Recap
u C ost
u A uthorisation
u V aluation
u E xistence
u B eneficial
u O wnership
u P resentation
Learning objectives
u Identify the audit objectives applicable to
stocks
u Explain the nature of stock records
u Describe procedures to be followed at a
physical stocktake
u Discuss considerations relevant to determining
the audit strategy for stocks
u Describe procedures to be followed when
observing physical stocktake
u Explain the audit procedures for verifying stock
pricing
u Identify the audit objectives applicable
to tangible fixed assets
u Discuss considerations relevant to
determining the audit strategy for
tangible fixed assets
u Design a substantive audit programme
for tangible fixed assets
Learning objectives
(continued)
Stock
uManufacturing
Transactions
3 stages:
-Raw materials awaiting
processing
-Work in progress
-Finished goods awaiting
sale
STOCK - AUDIT
OBJECTIVES
STOCK RECORDS
u Goods in/out/transit
u Perpetual stock records
usually maintained by manufacturing entities;
other entities may rely on physical count
range from quantity only records through to
fully integrated quantity and cost records
u Functions
recording goods into stock
recording goods from stock
recording transfers
comparison of book to physical
Differences—
physical to stock
recordsuTheft
uDamage
uObsolescence
uFail to record in
uFail to record out
uThird party
uTransfer/Quarantine
STOCK - AUDIT
STRATEGY
uMateriality and inherent risks
High volume of transactions
Contentious accounting issues including
determination of cost and value
Diverse nature poses problems in
determining quantities and reliance on
experts
Storage at multiple sites poses risk of theft,
damage and of accounting for goods in
transit
Vulnerable to fall in value
Audit Strategy
u Control risk
low where reliable fully integrated perpetual stock
records are kept
medium where reliable but non-integrated perpetual
records are kept
high where no or unreliable perpetual records are
kept
u Audit strategy
depends on nature and reliability of stock records
for manufacturing entities, the availability of reliable
cost records is essential in determining cost
Stockcount
The auditor is not to count
and value stock, but to
ensure that stock is
taken and valued
properly by client's staff.
Includes reviewing
stocktaking instructions
put into place by
management,
observation of the
stockcount, and carry
out a sample of random
physical stock counts.
Stockcount
(ISA501)“When inventory is material to the
financial statements, the auditor
should obtain sufficient appropriate
audit evidence regarding its existence
and condition by attendance at
physical inventory counting unless
impracticable.” This allows the
auditor to “observe compliance with
the operation of management’s
procedures” and to “provide evidence
as to the reliability of management’s
procedures.”
STOCKTAKE
u Stock count
procedures
assigning
responsibility
preparation
identification
counting
checking
recording
clearing
cut-off
u Comparison with
records
recount material
differences
investigate cause
maintain cumulative
record of differences
adjust records
Review Stocktaking
Arrangements
supervision
uwhich staff are involved
umakeup and training of
teams
ucontrol over stock sheets
- sequentially numbered
u teams sign sheets to
acknowledge
performance.
OBSERVATION OF
STOCKTAKE
uEvaluate entity plans
uObserve count
test compliance with plans
make test counts
identify damaged etc.
items
account for use of count
sheets etc.
record cut-off
Attendance at Stocktake
observe procedures
are instructions carried out
dual function of auditor
is there adequate supervision
is stock divided into areas
is stock marked when counted to
avoid omission or double-counting
is damaged or old stock highlighted
on stock sheets
are all stock sheets accounted for.
Stock Count
u Follow-up count
test clerical accuracy of
final stock list
trace test counts to list
test final list to and from
count records
compare counts with
physical stock if any
test cut-off
verify movement between
date of count and period
end
STOCK PRICING
u With suppliers’ invoices for purchased stock
u With costing records for manufactured stock
propriety of cost system
control effectiveness of cost records
u Assess need for write-down to net realisable
value
Stock Pricing
uCost of raw materials per
invoice
uDirect labour costs
uFor WIP- material, labour
and overhead
uFor FG- material, labour
and overhead, but need
to evaluate lower of cost
and NRV
Review Stock Valuation Method
is cost accurately identified on stock
records or invoices
how are overheads evaluated for
inclusion in Cost figures
is valuation method consistently
applied (. FIFO)
treatment and valuation of damaged
or old stock
perform some sample calculations
Observe sales after balance sheet
date to confirm valuation.
Substantive
Procedures for
stock
uDesigning procedures for
stock
Initial procedures
-Trace opening balances
-Review activity
Analytical procedures
- Industry experience
Substantive
Procedures for
stock
uTests of details of
transactions
Testing entries in stock
records
Testing cut-off of
purchase,
manufacturing and
sales transactions
Substantive
Procedures for
stock
uTests of Details of
Balances
Observe physical stock
count
Test clerical accuracy of
stock listings
Test stock pricing
-Materials, labour,
overheads
-Cost vs net realisable value
-Use of experts
Stock Provision
uPolicy/procedure
uCompleteness, accuracy,
validity, existence
uDisclosure
uRisk re manipulation to
adjust profits
LONG TERM
PROJECTS
uExamples- motorways,
bridges
uRecognition of revenue
uRecognition of profit–
notional profit v realised
profit
uRules- stage of
completion, future costs,
recognition of loss
Tangible Fixed
Assets
uLand and building
uPlant and machinery
uFixtures and fittings
uMotor vehicles
Intangible Fixed
Assets
Goodwill
Brands
Trademarks
FIXED ASSETS- AUDIT
OBJECTIVES
Transaction class
Existence or occurrence
u recorded additions and
disposals occurred
Completeness
u all additions and disposals
are recorded
Rights and obligations
u additions and disposals
effectively transfer rights
Account balance
u recorded fixed assets
represents productive
assets in use
u all applicable assets used
in operations are included
u the entity owns or has
rights to applicable
recorded assets
Transaction
class
Valuation
u additions and
disposals are correctly
recorded
Disclosure
u recorded details of
additions and
disposals support their
classification and
presentation
Account
balance
u fixed assets are
correctly stated at cost
or valuation less
depreciation
u disclosures are
adequate as to cost or
valuation, depreciation
methods and other
requirements
Property, Plant &
Equipment
uDeveloping the audit plan
Materiality
Inherent risk
Audit strategy
Plant register
FIXED ASSETS - AUDIT
STRATEGY
uMateriality and inherent risk
often the largest category of
assets
not normally vulnerable to theft
valuation and measurement
problems
- self constructed assets
- assets held under finance leases
FIXED ASSETS - AUDIT
STRATEGY
u Control risk and audit strategy
transactions often few, large and subject
to special authorisation
- predominantly substantive approach often
used in such cases
- lower assessed level of control risk
approach used for expenditures processed
as routine purchases
- plant register may be used to assist
substantive procedures but rarely
assessed for control
Substantive Procedures for
Property, Plant & Equipment
u Initial procedures
Opening balances
uAnalytical procedures
Comparisons
uTests of details of
transactions
Additions/Disposals
Repairs and maintenance
Substantive Procedures for
Property, Plant & Equipment
uTests of details of
balances
Examining title documents
& contracts
Reviewing provisions for
depreciation
Considering the possibility
of impairment
Inquiring into the valuation
uDisclosure
Contentious Issues
uRevaluation
uChange in depreciation
uMaintain so do not
depreciate
uAmortisation of
intangibles
uValuation of brand and
trademarks
