The procedures to be carried out by the auditor when attending stock taking are divided into:

  1. Duties before stock take.
  2. Duties during stock take.
  3. Duties after stock take.

Duties before stocktaking

The auditor should:

  1. Study of the clients stock taking instructions and recommend for changes or improvements if the auditor consider them inadequate.
  2. Familiarisation with the location of the stocks and the opportunity to plan for the work to be undertaken.
  3. Familiarisation with the nature and volume of stocks and especially with high value items.
  4. Review of previous years working papers and discussions with the managers of any significant changes from the previous year.
  5. Consideration of the location of stocks and likely points of difficulty e.g. cut off.
  6. Consideration of any involvement of the internal audit department and the extent of reliance to be placed upon their work.
  7. Arranging to obtain from third parties confirmation of stocks held by them.
  8. 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 of 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.

Note that

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 stocks 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, summarisation 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 an agent.

iii. Examine perpetual inventory records more thoroughly.

Obtain representations from management on the existence, completeness and valuation of stock.