Professional Documents
Culture Documents
2004
Note 25
January
ATTENDANCE AT STOCKTAKING
The Auditing Practices Board Limited is responsible for the establishment of standards
and guidance for auditing in the United Kingdom and Republic of Ireland with the
objective of enhancing public condence in the audit process and the quality and
relevance of audit services in the public interest.
The Auditing Practices Board Limited discharges its responsibilities through a Board
(the APB) comprising individuals who are not eligible for appointment as company
auditors, as well as those who are so eligible. Those who are eligible for appointment
as company auditors may not exceed 40% of the APB by number.
Neither the Auditing Practices Board Limited nor the APB accepts any liability to any
party for any loss, damage or costs howsoever arising, whether directly or indirectly,
whether in contract, tort or otherwise from any action or decision taken (or not taken) as
a result of any person relying on or otherwise using this document or arising from any
omission from it.
The purpose of Practice Notes issued by the APB is to assist auditors in applying
Auditing Standards of general application to particular circumstances and industries.
They are persuasive rather than prescriptive. However, they are indicative of good
practice, even though they may be developed without the full process of consultation
and exposure used for Statements of Auditing Standards.
This Practice Note replaces Auditing Guideline 405 which was issued by the Auditing
Practices Committee in October 1983.
PRACTICE NOTE 25
ATTENDANCE AT STOCKTAKING
Contents Paragraphs
Introduction 1-6
Procedures
Before the stocktake 17-18
During the stocktake 19-25
After the stocktake 26-28
Work in progress 29
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Practice Note 25 January 2004
INTRODUCTION
2. The main assertions1 relating to stock and work in progress (stocks) are existence,
ownership, completeness and valuation. Practice Note 25 is primarily concerned with
audit evidence relating to the existence assertion.
3. When stocks are material to an entitys nancial statements, or where the risk of mis-
statement of stocks is so great as to give rise to the risk of material mis-statement in the
nancial statements, it will normally be necessary for auditors to attend stocktakes to
obtain evidence of the existence of stocks2.
5. It is the responsibility of the directors of an entity to ensure that the amount at which stocks
are recorded in the nancial statements represents stocks physically in existence and
includes all stocks owned by the entity. To achieve this entities may maintain detailed
stock records and check these by regular test counts. In some entities where the
accounting records are less detailed, the amount of stock may be determined by way of a
full physical count of all stocks held at a date close to the entitys balance sheet date.
1 Assertions are the representations of the directors that are embodied in the nancial statements and
are more fully described in SAS 400 Audit evidence.
2 International Standard on Auditing 501 Audit evidence-additional considerations for specic items
includes a bold letter requirement which states When inventory is material to the nancial
statements, the auditor should obtain sufcient appropriate audit evidence regarding its existence and
condition by attendance at physical inventory counting unless impracticable.
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6. In the case of a company incorporated under the Companies Acts, management also has
responsibilities to maintain proper accounting records and to include any statements of
stocktakings in those records3.
7. SAS 300: Accounting and Internal Control Systems and Audit Risk Assessments
requires that auditors should obtain an understanding of the accounting and internal
control systems sufcient to plan the audit and develop an effective audit approach. The
SAS requires that auditors should use their professional judgment to assess the
components of audit risk and to design audit procedures to reduce this to an acceptably
low level.
8. In accordance with SAS 300 auditors should use professional judgment to assess the
components of audit risk4. Risk factors relating to the existence assertion in the context of
the audit of stocks include the:
9. When planning the audit, auditors also assess the risk that fraud may cause the nancial
statements to contain material mis-statements. Based on this risk assessment, the
auditors design audit procedures so as to have a reasonable expectation of detecting
3 In the United Kingdom Section 221 of the Companies Act 1985; in the Republic of Ireland Section
230.3(c) of the Companies Act 1990.
4 SAS 300.2.
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material mis-statements arising from fraud. Fraudulent activities which can occur in
relation to stocks include:
false sales involving the movement of stocks still owned by the entity to a location not
normally used for storing stocks;
movement of stocks between entity sites with stocktakes at different dates;
the appearance of stocks and work in progress being misrepresented so that they
seem to be of a higher value/greater quantity;
the application of inappropriate estimation techniques;
stock count records prepared during stock counts deliberately being incorrectly
completed or altered after the event; and
additional (false) stock count records being added to those prepared during the
count.
