A physical stock audit is the process of physically counting and verifying all inventory items in your business against recorded quantities. For Pakistani businesses dealing with stock—whether retail, wholesale, or manufacturing—regular stock audits are essential for accurate financial reporting and preventing losses.

Stock discrepancies cost Pakistani businesses millions of rupees annually through theft, damage, administrative errors, and supplier fraud. This comprehensive guide will walk you through conducting effective stock audits that protect your business.

What is a Physical Stock Audit?

A physical stock audit (also called stock take or inventory count) involves manually counting every item in your inventory and comparing those counts against your inventory records. The goal is to identify discrepancies and ensure your books accurately reflect actual stock levels.

Physical stock audits help businesses:

Verify inventory accuracy
Identify theft, damage, or shrinkage
Catch recording errors
Value inventory for financial statements
Comply with tax and audit requirements
Improve inventory management processes

Types of Stock Audits

1. Complete/Full Stock Audit

Count every item in your inventory at once. This is typically done annually, often at financial year-end. Best for smaller inventories or when a complete picture is needed.

2. Cycle Counting

Count a portion of inventory on a rotating basis throughout the year. High-value or fast-moving items are counted more frequently. This method is less disruptive to operations.

3. ABC Analysis-Based Counting

Count frequency based on item value and movement:

A Items (High value): Count monthly
B Items (Medium value): Count quarterly
C Items (Low value): Count annually

4. Spot Checks

Random, unannounced counts of selected items. Useful for detecting theft and keeping staff alert to inventory control importance.

When to Conduct Stock Audits

Business Type	Recommended Frequency	Best Timing
Retail Shop	Monthly + Annual	After closing hours, month-end
Wholesale/Distribution	Quarterly + Annual	Low activity periods
Manufacturing	Monthly raw materials, Annual finished goods	Production downtime
Pharmacy	Monthly + Expiry checks weekly	After closing
Restaurant/Food	Weekly perishables, Monthly overall	Before opening

Additionally, conduct stock audits:

At financial year-end (mandatory for tax purposes)
Before or after Eid seasons (peak sales periods)
When changing inventory staff
After suspected theft or loss
When implementing new inventory software

Pre-Audit Preparation

Proper preparation is crucial for accurate stock counts. Here’s your pre-audit checklist:

1. Schedule the Audit

Choose a time when business activity is minimal
Inform all relevant staff at least one week in advance
Arrange for adequate staffing for the count
Plan for 2-4 hours for small inventories, full day for large ones

2. Organize the Inventory

Ensure all items are in designated locations
Remove damaged or obsolete items to a separate area
Return any items from receiving area to proper shelves
Complete all pending goods receipts and dispatches
Ensure items are clearly labeled with SKU/item codes

3. Prepare Documentation

Print stock count sheets (or use mobile app)
Prepare a warehouse/store map divided into zones
List high-value items requiring special attention
Have blank sheets for items not on the list

4. Gather Equipment

Clipboards and pens
Calculators
Ladders for high shelves
Weighing scales (for bulk items)
Barcode scanners (if using)
Mobile phones for photos of discrepancies

5. Freeze Inventory Movement

Critical: Stop all inventory movement during the count. No receipts, dispatches, or internal transfers. This is why evening/weekend counts work best.

Step-by-Step Stock Audit Process

Step 1: Divide Into Zones

Split your storage area into manageable zones. Assign a team to each zone. For a retail shop, zones might be: Shelves A-D, Shelves E-H, Storage Room, Display Counter.

Step 2: Assign Teams

Use two-person teams where possible:

Counter: Physically counts items
Recorder: Writes down quantities

This prevents counting errors and provides accountability.

Step 3: Conduct Blind Counts

For maximum accuracy, use “blind” count sheets that don’t show expected quantities. Counters record what they see without being influenced by what the system says should be there.

Step 4: Count Systematically

Start from top-left of each shelf, move systematically
Count each item once, mark counted areas
Use tick marks (正) for easy counting of large quantities
Weigh bulk items and calculate quantity
Note any damaged or expired items separately

Step 5: Verify High-Value Items

Have a supervisor double-count expensive items. For these items, verify serial numbers if applicable.

Step 6: Handle Discrepancies During Count

When items don’t match expected locations:

Note items found in wrong locations
Record items found that aren’t on the list
Mark items on list that can’t be found
Don’t adjust during count—just record actual findings

Step 7: Consolidate Count Sheets

After counting is complete, collect all count sheets. Ensure each zone is accounted for. Check for any missed areas.

