Stock audit at a third-party warehouse or job worker

When a client's inventory sits at a third-party warehouse or with a job worker and attending a physical count there is not practical, the auditor obtains alternative evidence instead: a direct confirmation of quantities held, from the warehouse operator or job worker, as of the balance sheet date, supplemented by a review of the third party's own inventory control reports and, where the amounts are significant, independent corroboration such as attending a count at the third party's premises or inspecting their records directly. Stock held under job-work challans carries the extra risk that nobody but the job worker can confirm what remains of the raw material actually sent out.

When physical attendance is not practical

Practicability is a genuine constraint here, not an excuse to skip the work. Typical reasons attendance is impractical: the location is a public bonded warehouse serving many clients with no segregated area to inspect, the job worker is a small unregistered unit with no formal count process of its own, the amount held is individually small and scattered across many such locations, or distance and time simply make attendance disproportionate to the amount at risk.

Confirmation from the warehouse operator or job worker

A confirmation request sent directly by the auditor, returned directly to the auditor, is the core alternative procedure. It needs to ask for more than a bare quantity figure to be useful.

1. 01Send the request directly, not through the clientThe same principle as a bank or debtor confirmation: control of the request and the response has to sit with the auditor, or the confirmation's value as independent evidence is undermined.
2. 02Ask for item-level detail, not a single totalSKU or material code, description, quantity, and ideally the date of last movement for each item. A single aggregate figure cannot be reconciled to the client's records at any useful level.
3. 03Ask explicitly about any lien, charge or pledgeStock held at a third party is sometimes pledged to a lender as collateral, with the warehouse acting under the lender's instructions. This changes the disclosure and sometimes the ownership picture, and it will not surface unless asked for directly.
4. 04Reconcile the response to the client's book recordsItem by item, the same way a goods-in-transit schedule would be reconciled. Investigate every variance rather than netting them into a single adjustment.
5. 05Follow up non-responsesA warehouse or job worker that does not respond needs a second request or an alternative procedure for that specific location — not silent acceptance of the client's own figure for it.

Reviewing the third party's own control reports

Where the warehouse or job worker operates its own inventory management system — a bonded warehouse almost always does, a small job worker often does not — their own reports are a useful second source, though they come from a party who is not independent of the arrangement and whose own records may not be audited.

The specific risk in job-work challans

Material sent to a job worker for processing moves out of the client's premises on a job-work delivery challan, not a sale invoice, and under GST rules this is meant to be tracked and returned (or converted into output and returned) within prescribed time limits. The accounting risk is that the client's books continue to show this material as its own raw material or WIP inventory — correctly, since ownership has not transferred — but there is no independent way to confirm it still exists in that form and quantity at the job worker's premises unless someone actually checks.

• Reconcile the register of challans issued against challans for which processed goods (or unused material) have been received back, by quantity, not just by value.
• Identify challans outstanding well beyond the job worker's normal processing cycle and ask for a specific explanation for each, not a general assurance that 'it is all accounted for'.
• Confirm the GST job-work return and retention time limits have not been breached for outstanding challans, since a breach can itself trigger a supply under GST law regardless of the accounting treatment.
• Where a job worker holds material for multiple clients, ask how they segregate and identify the client's specific material — a job worker who cannot answer this clearly cannot give a reliable confirmation either.
• Watch for job-work material effectively abandoned at the job worker's site for years, still carried at full cost in the client's books, with no provision considered — this is an obsolescence question layered on top of the existence question.