A very important aspect of the audit of the financial statements by an external auditor is the observation of the physical stocktaking. Required: Explain the audit tests that the 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.
(vii) Reach a conclusion as to whether or not the stock taking was satisfactory and hence provides reliable evidence supporting the final stock figure.

(viii) To establish the physical quantities of stock, the auditor should attend the stock- take and observe how the clients‘ employees are counting stocks particularly: –

i. Are the client employees carrying out the work allotted to them properly and are they following the stock-take instructions?
ii. Does the stock appear to be recorded correctly on the stock sheets both as to description and quantity?
iii. Are all slow moving, obsolete and substandard stocks properly identified?

NOTE:-
It may be sufficient to watch the counting and recording of stock as it is done by the clients‘ employees, but it will normally be advisable for the auditor to test the efficiency of the counting by arranging for a count or recount in his presence of selected items. Items checked should be marked or noted in a way appropriate to ensure that any subsequent change can be identified.



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