# Audit of Stores and Inventories

## Overview

Audit of stores and inventories has developed as part of expenditure audit, with reference to the duties and responsibilities entrusted to C&AG. It covers the full lifecycle: purchase, receipt, issue, custody, sale, and inventory-taking.

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## Objectives of Stores and Inventory Audit

### 1. Assess Regulatory Framework

Ascertain whether regulations governing the following are well-devised and properly carried out:

Purchase, receipt, and issue of stores
Custody of stores
Sale of stores
Inventory-taking of stores

### 2. Report Deficiencies

Bring to the notice of government:

Deficiencies in quantities of stores held
Defects in the system of control over stores

### 3. Verify Sanctioned and Economical Purchases

Verify that purchases are:

Properly sanctioned by the competent authority
Made economically and in accordance with purchase rules

### 4. Ensure Reasonable Prices and Quality

Ensure that:

Prices paid are reasonable and in agreement with contract rates
Certificates of quality and quantity are furnished by inspecting and receiving units
Cases of uneconomical purchases and losses due to defective/inferior quality stores are specifically brought out in audit

### 5. Check Accuracy of Accounts and Inventory Levels

Check accounts of receipts, issues, and balances for:

Accuracy, correctness, and reasonableness of inventory balances
Comparison against specified norms for level of consumption and inventory holding
Identification and reporting of excess or idle inventory (specifically mentioned in the report)
Periodical physical verification to ensure actual existence of stores

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## Key Point

Stores audit does not stop at bookkeeping — physical verification of actual existence is a required component, ensuring that book balances reflect real inventory.

Worked example

### Example 1

Scenario: During audit, it is found that a government department has been holding 5,000 units of a particular item for 3 years without any issue or consumption, well beyond the prescribed holding norm of 6 months. What aspect of stores audit applies and what would the auditor do?

Answer:

This falls under Objective 5 — Accuracy of Accounts and Inventory Levels.

The auditor would:

1. Identify this as excess/idle inventory — the stock far exceeds the specified norm for holding (3 years vs. 6-month norm)

2. Specifically mention this in the audit report

3. Flag the economic loss from holding costs and possible obsolescence

4. Also scrutinise whether the original procurement was economically sanctioned (Objective 3)

This may result in a recommendation for disposal of surplus stock and review of the procurement process.

### Example 2

Scenario: An auditor finds that a department purchased office furniture at ₹5,000 per unit from a vendor but the contract rate was ₹3,500 per unit, and no quality inspection certificate was obtained. Identify the audit objectives violated.

Answer:

This violates Objective 4 — Reasonable Prices and Quality:

Prices paid (₹5,000) do not agree with contract rates (₹3,500) — overpricing of ₹1,500 per unit
Certificate of quality/quantity was not furnished by the receiving unit

The auditor should specifically bring this out as a case of uneconomical purchase and report it. Physical verification should also be conducted to confirm actual receipt of the furniture.

⚠️ Common exam mistakes

Limiting stores audit only to checking purchase prices — it covers the full cycle: purchase, receipt, issue, custody, sale, and inventory-taking.
Forgetting that periodical physical verification is part of stores audit — it verifies actual existence of stores, not just bookkeeping accuracy.
Missing that BOTH uneconomical purchases AND losses due to defective/inferior quality are specifically reported — students often mention only one.
Assuming stores audit is standalone — it has developed as a part of expenditure audit, meaning the expenditure audit framework applies.

Reference:

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