Perpetual inventory verification

Perpetual inventory verification refers to the process of ensuring the accuracy of real-time inventory records maintained by a perpetual inventory system. Even though the system updates automatically, verification is essential to catch discrepancies due to theft, damage, or data errors.

1. Why Periodic physical audits are still necessary?

Even with real-time tracking, occasional physical counts help validate system accuracy and uncover issues like shrinkage or mislabeling or theft or damage.

2. How:

Through Cycle counting: Implement cycle counting — verifying a portion of inventory regularly — maintain ongoing accuracy and reduces the need for full inventory shutdowns full physical count.

3. Discrepancy resolution:
• Correction: Any mismatch between recorded and actual inventory must be investigated and corrected promptly to maintain trust in the system.
• System integrity checks: Analysis of discrepancies sometimes may reveal /highlight issues with system integrity. To prevent issues arising from system failure, regularly verify that barcode scanners, POS systems, and ERP integrations are functioning correctly and syncing data properly.
4. Internal Controls
• Employee training: New staff/contract staff should be adequately trained to handle inventory transactions accurately to prevent data entry errors.
• Audit trails and logs: Maintain detailed logs of inventory movements and adjustments to support internal audits and compliance.
• Exception reporting: Use system-generated reports to flag unusual activity, such as frequent adjustments or negative stock levels.

Standard Operating Procedure (SOP) for Perpetual Inventory Verification

Department: Stores / Finance / Internal Audit
Frequency: Ongoing (Cycle-based or Monthly)
Objective: To ensure accuracy of inventory records maintained under the perpetual inventory system.

1. Scope: This SOP applies to all inventory items tracked under the perpetual inventory system, including raw materials, WIP, and finished goods.
2. Responsibilities Stores Team: To conduct physical verification and maintain bin cards Finance Team: Reconciliation of stores ledger and GL balance Internal Audit Team: Review discrepancies and ensure compliance
3. Procedure Steps: Following are the step-by-step procedures

Step 1: Planning & Scheduling (a) Identify items for verification (based on ABC classification or cycle count schedule) (b) Notify relevant departments of planned verification dates	Step 2: Cutoff Control (a) Suspend inventory movement during verification window (b) Ensure all transactions are posted before count begins	Step 3: Physical Verification Count physical stock of selected items Record quantities on verification sheets or handheld devices
Step 4: Record Comparison Compare physical count with: - Bin card balances (quantity) - Stores ledger (quantity and value) - ERP system records	Step 5: Finished Goods Analysis Verify valuation of completed goods Confirm costing aligns with BOM and production records	Step 6: Discrepancy Investigation Identify reasons for mismatches (e.g., damage, theft, posting errors) Document findings and corrective actions

4. Documentation: Physical verification sheets, Discrepancy reports, Adjustment entries and Final verification summary
5. Compliance Reference: Ind AS 2 – Inventories, Internal control policies and ERP system audit guidelines

Notes:

1. What is bin card?
A bin card is a physical record kept for each individual stock item to track the quantity of items received, issued, and the current balance. It helps monitor inventory in real time.

What is cycle based verification:
Cycle-based means verifying inventory in small batches on a rotating schedule, rather than all at once ensuring continuous accuracy without disrupting operations.