- Ascertain the existence of stock
- Ascertain that stock is appropriately valued at lower of cost and net realisable value. Adequate provisions are created for dead and slow moving stock.
- Verify the completeness and accuracy of the stock balance
- Verify that stock is appropriately presented and disclosed in the financial statements.
Audit of stock
This involves determining the method adopted by the organisation in costing stocks. The auditor should then check the acceptability and appropriateness of the adopted policies.
The rest of the exercise is to test that the adopted exercise is correctly applied.
Stock should be valued at lower of cost and net realisable value where net realisable value is defined as the amount that could be realised on the open market in the ordinary cause of business less the cost of putting them into a saleable condition and less the cost of sales.
It is up to the auditor to ensure that the net realisable value is properly calculated and is in accordance with the accounting standards.
Stocks should be reduced by a provision for obsolete or damaged and slow moving stock. This provision should not be excessive or inadequate. The auditor is guided by factors such as age of stock, condition of stock, its turnover, technological advances in the industry, nature of stock (perishable or not), prevailing economic conditions, etc. These guide him on judging the adequacy of provision for slow moving, obsolete or damaged stock.
The auditor must obtain adequate independent evidence that the stocks concerned are in existence. On several occasions auditors have certified accounts as giving a true and fair view when the stocks concerned were non-existent. The unfavourable decisions against the auditor have resulted in the profession making it obligatory that where stocks are of a significant figure in the accounts the auditor must verify existence. This is chiefly through the client arranging for a stock take and the auditor attending to observe the stock take.