Post-Audit Reconciliation

This is where you compare physical counts to system records and investigate differences.

1. Enter Physical Counts

Input all physical counts into your inventory system or spreadsheet alongside recorded quantities.

2. Calculate Variances

For each item:

Variance = Physical Count - System Quantity
Variance % = (Variance / System Quantity) × 100

3. Identify Significant Discrepancies

Focus investigation on:

High-value items with any variance
Items with variance greater than 5%
Items with consistent shortages over multiple audits

4. Investigate Causes

Common causes of discrepancies include:

Discrepancy Type	Possible Causes
Stock Short	Theft, unrecorded sales, damage, supplier short-delivery
Stock Over	Unrecorded receipts, data entry errors, returns not processed
Wrong Location	Poor organization, items placed incorrectly after sale
Damaged Items	Poor handling, storage conditions, expiry

5. Make Adjustments

After investigation, adjust your system records to match physical reality. Document the reason for each adjustment. Your accounting software should have an inventory adjustment feature for this.

6. Calculate Shrinkage

Shrinkage Rate = (Inventory Loss Value / Total Inventory Value) × 100

Acceptable shrinkage: 1-2% (retail), 0.5-1% (wholesale)

Stock Audit Best Practices

1. Use Technology

Barcode scanning significantly improves accuracy and speed. Even simple smartphone apps can scan barcodes and record quantities. Integrated barcode/SKU management systems make reconciliation automatic.

2. Conduct Surprise Audits

Unannounced spot checks deter theft and catch issues early. Do these monthly in addition to scheduled counts.

3. Rotate Audit Teams

Don’t have the same person count the same area every time. Rotation prevents collusion and brings fresh eyes to spot issues.

4. Document Everything

Keep records of all audits, including:

Date and time of audit
Team members involved
Count sheets (original, signed)
Variance reports
Investigation notes
Adjustment entries

5. Act on Findings

An audit is worthless if you don’t address issues found:

Implement better security for frequently stolen items
Retrain staff on proper receiving procedures
Improve storage organization
Address supplier issues

Stock Audit for Tax Compliance in Pakistan

FBR requires businesses to maintain accurate inventory records. For income tax purposes:

Physical stock count at year-end is mandatory for businesses claiming cost of goods sold
Stock registers must be maintained with opening stock, purchases, sales, and closing stock
Inventory valuation method (FIFO, LIFO, or weighted average) must be consistent
Stock audit reports may be requested during tax audits

Frequently Asked Questions

How often should small businesses conduct stock audits?

Small retail businesses should conduct at least one full audit annually (at financial year-end) plus monthly cycle counts of high-value items. If you experience frequent discrepancies, increase to quarterly full audits until issues are resolved.

What is acceptable inventory shrinkage in Pakistan?

For retail businesses, 1-2% annual shrinkage is considered acceptable. For wholesale and distribution, aim for under 1%. Anything higher indicates systemic issues—theft, poor handling, or recording problems—that need investigation.

Can I conduct a stock audit while the business is open?

It’s not recommended as ongoing sales and receipts create moving targets. If you must, use cycle counting and freeze specific zones while counting them. Avoid full audits during business hours.

How do I handle items found during audit that aren’t in the system?

First, verify if it’s an existing item with a different code. If genuinely new, check if it was a recent receipt not yet entered. Create a new item record if necessary and investigate how it entered inventory without documentation.

Should external auditors conduct stock audits?

For larger businesses or those with significant inventory value, annual external audits are recommended. External auditors provide independence and may be required for bank financing or investor reporting. For small businesses, internal audits with proper controls are usually sufficient.

Conclusion

Regular physical stock audits are essential for maintaining accurate inventory records, preventing losses, and ensuring tax compliance. While time-consuming, the insights gained from proper audits far outweigh the effort invested. Start with the basics—organized inventory, systematic counting, proper documentation—and improve your process over time.

Looking to simplify your inventory management and stock audits? HysabOne offers integrated inventory tracking with barcode scanning, automatic reconciliation, and audit trail features. Contact us on WhatsApp for a demo.

Last Updated: December 2024

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How to Conduct a Physical Stock Audit: Complete Guide for Pakistani Businesses