receiving notices corrected the problem for the next reporting period.

These examples reflect typical outcomes when teams improve how to do stock audit processes and controls.

Glossary

SKU: Stock Keeping Unit, a unique identifier for inventory items.
Cut-off: Procedures to ensure transactions are recorded in the correct accounting period.
Cycle count: Periodic counts of a subset of inventory on a rotating schedule.
Shrinkage: Loss of inventory due to theft, damage or error.
FIFO / LIFO: Cost flow assumptions for inventory valuation (FIFO = first in, first out; LIFO = last in, first out).
Perpetual inventory: A system that continuously updates inventory balances after each transaction.
Physical count: The act of counting items in storage to verify quantities.

Practical sample: step-by-step procedure for a medium-size retailer

Planning (4 weeks before count)
- Define scope: all distribution centers and top 2,000 SKUs by value.
- Notify teams and schedule counts during a low-sales weekend.
- Pull ERP inventory extracts and prior variance reports.
Preparation (2 weeks before count)
- Label bins, adjust layout for count paths, segregate incoming goods.
- Prepare count sheets and mobile app user accounts.
Freeze and cut-off (count day)
- Stop non-essential movements; record timestamped receipts and shipments.
- Deploy count teams with scanners and supervisors.
Count execution (count day)
- Two-person teams scan or count each bin, verify unit-of-measure and place count tags.
- Supervisors perform blind counts on 5% of locations.
Reconciliation (within 48 hours)
- Upload counts, generate variance reports, investigate exceptions with warehouse leads.
- Verify receipts and sales around count timestamp.
Adjustments and reporting (within 5 days)
- Prepare journal entries for approved variances and obtain manager sign-off.
- Produce final audit report and present findings to finance and audit committee.
Follow-up (ongoing)
- Implement recommended controls and schedule targeted cycle counts for problematic SKUs.

Common KPIs to monitor after the stock audit

Inventory accuracy (% of SKUs with no variance).
Shrinkage rate (value lost / opening inventory value).
Cycle count completion rate and timeliness.
Number and dollar value of post-count adjustments.
Time to investigate and close variance root-cause items.

Tracking KPIs helps demonstrate improvements after changes to how you do stock audit.

How Bitget can help teams managing inventory and reporting needs

When companies involved in digital asset operations or custody need reliable record-keeping and wallet controls, they can rely on integrated custody solutions and wallets that prioritize security and audit trails. For teams working across trading, custody and treasury, Bitget Wallet offers secure self-custody and transaction logs that can support audit processes for digital assets. For corporate treasury teams needing trading or liquidity services, Bitget provides institutional features and compliance tools that may assist in operational reconciliation and reporting.

Note: This article addresses inventory (stock) auditing for companies and public filers. It is distinct from crypto-specific "token audits" (smart contract security reviews). For crypto security audits and on-chain controls consult specialized security guidance and dedicated audit providers.

Final recommendations and next steps

If your objective is to improve inventory accuracy and support reliable financial reporting, start by running a risk-based stock audit pilot focused on high-value SKUs using barcode scanning and clear cut-off procedures. Use the audit checklist above, document results thoroughly and implement corrective actions prioritized by financial impact.

To explore applied tools for record-keeping and custody of digital assets related to corporate treasury, consider Bitget products and Bitget Wallet for secure transaction recording and audit-friendly logs.

Further assistance: if you want a printable checklist or a tailored step-by-step procedure for retail, manufacturing, e-commerce or a public-company year-end audit, request a customized template and we will provide one adapted to your industry.

Article last updated: 2025-12-31. As of 2025-12-31, according to regulatory and professional accounting guidance, inventory audit procedures and documentation remain prioritized areas for auditors and filing issuers.

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