Auditing and Assurance Standards and Guidance

FRC Practice Notes

PN 25 (Revised) Attendance at stocktaking (February 2011)

Introduction

1.

International Standard on Auditing (ISA) (UK and Ireland) 501 'Audit Evidence – Specific Considerations for Selected Items' includes requirements and application material relating to inventory (stock and work in progress – 'stocks') and, in particular, obtaining audit evidence by attendance at physical inventory counting (stocktakes). Practice Note 25 contains further guidance, including how the requirements of other ISAs (UK and Ireland) may be applied in relation to attendance at stocktaking. The guidance is intended to assist auditors in applying the requirements of, and should be read in conjunction with, the ISAs (UK and Ireland) which apply to all audits undertaken in the United Kingdom and the Republic of Ireland.

2.	The main assertions1 relating to stocks are existence, rights to assets (ownership), completeness and valuation. Practice Note 25 is primarily concerned with audit evidence relating to the existence assertion.

3.

ISA (UK and Ireland) 501, paragraph 4, 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 (see paragraphs 10 and 16 below).

4.

While the principal reason for attendance at a stocktake is to obtain evidence to substantiate the existence of the stocks, attendance can also enhance the auditor's understanding of the business by providing an opportunity to observe the production process and/or business locations at first hand and providing evidence in relation to the:

completeness and valuation of stocks;

'cut-off' for recording stock inwards and outwards movements, and the resultant impact on revenues and costs; and

design and operation of an entity's internal control relating to stocks.

5.

It is the responsibility of those charged with governance of an entity to prepare financial statements that are free from material misstatement and, in so doing, to ensure that the amount at which stocks are recorded in the financial statements represents stocks physically in existence and includes all stocks of the entity. To achieve this, entities may maintain detailed records of stocks and check these by regular test counts. In some entities where the accounting records are less detailed, the amount of stocks may be determined by way of a full physical count of all stocks held at a date close to the entity's balance sheet date.

6.	In the case of a company incorporated under the Companies Act, management has specific responsibilities to keep adequate accounting records and to include any statements of stocktakings in those records2.

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