| 10. | ISA (UK and Ireland) 501: 'Audit Evidence – Specific Considerations for Selected Items' requires that, if inventory is material to the financial statements the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by, in addition to other procedures, attendance at physical inventory counting unless impracticable. (paragraph 4) |
| 11. | Attendance at stocktaking can provide evidence to the auditor in respect of the existence, completeness and valuation assertions (including a consideration of possible obsolescence and deterioration). |
| 12. | The principal sources of evidence relating to the existence of stocks are: |
| evidence from audit procedures which confirm the reliability of the accounting records upon which the amount in the financial statements is based; |
| evidence from tests of the operation of control activities over stocks, including the reliability of counting procedures applied by the entity; and |
| substantive evidence from the physical inspection tests undertaken by the auditor. |
| 13. | The nature and extent of the auditor's procedures during attendance at a stocktake will depend upon the auditor's assessment of the risks of material misstatement carried out in accordance with ISA (UK and Ireland) 315. In cases where the auditor's assessment of risks of material misstatement at the assertion level includes an expectation that relevant controls for confirming the existence of stocks are operating effectively (that is, the auditor intends to rely on the operating effectiveness of controls in determining the nature, timing and extent of substantive procedures), the auditor may attend a stocktake to obtain evidence regarding the operating effectiveness of those controls as well as performing substantive procedures. |
| 14. | Where entities maintain detailed records of stocks and check these by regular test counts the auditor performs audit procedures designed to confirm whether management: |
| maintains adequate records of stocks that are kept up-to-date; |
| has satisfactory procedures for stocktaking and test-counting; and |
| investigates and corrects all material differences between the book records of stocks and the physical counts. |
| The auditor attending a stocktake considers whether the checking of stocks as a whole is effective in confirming that accurate records of stocks are maintained. If the entity's records of stocks are not reliable the auditor may need to request management to perform alternative procedures which may include a full count at the year end. |
| 15. | In entities that do not maintain detailed records of stocks the quantification of stocks for financial statement purposes is likely to be based on a full physical count of all stocks at a date close to the entity's year end. In such circumstances the auditor recognises that the evidence of the existence of stocks provided by the stocktake is greater when the stocktake is carried out at the end of the financial year. Stocktaking carried out before or after the year end may also provide acceptable evidence for audit purposes provided the auditor is satisfied that the records of movements of stocks in the intervening period are reliable. |
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