Sunday, November 10, 2013

Audit - cut-off test for inventory - implication arising from attendance of stock-take

Attendance of stock-take is an audit procedure carried out by auditor to test the existence and completeness of client's inventory balance as at the audit period.

Generally, auditors would select random samples from inventory list and test count the physical stock to test the existence of the inventory recorded on inventory list. Also, auditors would pick some physical random stocks from the floor and test that these stocks have been recorded in the inventory to address the assertion of completeness.

Random samples are selected by auditors for the purpose of auditors' procedures - however, this may not be sufficient. What are the procedures to be carried out to ensure that stocks are not added to stock list incorrectly subsequent to auditors' count?

- Auditor need to obtain the complete inventory list on the stock count day - with quantity, value and total value been stated clearly
- Auditor is required to perform cut-off test by checking to delivery orders (for goods outward) and goods received notes (for goods inward) subsequent to stock-count day to test that these inventories are not included in the inventory list obtained.
- Also, please match the inventory list obtained on the stock-take day to final inventory list to identify any variances. Any movement in stocks must be explained and supported by appropriate evdience.

A inventory cut-off test has a similar objective of sales and purchase cut-off tests, which assist to ensure that inventory movements are recorded in the proper period.

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