When auditors must take stock
Due to the new Clarified auditing standards which are now beginning to bite for audits of accounts for periods ending on or after 15 December 2010, the Auditing Practices Board (APB) is starting to issue revised Practice Notes.
On 22 February 2011, the APB issued Practice Note 25 (revised) which covers the area relating to the auditor’s attendance at stocktake.
It is easy to forget the primary objective of why the auditor attends a stocktake and auditors may not note any fundamental changes. This article will take a brief look at the revised PN 25 and offer a brief refresher on why the audit firm attends the client’s stocktake, what to do beforehand and what types of procedure will gather evidence that will be both sufficient and appropriate.
Practice Note 25 (Revised) ‘Attendance at Stocktaking’
Auditors may not notice any differences to this practice note. However, what is often confusing (particularly to more junior audit staff) is the reason why auditors are required to attend stocktakes.
The practice note confirms the assertions relating to stock which are:
- Rights and obligations (i.e. ownership)
Before the stocktake, PN 25 requires the auditor to undertake an element of planning, including:
- Performing analytical procedures and discussing any significant variances with management
- Discuss stocktaking arrangements and procedures with management
- Familiarisation of the nature of stocks, volume, identification of high value items and the accounting method of stock valuation
- Consideration of the location of stocks
- Consideration of the quantity and nature of work in progress, quantity of stocks held by third parties and whether auditor’s experts may be required
- Considering the internal controls relating to stocks to identify problem areas (e.g. problems relating to ‘cut offs’)
- Whether any internal audit function exists and deciphering the extent to which reliance can be placed on internal audit
- Considering the results of previous stocktakes
- Reviewing the audit working papers for the previous year
Paragraph 4 of ISA 501 (UK and Ireland) specifically requires the auditor to attend stocktake if the value of stock at the reporting date is (likely to be) material to the financial statements. Primarily the attendance at stocktake is that of an ‘observance’ test, i.e. to observe whether the procedures adopted by management insofar as the stock count is concerned would reduce the risk of material misstatement in the stock valuation.