AUDIT EVIDENCE
10. SAS 400: Audit Evidence requires that auditors should obtain sufcient appropriate
audit evidence to be able to draw reasonable conclusions on which to base their audit
opinion. The SAS also requires that, in seeking to obtain audit evidence from substantive
procedures, auditors should consider the extent to which that evidence together with any
evidence from tests of controls, supports the relevant nancial statement assertions.
11. Where stocks are material to an entitys nancial statements, or where the risk of mis-
statement of stocks is so great as to give rise to the risk of material mis-statement in the
nancial statements, it will normally be necessary for auditors to attend a stocktake to
obtain evidence of the existence of stocks. Such attendance might also provide evidence
to the auditors in respect of completeness and valuation assertions (including
consideration of possible obsolescence and deterioration). The extent and nature of
evidence required will depend upon the auditors assessment of risk.
12. The principal sources of evidence relating to the existence of stocks are:
evidence from audit procedures which conrm the reliability of the accounting records
upon which the amount in the nancial statements is based;
evidence from tests of the operation of internal controls over stocks, including the
reliability of stock-counting procedures applied by the entity; and
substantive evidence from the physical inspection tests undertaken by the auditors.
13. The nature of the auditors procedures during their attendance at a stocktake will depend
upon the results of the risk assessment carried out in accordance with SAS 300. In cases
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Practice Note 25 January 2004
where the auditors decide to place reliance on accounting systems and internal controls,
the auditors attend a stocktake primarily to obtain evidence regarding the design and
operating effectiveness of management procedures for conrming stock quantities.
14. Where entities maintain detailed stock records and check these by regular test counts
auditors perform tests designed to conrm whether management:
15. In entities that do not maintain detailed stock records the quantication of stocks for
nancial statement purposes is likely to be based on a full physical count of all stocks held
at a date close to the companys year end. In such circumstances auditors will consider
the date of the stocktake recognising that the evidence of the existence of stocks provided
by the stocktake is greater when the stocktake is carried out at the end of the nancial
year. Stocktaking carried out before or after the year end may also be acceptable for audit
purposes provided the auditors are satised that the records of stock movements in the
intervening period are reliable.
PROCEDURES
16. The following paragraphs set out the principal procedures which may be carried out by
auditors when attending a stocktake, but are not intended to provide a comprehensive list
of the audit procedures which the auditors may nd it necessary to perform during their
attendance.
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familiarising themselves with the nature and volume of the stocks, the identication of
high value items, the method of accounting for stocks and the conditions giving rise to
obsolescence;
considering the location of the stock and assessing the implications of this for stock
control and recording;
considering the quantity and nature of work in progress, the quantity of stocks held by
third parties, and whether expert valuers or stocktakers will be engaged (further
guidance on these issues is set out in paragraphs 29-32 below);
reviewing the systems of internal control and accounting relating to stocks, so as to
identify potential areas of difculty (for example cut-off);
considering any internal audit involvement, with a view to deciding the reliance which
can be placed on it;
considering the results of previous stock counts made by the entity; and
reviewing their working papers for the previous year.
18. The auditors examine the way the stocktake is organised and evaluate the adequacy of
the clients stocktaking instructions. Such instructions, preferably in writing, should cover
all phases of the stocktaking procedures, be issued in good time and be discussed with
the person responsible for the stocktake to check that the procedures are understood and
that potential difculties are anticipated. If the instructions are found to be inadequate, the
auditors seek improvements to them.
20. When carrying out test-counts, the auditors select items both from count records and from
the physical stocks and check one to the other to gain assurance as to the completeness
and accuracy of the count records. In this context, they give particular consideration to
those stocks which they believe to have a high value either individually or as a category of
stock. The auditors record in their working papers items for any subsequent testing
considered necessary, such as copies of (or extracts from) stock count records and
details of the sequence of those records, and any differences noted between the records
and the physical stocks counted.
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21. The auditors determine whether the procedures for identifying damaged, obsolete and
slow moving stock operate properly. They obtain (from their observations and by
discussion, for example with storekeepers and stock counters) information about the
stocks condition, age, usage and, in the case of work in progress, its stage of completion.
Further, they ascertain that stock held on behalf of third parties is separately identied and
accounted for.
