H1 Is Closed. Has Anyone Counted the Stock?
SCORE Insights Team
The half-year is closed. Is your stock?
30 September has come and gone. For most Indian companies, the first half of the financial year is now closed.
The numbers may be in. But has anyone actually counted the stock?
That question matters more than it looks. When your statutory auditor signs off in a few months, the Companies (Auditor’s Report) Order, 2020 (CARO 2020) requires them to report on how you verified your inventory and fixed assets. They must also report whether the stock figures you gave your bank match your books.
If something is wrong, it goes into the audit report. Your lenders, your board and your investors will read it.
The good news: two quarters are still left. This article sets out the three CARO 2020 rules that matter, and six checks you can run now, while there is still time to fix what you find.
Rule 1: What you tell your bank must match your books
CARO 2020, CLAUSE 3(II)(B)
This rule applies if, at any point during the year, your company has been sanctioned working capital limits of more than ₹5 crore in aggregate from banks or financial institutions, on the basis of security of current assets.
Most such companies file quarterly stock statements with their lender. The auditor must report whether those quarterly returns or statements agree with the books of account. If they don’t, the auditor has to give the details in the audit report.
Three points are easy to miss:
• It’s “at any point” in the year. A limit that crossed ₹5 crore for even part of the year brings you in.
• It’s “in aggregate”. Limits from several banks are added together.
• Every quarter counts. One mismatched quarter is enough to be reported.
The practical message: a stock statement prepared in a hurry for the bank, and never tied back to the books, can turn into an audit-report disclosure months later.
Rule 2: Counting isn’t enough. It has to be done right.
CARO 2020, CLAUSE 3(II)(A)
The auditor must report on three things:
1. Whether management has physically verified inventory at reasonable intervals.
2. Whether the coverage and procedure of that verification are appropriate, in the auditor’s opinion.
3. Whether any discrepancies of 10% or more in aggregate, for each class of inventory, were noticed, and if so, whether they were properly dealt with in the books of account.
The second point is a judgment call. Counting a convenient sample, or only the main warehouse, may not be enough for your auditor to call the coverage appropriate.
The third point turns on the words “for each class”. Raw material, work in progress and finished goods are looked at separately. A company-wide variance of 4% can still hide one class that is over 10%.
Rule 3: Your fixed assets need counting too
CARO 2020, CLAUSE 3(I)(B)
The auditor must report whether property, plant and equipment have been physically verified by management at reasonable intervals, and whether any material discrepancies found were properly dealt with in the books.
Many companies verify fixed assets in phases, for example covering every asset once in three years. That can work. But a schedule on paper is not enough on its own: the auditor has to form an opinion on whether the interval is reasonable, given the size of the company and the nature of its assets.
If the plan exists but this year’s portion wasn’t carried out, or the results weren’t recorded, the auditor has little to rely on.
Six checks to run before March
All six can be done in the next quarter, well before the year-end audit starts.
| # | Check | What to do | CARO 2020 clause |
| 1 | Reconcile Q1 and Q2 | Tie the Q1 stock statement already filed, and the Q2 statement going to the bank now, back to the books, both quantity and value. | 3(ii)(b) |
| 2 | Explain every gap in writing | Record why each difference exists: valuation basis, cut-off timing, goods in transit, or stock held at third-party locations. | 3(ii)(b) |
| 3 | Measure variance class by class | Compare physical counts to the books separately for raw material, work in progress and finished goods, not just in total. | 3(ii)(a) |
| 4 | Pass the entries | A discrepancy written on a count sheet but never dealt with in the books is exactly what gets reported. Investigate it, adjust it, approve it. | 3(ii)(a) |
| 5 | Tag and count fixed assets | Match every asset in the fixed asset register to one on the ground, and every asset on the ground to the register. | 3(i)(b) |
| 6 | Document the plan and the results | Keep the verification schedule, the count results and how each discrepancy was resolved. That file is what the auditor will ask for. | 3(i)(b) and 3(ii)(a) |
The cheapest audit finding is the one you fix in October.
How SCORE can help
SCORE’s Physical Verification practice runs independent, technology-driven stock audits and fixed asset verification:
• Stock audits: simultaneous counts across multiple locations using barcode scanners.
• Fixed asset verification: tagging, mapping and reconciling assets to the register to remove ghost assets.
• Perpetual inventory control: ongoing systems to keep physical stock and ERP records close to zero variance.
• SOP design: procedures for receiving, dispatch, returns and damage handling.
In one engagement for a fashion retail brand with a central warehouse and 30 outlets, SCORE’s audit traced shrinkage to damaged returns being recorded as sales. Shrinkage fell from 3.5% to 0.9% within six months.
Get the Inventory Management SOP. Download it free from the Downloads page in SCORE’s Resources section.
Book a pre-audit physical verification. Write to contact@scoreindia.co.in or call +91 87966 07005. Every initial consultation is complimentary.
Frequently asked questions
Which CARO 2020 clause covers physical verification of inventory?
Clause 3(ii)(a). The auditor reports whether inventory was verified at reasonable intervals, whether the coverage and procedure were appropriate, and whether discrepancies of 10% or more for any class were properly dealt with in the books.
Does clause 3(ii)(b) apply if our working capital limit is exactly ₹5 crore?
No. The clause applies to limits in excess of ₹5 crore in aggregate, sanctioned at any point during the year on the security of current assets.
Is the 10% discrepancy threshold measured on total inventory?
No. It applies in aggregate for each class of inventory, so each class is tested on its own.
Is a three-year rolling plan for verifying fixed assets acceptable?
It can be. Under clause 3(i)(b), the auditor must judge whether the interval is reasonable for the company’s size and the nature of its assets. Stating the plan alone is not sufficient.
What happens if our bank stock statements don’t match our books?
The auditor must give details of the differences in the audit report under clause 3(ii)(b).
Sources
• CARO 2020 inventory reporting: statutory wording of clause 3(ii) (Patron Accounting)
• CARO 2020: inventories and other current assets (Bombay Chartered Accountants’ Journal)
• Property, plant and equipment under CARO (Taxmann)
• CARO 2020 clauses 3(i)(b), 3(ii)(a), 3(ii)(b) (ICAI Navi Mumbai Branch)
• SCORE case study and service details: scoreindia.co.in, Physical Verification service page
This article is for general information only and is not professional advice. For advice on your company’s position, speak to a SCORE partner.
Disclaimer: This article is for general information only and does not constitute legal, financial or tax advice. Laws, rates and due dates change, and their application depends on your facts. Please consult a qualified professional before acting on it.