Stocktaking (or stock counting) is when a business manually checks and records all the inventory that it currently has in hand. Two of the main procedures utilized by auditors when auditing stock as part of a financial statement audit, consist of a stock take observation or else the performance of a partial stock take, which is termed as a ‘test count’.
The audit team at GCS Malta discusses the importance of observing and performing a stock count for audit purposes in this article.
Observing a stock count for audit purposes
Although it may seem unusual for auditors to attend stock counts, it is essential since, for many businesses, one of their largest assets is their stock. Auditors observe stock counts for several reasons:
- To confirm the existence of the stock
- To confirm the completeness of the stock list
- To observe that sound internal controls are in place during the stock count
- To assess whether, based on the procedures adopted by the management, the overall risk of material misstatement on inventory would be reduced in the financial statements.
What is the auditor’s role during a stock count?
While auditors are not involved in the counting process themselves, they are responsible for observing and taking note of the processes and procedures in place by management.
What should auditors look out for during a stock count?
Auditors need to observe a variety of things during the stock count. Here is a checklist of what to look out for:
- Instructions for the stock count.
- The number of persons performing the stock count, their role within the company (if any) and their responsibilities.
- Any work being performed whilst the stock count is taking place.
- Any defective, old or damaged items during the count.
- Deliberate skipping of items from being counted.
- Actions in place once a particular item is counted.
- Counting of the stock that has been sold but not yet dispatched from the store.
- Confirm that any stock purchased but not yet received is not being included.
- Stock held in other locations.
- Holding stock owned by third parties.
- Degree of fluctuation of the stock movement for particular items.
- Recounts taking place.
Performing a stock count
Besides observing a stock count, auditors may also be required to perform a stock count. However, auditors are not expected to perform a full stock count but rather perform a test count on a sample of inventory items by following these steps:
- Obtain the company’s stock list as at the date when the count is taking place – This sheet is to be requested from the store managers before the count commences.
- Select a small sample of 15 to 30 items from the company’s stock list and confirm these are located at the store – The auditor must ensure that the sample of items chosen from the stock list is physically present in the location where the count is being performed.
- Select a similar number of items physically from the warehouse and verify these are included within the stock list – When selecting these, aim to target the items prone to higher risk, such as small, high-value items which may easily be subject to theft. The selected items are traced back to the stock list to ensure that the inventory quantity within the sheet agrees with what is actually found in the warehouse.
Why GCS Malta?
At GCS Malta, our team of professional auditors can assist you with a variety of services. From ad-hoc investigations to due diligence reviews, our team is here to help your business grow. Contact us today for more information on our services.