22. The auditors consider whether management has instituted adequate cut-off procedures,
i.e. procedures intended to ensure that movements into, within and out of stocks are
properly identied and reected in the accounting records in the correct period. The
auditors procedures during the stocktake will depend on the manner in which the year
end stock value is to be determined. For example, where stocks are determined by a full
count and evaluation at the year end, the auditors test the arrangements made to identify
stocks that correspond to sales made before the cut-off point and they identify goods
movement documents for reconciliation with nancial records of purchases and sales.
Alternatively, where the full count and evaluation is at an interim date and year end stocks
are determined by updating such an amount by the cost of subsequent purchases and
sales, the auditors perform appropriate procedures during their attendance at the
stocktaking and in addition they test the nancial cut-off (involving the matching of costs
with revenues) at the year end.
23. The auditors working papers include details of their observations and tests (for example,
of physical quantity, cut-off date and controls over stock count records), the manner in
which points that are relevant and material to the stocks being counted or measured have
been dealt with by the entity, instances where the entitys procedures have not been
satisfactorily carried out and the auditors conclusions.
24. Although the principal reason for attendance at a stocktake is usually to obtain evidence to
substantiate the existence of the stocks, as noted in paragraph 4 above attendance can
also enhance the auditors understanding of the business by providing an opportunity to
observe the production process and/or business locations at rst hand and providing
evidence regarding the completeness and valuation of stocks and the entitys accounting
and control systems. Matters that the auditors may wish to observe whilst attending a
stocktake include:
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physical controls;
obsolete stock (for example goods beyond their sale date);
scrap, and goods marked for re-work;
returned goods.
exceptions identied by the production process (for example missing work tickets);
and
the operation of shop-oor disciplines regarding the inputting of data such as stock
movements into the computer systems.
25. Some entities use computer-assisted techniques to perform stocktakes; for example hand
held scanners can be used to record stock items which update computerised records. In
some situations there are no stock-sheets, no physical count records, and no paper
records available at the time of the count. In these circumstances the auditors consider the
IT environment surrounding the stocktake and consider the need for specialist assistance
when evaluating the techniques used and the controls over them. Relevant issues involve
systems interfaces, and the controls over ensuring that the computerised stock records
are properly updated for the stock count information.
how the test counts (and double counts where two people are checking) are recorded,
how differences are investigated before the computerised stock records are updated
for the counts, and
how the computerised stock records are updated, and how stocktake differences are
recorded.
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27. The auditors review whether continuous stock records have been adjusted to the amounts
physically counted or measured and that differences have been investigated. Where
appropriate, they consider whether management has instituted procedures to ensure that
all stock movements between the observed stock count and the period end have been
adjusted in the accounting records, and they test these procedures to the extent
considered necessary to address the assessed risk. In addition, they follow up queries
and notify senior management of serious problems encountered during the stocktake.
28. In conclusion, the auditors consider whether attendance at the stocktake has provided
sufcient reliable audit evidence in relation to relevant assertions (principally existence)
and, if not, the other procedures that should be performed.
Work in progress
29. Management may place substantial reliance on accounting systems and internal controls
designed to ensure the completeness and accuracy of records of work in progress. In
such circumstances there may not be a stocktake which can be attended by the auditors.
Nevertheless, inspection of the work in progress may assist the auditors in understanding
the entitys control systems and processes. It will also assist them in planning their other
audit procedures, and it may also help on such matters as the determination of the stage
of completion of construction or engineering work in progress. For this purpose, auditors
identify the accounting records that will be used by management to produce the work in
progress gure in the year-end accounts and, where unnished items are uniquely
identiable (for example by reference to work tickets or labels), they physically examine
items to obtain evidence that supports the recorded stage of completion. In some cases,
for example in connection with building projects, photographic evidence can also be
useful evidence as to the state of work in progress, particularly if provided by independent
third parties or the auditors themselves.
31. Management may from time to time appoint stocktakers from outside the entity, a practice
common for stocks at, for example, farms, petrol stations and public houses. The use of
independent stocktakers does not eliminate the need for auditors to obtain audit evidence
as to the existence of stocks. In addition, as well as satisfying themselves as to the
competence and objectivity of the independent stocktakers, the auditors consider how to
obtain evidence as to the procedures followed by them to ensure that the stocktaking
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records have been properly prepared. In this connection, auditors have regard to the
relevant guidance set out in SAS 480: Service organisations.
testing the owners procedures for investigating the custodian and evaluating the
custodians performance;
obtaining an independent report on the custodians control procedures relevant to
custody of goods; and
observing physical counts of the goods, or arranging for the third partys auditors to
do so.
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