Audit of Inventory

Procurement and Audit notes revision

a. Ascertain the existence of stock.
b. Ascertain that stock is appropriately valued at lower of cost and net realizable value. Adequate provisions are created for dead and slow moving stock.
c. Verify the completeness and accuracy of the stock balance.
d. Verify that stock is appropriately presented and disclosed in the financial statements.
Problem encountered in the verification of stock
• The amounts involved are invariably material.
• Stock has a one for one impact on the reported profits i.e. an increase in stock increase the reported profit. It is therefore open to distortion by management.
• Stock does not derive from the normal double entry system; it is arrived at by stock taking carried out at the year-end.

• Stocks are portable and valuable opening themselves to pilferage and deterioration either intentional or accidental.
• The number of items involved is usually numerous creating verification problems as far as existence and condition is concerned.
• Although stocks are valued at the lower of cost and net realizable value, what constitutes cast can vary from one management to another and the basis of determining that cost can be subject to so many different methods all resulting in different values for the same items.
• It is an area that is susceptible to manipulation by management provision for obsolescence, slow moving and damaged stocks is a question of judgment therefore it vis easy for the auditor to disagree with management.
• stock is normally made up of different items e.g. work in progress, raw materials all these can be valued on a different basis and amalgamated and described as stocks.
• Stock may be overstated by inclusion of goods sold but not dispatched to customers.

Procurement and Audit notes revision

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