It is very common for an auditor to attend stocktakes at a company’s year end. These stocktakes may also be referred to as a stock counts and these terms are used interchangeably.
It may seem unusual for an auditor to attend a physical stocktake as most people assume they just work with the numbers in an office. However for most businesses one of the largest assets they hold is their stock (inventory)
Therefore it is crucial that the auditors make sure that the stock is all there and in good condition as at the date of the business’ year end.
The only way to do this is to attend the year end stocktake. By doing this the auditor is able to check a few different things. We will look at these separately below:
1. Stocktakes Confirm the Existence of Stock
As stock tends to be a significant asset noted on the balance sheet, it is absolutely vital for auditors to confirm that all of the stock actually exists.
When the auditor attends the stocktake, they will normally select a sample of stock from the year end stock listing and check that all of those items are in the warehouse. If all of the items in the sample exist, this is a good indication to the auditor that all of the other stock on the list is also there.
Remember, auditors work on a sample basis and it is highly unlikely that they will actually count all of the items on the stock listing. The only circumstance in which they may count all of the stock is there is only a low amount of items. In this circumstance it makes more logistical sense to just count everything rather than spend time picking samples and finding each item individually.
This area of the count is known as sheet-to-floor counting as the auditor selects an item from the sheet to confirm back to the actual stock item in the warehouse (on the floor). This proves that all stock items on the balance sheet exist which stops the business from adding fictional assets on their balance sheet.
2. To Confirm the Completeness of the Stock Listing
The auditor needs to check if the stock listing they have been given actually includes all of the stock. It will be difficult to do this without actually attending the year end stock count.
In order to check the completeness of the list, the auditor uses an additional sample. However instead of choosing the sample from the stock listing, they pick an item at random in the warehouse and agree that this is on the list.
If the item they choose is not on the list this is an indication that the list may not include all the stock.
This test is known as floor-to-sheet counting as the auditor picks and item at random from the floor (warehouse) and agrees it back to the sheet (stock listing).
3. Stocktakes Reveal the Condition of the Stock
By this point, the auditor should have confirmed that the stock is all there and also that the stock figure on the balance sheet is not missing any stock (i.e. the stock listing is complete).
However, there is another aspect to accounting for inventory that is important:
Stock must be valued appropriately.
It is good to ensure that all the stock exists, but even more important to ensure that none of the stock is broken or obsolete.
In reality, the auditor is not likely to choose a sample of stock to check its condition. Instead they will make observations as they go around the warehouse performing their other tests that none of the stock is damaged.
If, for example, the auditor noticed some stock that appear to have been broken or damaged, they may ask their client how this is being treated and whether the value of it is planning to reflect that it is damaged. This is likely to be something they follow up when they complete their audit fieldwork at a later stage.
Similarly, they may ask the warehouse employees how long certain items have been sat in the warehouse. If they discover that some items are rarely sold and have been sat in the warehouse for a considerable amount of time, they may inquire with the accounts team whether a provision ought to be put in place against these items.
4. To Check the Controls Over Stock
By attending stocktakes, auditors may be able to verify that controls are in place relating to the inventory processes.
This can be especially helpful if the auditor is planning to use tests of controls to reduce their sample sizes when they come to fieldwork.
As part of this, checks may be performed to see how any variances are dealt with. I.e. they may want to see that any variances are dealt with in a timely manner and that the stock listing will always reflect the true stock balance on the day.
They may wish to see that high-value stock has higher levels of security that protects it.
The type of controls the auditor intends to check will vary from client to client and in some cases, the controls may not be tested at all.
Summary
In summary, the main purpose of an auditor attending a stocktake is to ensure that all of the stock is there.
Upon doing so, they are likely to perform other checks. For example, checking that the stock listing is complete, checking that the stock is not damaged and ensuring that inventory controls are being followed.