It is the responsibility of management to ensure that the amount at which stocks are shown in the financial statements represents stocks physically in existence. The auditor should obtain evidence in order to enable him to draw conclusions about the validity of amounts attributable to stocks. Where stocks are material in the financial statements the auditor should attend the stock take. The auditor must be present during the stock take not necessarily to count stock but to witness and observe the way stock taking is done to obtain assurance on the existence and value of stock in trade.
The procedures to be followed during the count vary according to the size and circumstances of the business, nature of it’s stock and it’s stock records. Definite instructions preferably in writing should be issued in all cases for the guidance of those who will be engaged in the actual stock taking. The instructions should contain:
a. Identification of the stock items and their ownership.
b. Counting, weighing or measuring.
c. Reporting of stocks which are damaged/defective.
d. The following issues should be addressed:
- Stocktaking should be well planned and carried out systematically by persons who are fully informed of the duties involved.
- These persons should be familiar with the stock but supervisors should be from different departments. Counting should be done by at least two people, one to count and the other to check and record what has been counted.
- Stocks should be marked to facilitate counting. The whole stock taking area should be divided into sections for control purposes and avoids double counting.
- Ensure that properly qualified personnel are available where specialised knowledge is necessary to identify, quality and quantity of stock.
- Cut off procedures should be performed i.e. despatch documents for all goods belonging to customers and still held by client and those that have already passed to the customer. Exclude these from stock take.
- Include all goods that have been purchased by client. This is in spite of them not being in the client’s premises.
- Goods held in safe custody for others should not be recorded as part of the client’s stock.
- Arrangements to confirm the goods held for the company by outside parties should be made.
- There should be procedures to identify the slow moving and obsolete/damaged stock.
- There should be procedures for identification of the stage of completion of work in progress.
The following details should be available for the auditors during the stock take:
a. Details of stock movement during the count.
b. The last numbers of goods inwards and outward records for testing the cut off procedures.
c. The details of the numbering of stock sheets issued of those completed and those cancelled and unused.