The procedures to be carried out by the auditor when attending stock taking are divided into:
• Duties before stock take.
• Duties during stock take.
• Duties after stock take. Duties before stocktaking The auditor should:
• Study of the client’s stock taking instructions and recommend for changes or improvements if the auditor consider them inadequate.
• Familiarization with the location of the stocks and the opportunity to plan for the work to be undertaken.
• Familiarization with the nature and volume of stocks and especially with high value items.
• Review of previous year’s working papers and discussions with the
managers of any significant changes from the previous year.
• Consideration of the location of stocks and likely points of difficulty e.g. cut off.
• Consideration of any involvement of the internal audit department and the extent of reliance to be placed upon their work.
• Arranging to obtain from third parties confirmation of stocks held by them.
• Establishing whether expert advice may be needed.
Duties during the stock take
• The main task is to ascertain whether the client’s employees are carrying out their instructions properly so as to provide reasonable assurance that the stock take was accurate and not necessarily to count stock. He will do this by testing efficiency of the counting by counting selected items.
• He should make notes for follow up purposes of items counted in his presence, details of damaged, obsolete or slow moving items.
• Details of items for cut off purposes should be noted.
• He should find out the methods of identifying slow moving, obsolete or damaged stock.
• Record fully the work done and his impression on the stock take exercise.
• He must form a conclusion as to whether the stock take can be relied on.
• Get photocopies of rough stock sheets.
• Get details of the sequence of the stock sheets.
• Pay special attention to high value items.
• If the auditor is not satisfied about the way stock taking was conducted, he should inform management and may request a recount.
The auditor should conclude whether stock taking was properly carried out and can be relied upon for determining the existence of stock. He should also try to gain from his observations an overall impression of the levels and values of stocks held so as he may judge whether the value of stock appearing in the financial statements is reasonable.
Duties after the stock take
This is mainly a follow up exercise and it involves:
• Checking the cut off with the details of last numbers of stock movement forms and goods inwards and goods outward notes during the year and after the year end.
• Ensuring that the final stock checks have been properly prepared from the count records.
• He must particularly check that all the count sheets issued were returned.
• Check the final stock sheets for pricing, extensions, casting, summarization and the necessary improvement.
• The auditor should ensure that the stock records have been adjusted to amounts physically counted and that all reported differences have been investigated.
• Follow up any notes made in the attendance. Inform the management of any problems in the stock taking exercise so that they can act accordingly.
Non-attendance at stock takes
If the auditor is unable to attend a stock take either, because he has numerous clients with similar year ends or stock is located in remote locations, the auditor must still certify himself on the stock take. The auditor can in such cases:
i. Arrange for stock take to be done earlier.
ii. Appoint as agent.
iii. Examine perpetual inventory records more thoroughly.
Obtain representations from management on the existence, completeness and valuation of stock.
The audit tests that the procurement auditor would apply to establish the physical qualities of stock and their ownership
During the stocktaking, the main task is to ensure that the clients staff are carrying out their duties effectively. The auditor should:
i. Make two-way test counts from stores floor to stock sheets, and from stock sheets to stores floor.
ii. Make notes of items counted, damaged stock, instances where the stock taking procedures are not being followed.
iii. Examine and test control over the stock sheets. The client should keep a stock sheet register.
iv. Examine cut off procedures. The auditor should examine the link between purchases records and stocks, and between sales records and stocks, to ensure that there is complete accord between stock and the financial records of purchases and sales, debtors and creditors. These are known as cut-off procedures. Procedures the auditor would carry out to ensure correct cut off include:
– During stock-take attendance note the serial numbers of the last sales invoice, dispatch note and goods received note generated before the stock-take.
– After the stock-take, check the year end dispatch notes to sales invoices and the sales day book and vice versa to ensure that dispatches and the related invoice both fall before year end.
– Similarly, for purchases, ensure year-end goods receipts notes and related purchase invoices are correctly treated in the current period.
– Take a sample of goods received and goods dispatched just after the year end and ensure that the related stock was not included in the count in the case of goods received, that it was included in the goods dispatched.
v. Pay particular attention to goods held on behalf of third parties e.g. goods on consignment.
vi. Reach a conclusion as to whether or not the stock taking was satisfactory and hence provides reliable evidence supporting the final stock figure.
vii. To establish the physical quantities of stock, the auditor should attend the stock-take and observe how the clients’ employees are counting stocks particularly: –
– Are the client employees carrying out the work allotted to them properly and are they following the stock-take instructions?
– Does the stock appear to be recorded correctly on the stock sheets both as to description and quantity?
– Are all slow moving, obsolete and substandard stocks properly identified
How a procurement auditor satisfy himself that the procedures adopted by the management with regard to stocks have been applied throughout the financial period
In an attempt to satisfy himself that the management procedures as regards stocks have been properly applied throughout the period, the auditor will carry out tests of control which include: –
• Observe physical security of stocks and environment in which they are held.
• Test procedures for recording of stock movements in and out of stock.
• Test authorization for adjustments to stock records.
• Test authorization for write off or scrapping of stocks
• Test controls over recording of stock movements i.e. the use made of authorized goods received and dispatch notes.
• Inspect reconciliation of stock counts to stock records.
• Check sequences of dispatch notes and goods received notes for completeness.