Physical Stock Taking & Cash Counting

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Topics will be covered

Definition Assertions Audit Evidence

Inventory System Physical Inventory Cash Counting

Definition
Inventories are assets

 Held for sale in the ordinary course of business;

 In the process of production for such sale; or

 In the form of materials or supplies to be consumed in the production

process in the rendering of services.
Financial statements assertion
Assertions about class of transactions and events for the
period under audit

Occurrence — Transactions and Events that have been

recorded have occurred and pertain to the entity

Completeness — All transactions and events that should

have been recorded have been recorded

Accuracy — Amounts and other data relating to recorded

transactions and events have been recorded appropriately

Cutoff — Transactions and events have been recorded in

the correct accounting period

Classification — Transactions and events have been

recorded in the proper accounts
Financial statements assertion
Assertions about account balances at the period end

Existence — assets, liabilities, and equity interests exist

Rights and obligations — the entity holds or controls the

rights to assets, and liabilities are the obligations of the entity

Completeness — all assets, liabilities and equity interests

that should have been recorded have been recorded

Valuation and allocation — assets, liabilities, and equity

interests are included in the financial statements at
appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded
Financial statements assertion
Assertions about presentation and disclosure

Occurrence and rights and Obligations — disclosed

events, transactions, and other matters have occurred and
pertain to the entity.

Completeness — all disclosures that should have been

included in the financial statements have been included.

Classification and understandability — financial

information is appropriately presented and described, and
disclosures are clearly expressed

Accuracy and valuation — financial and other information

are disclosed fairly and at appropriate amounts
Audit procedures of obtaining audit evidence

Objective

The auditor obtains audit evidence to draw reasonable conclusions on

which to base the audit opinion by performing audit procedures.
Audit procedures of obtaining audit evidence

Inspection of Inspection of Observation Inquiry

Records assets

Analytical
Confirmation Re-Calculation Re-performance
Review
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Physical Inventories
 Objective of physical attendance
 Need for physical stock taking
 General audit procedures for stock take
 Audit procedures for physical stock taking
 Specific areas
Objective of physical attendance

 The attendance at the client’s physical inventory is now

regarded as a compulsory procedure.

 The purpose of observing inventory is to determine that

the client’s procedure result in accurate count.

 The auditor will himself observe test count.

 The auditor will extract certain cut-off information.

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Needforphysicalstocktaking

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.

If unable to attend the physical inventory count on the date

planned, take or observe some physical counts on an alternative date
and, when necessary, perform audit procedures on intervening
transactions.

Where attendance is impracticable, due to factors such as the

nature and location of the inventory, the auditor should consider
alternative procedures.
General Considerations for Stock Taking
In planning attendance at the physical
inventory count or the alternative procedures,
the auditor considers the following:

 The risks of material misstatement related

to inventory.
 The nature of the internal control related to
inventory.
 Whether adequate procedures are expected
to be established and proper instructions
issued for physical inventory counting.
 The timing of the count.
 The locations at which inventory is held.
 Whether an expert’s assistance is needed.
 Before stock take
During the stock take
After stock
take
Audit procedures for physical stock taking
Audit Procedures Before Stock Take
Audit Procedures Before Stock Take
Responsibility

The client has primary responsibility for planning and conducting the physical inventory.
The presence of Auditor during this phase is important because of participation in the
physical count.

The auditor may carry out the following procedures before the stock take:

 Date and time of inventory in consultation with client

 Locations of inventory in consultation with client
 Stocks held in bonded ware houses
 Methods of counting and recording
 Instructions to employees
 Determine materiality
 Need for expert
 Provisions for the following:
 Receipts and dispatch of inventory during the count
 Segregation of inventory held for third party
 Physical arrangement of inventory
Audit procedures during stock take
Audit Procedures During Stock Take
The main task is to ensure that the client’s staff are carrying out
their duties effectively. The auditor should:

 obtain cutoff numbers (last receiving number and last dispatch number)
 determine extent to which client counts would be tested.
 make two-way test counts from floor to sheet, and from stock sheets to floor.
 compare count with appears on inventory tag, sheet, bin cards, and also
compare serial number and description, of the tags, sheets, bin cards.
 Make notes of all tags, sheets, bin cards that represents damaged stocks and
slow moving items.
 examine source of stock sheet generation
 for work in process discuss with knowledgeable employee to review the
estimated cost to complete related to labor and factory overheads.
 Make sure that inventory not owned by the client is not included in the stock
sheets.
 If experts are used than observe the procedures performed by him.
Audit procedures afterstock take
Audit proceduresafterstock take

 The sheets shall be signed by all persons who were involved in the
physical stock taking

 Ensure all inventory sheets are accounted for

 Ensure rough inventory sheets are retained

 Cut off testing of receiving and dispatch of documents

 Prepare reconciliations in order to reach at year end stock, if the physical

stock tacking is performed before or after year end

 Document/ Inquire the observations/ discrepancies between physical

and sheets provided noted during the course of physical stock take
Must Complete
Audit Programme – Stock Attendance
Specific Areas
Stocks held at third party

1. Obtain direct confirmation

 As to the quantities.
 As to the condition of inventory.
2. Depending on materiality of this inventory the auditor would also consider
the following:

 The integrity and independence of the third party.

 Observing, or arranging for another auditor to observe, the physical inventory
count.
 Obtaining another auditor’s report on the adequacy of the third party’s internal
control for ensuring that inventory is correctly counted and adequately
safeguarded.
 Inspecting documentation regarding inventory held by third parties, for
example, warehouse receipts, or obtaining confirmation from other parties when
such inventory has been pledged as collateral.
Specific areas
Stock in transit
 The auditor should verify through reviewing purchase invoices and
subsequent status.
Stock in bonded ware houses
1. Auditor obtain direct confirmation in writing, from custodian.
2. The auditor should also apply one or more of the following
additional procedures:
 Review and test client’s procedures for investigating the warehouseman
and evaluating his or her performance.
 observe physical counts of goods, if applicable.
 if warehouse receipts have been pledge as collateral, confirm details of
pledged receipts with lenders.
Cash Counting
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