Your audit senior has assigned you the responsibility of auditing the stock of your client, XYZ Supermarket Ltd. for the year ending 31 December 2005.
The company‘s stock take is carried out once a year in the month of November simultaneously for all the retail outlets.
a) State the audit assurances you would seek to obtain in the audit of stock. (4 marks)
b) Describe the audit procedures that you would perform in order to be satisfied as to the validity of the amount attributed to stock in the balance sheet of XYZ Supermarket Ltd.
(12 marks) c)
Define the word ―bar coding‖ and explain its importance to XYZ Supermarket Ltd.
(Total: 20 marks)
a) Audit assurances in the audit of stock
– Whether a continuous inventory is maintained. There should be at least annual stock take
– Control over stock documents. Documentation should be considered use of pre- numbered forms with regular sequence checks
– Controls over receipt of goods
– Storage conditions for stock
– Safeguarding of stock against loss, fire, deterioration due to poor storage
– Recording system. Stock records should be continuously compared with actual stocks held independent officials
– Valuation per IAS 2 i.e. lower of cost and not realizable value
– Existence of stock
– Completeness of stock records
– Presentation and disclosure of stock in financial statements.
– Whether the company has rights and obligation over stock recorded.
b) Audit procedures for stock balances in Balance Sheet
– Enquire into what costs are included, how these have been established and ensure that overhead addition is based on normal costs and is reasonable in relation to information disclosed draft financial statements.
– Test check price on inventory, lists with official sales list bearing in mind any trade discounts which are normally granted off the list prices
– Ensure that inventories are valued at net realizable value if this is less than cost. Check if the relevant party processed inventories and raw materials have also been written down
– Following up any items which inventory records show are more than say 6 months in inventory. Enquire into the reasons for this and ascertain the possible realizable value of such items.
– Follow up any inventories which at the time of selling of product lines at less than usual selling prices e.g. due to completion, or substitute products on the market
– Follow up valuation of all ―second‖ items and ensure that they are valued at reasonable estimated net realizable value is less than cost
– Check re-order levels, check whether all stock items are subjected to a maximum or minimum stock levels
– Compare actual stocks held independent officials with the stock records. All differences should be corrected and investigated
– Check on storage conditions which deter deterioration due to physical access e.g. heat, cold, microbial action.
– Check whether a continuous inventory is maintained. There should be at least an annual stock take
– Check procedures established for stock take
– Check procedures for identifying damaged, slow moving and obsolete stock and cut off procedures
– Check the purchases records to ensure completeness of stock records
– Check whether stock has been valued at lower of cost and net realizable value as per IAS 2
– Physically inspect stock in premises to ensure that closing stock figure actually exists.
c) Bar coding
It is a form of identification for all the products in the supermarket. Each product has a bar code number to identify it from other products. The product bar code number is read the bar code reader so as to identify the product and its price.
Importance of bar coding
– To identify each specific product
– To identify the price of each product
– To save supermarket on costs of attaching price tags to each product.