DETAILED AUDIT OF STOCK


a. Cost

For the auditor this is restricted usually to determining the methods adopted by the organization in costing stocks. The auditor weighs the acceptability and appropriateness of the policies adopted. The rest of the exercise is a mechanical exercise of testing to confirm that the methods adopted have been correctly applied.

b. Authorization

The purchases cycle produces stocks, therefore audit work of compliance tests, analytical reviews and substantive tests in the area of purchases usually provide the auditor with adequate evidence as to authorization procedures in obtaining stocks.

c. Valuation

IAS 2 prescribes that stock be valued at the lower of cost and net realisable value, It is up to the auditor to ensure that net realisable value is correctly assessed and that the choice between the cost and net realisable value is properly done and is in accordance with IAS 2. IAS 2 states that comparisons should be by individual units of stocks or categories. Comparison cannot be simply on a basis of the total cost of all stocks and the total net realisable value. Stocks is reduced to lower of cost and net realisable value by a provision for obsolete, slow moving and damaged stocks. This is a potential area of disagreement between the auditor and the management because it is subject to judgement. The auditor's concern is to ensure that the provision is neither inadequate nor excessive. To determine this adequacy, the auditor is guided by such factors as the consideration of:

i. The age of the stock;

ii. Its turnover;

iii. Its condition;

iv. Technological advances in the industry concerned;

v. The nature of the stock, it could be perishable or it could be subject to a volatile market;

vi. Economic conditions i.e. recent selling prices, demand for the product, the performance of competing products;

vii. The quantity of the stocks held;

viii. The accounting policies involved;

ix. Subsequent events

All these factors give the auditor a good indication of whether the provision is adequate or not.

Net realisable value based on selling prices relates to the selling prices prevailing at the balance sheet date. Occasionally we review the selling prices after the balance sheet date but the purpose of this is to obtain additional information about conditions existing at the balance sheet date. Temporary fluctuations must be ignored. By temporary we mean fluctuations of less than one month.

d. Existence

In the past the auditor accepted a directors certificate as to the existence of stocks. Until several cases particularly in the United States of America were decided against auditors for their failure to obtain adequate independent evidence that the stocks concerned were in existence. On several occasions, auditors 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 the stocks are a significant figure in the accounts the auditor must verify existence.

(Refer to ISA 501) This is achieved chiefly through the client arranging for a stock take and the auditor attending to observe the stock take.

If is not the auditor's duty to take stock. He must however satisfy himself as to the validity of the amount attributed to stocks in the accounts that are the subject of his audit. In determining the nature and extent of the audit steps necessary for this purpose the auditors must examine the system of internal control in order to assess its effectiveness relative to the ascertainment and evaluation of stocks and work in progress. While it will not normally be necessary for the auditor to observe the entire stock take or visit all locations their tests should cover a representative section of the stock. Where stocks is held at a number of locations the selection of the location to be visited should be planned so as to cover all significant locations over a period of years.

The amount at which stock is stated in the accounts may be based upon a physical stock taking at the year end or upon information taken from stock records. When stock is based on records these must be substantiated by continuous or periodical physical stock takings. The procedures should ensure:

a) Adequate stock records are kept up to date.

b) Each category of stock is checked at least once a year and a record of checks maintained.

c) If the checking is continuous, it is done systematically over the years or if periodic at suitable times, such as when stocks are low or have reached a specific reorder point.

d) All differences are properly investigated and the records amended accordingly. There should be maintained schedules of differences with details of the action that was taken.