Answer the following:
a) “Physical presence of the auditor at the time of year end verification of stocks is though not always possible, it is recommended that he should at least be present as an observer.” Signify the importance of this statement and list out the important aspects which the auditor should look into to ensure an effective physical verification programme.
c. Indicate briefly the purposes for which analytical procedures are applied the Auditor.
Physical verification of inventories is the responsibility of the management of the entity. However, as per NSA 501 “Audit Evidence: Specific consideration for selected items,” where the inventories are material and the auditor are placing reliance upon the physical count the management, it may be appropriate for the auditor to attend the stock-taking. The extent of auditor’s attendance at stock-taking would depend upon his assessment of the efficacy of relevant internal control procedures, and the results of his examination of the stock records maintained the entity and of the analytical review procedures. The procedures concerning the auditor’s attendance at stock-taking depend upon the method of stock-taking followed the entity. There are two principal methods of stock-taking: periodic stock-taking and continuous stock-taking. Under the first method, physical verification of inventories is carried out at a
single point of time, usually at the year end. Under the second method, physical verification is carried out throughout the year, with different items of inventory being physically verified at different points of time. However, the verification programme is normally so designed that each material item is physically verified at least once in a year and more often in appropriate cases. The continuous stock-taking method is effective when a perpetual inventory system of record-keeping is also in existence. Some entities use continuous stock-taking methods for certain stocks and carry out a full count of other stocks at a selected date. The auditor is expected to examine the adequacy of the methods and procedures of physical verification followed the entity.
Before commencement of the verification, the management should issue appropriate instructions to stock-taking personnel. Such instructions should cover all phases of physical verification and preferably be in writing. It would be useful if the instructions are formulated the entity in consultation with the auditor. The auditor should examine these instructions to assess their efficacy. Where the auditor is present at the time of stock-taking, he should observe the procedure of physical verification adopted the stock-taking personnel to ensure that the instructions issued in this behalf are being actually followed. The auditor should also perform test-counts to satisfy himself about the effectiveness of the procedures.
a) Analytical procedures are used for the following purposes:
to assist the auditor in planning the nature, timing and extent of other audit procedures;
as substantive procedures when theirs use can be more effective or efficient than tests of details in reducing detection risk for specific financial statement assertions, and
as an overall review of the financial statements in the final review stage of the audit.
Thus, analytical procedures may be used extensively while conducting an audit to establish authenticity of information contained in the financial statements. In some cases, analytical procedures can be more effective than tests of details in reducing detection risk for specific financial statement assertions. This is particularly true in case volume of information is homogeneous and quite large. For instance, in case of salaries and wages the volume is generally quite large and only internal evidence is available. In such a case, performing analytical procedures would provide substantive audit evidence and reduce the extent of vouching to a large extent.