PROBLEMS ENCOUNTERED IN THE VERIFICATION OF STOCK

Details
Category: Financial Auditing
  1. The amounts involved are invariably material.
  2. Stock has a one for one impact on the reported profits i.e. an increase in stock increase the reported profit. It is therefore open to distortion by management.
  3. Stock does not derive from the normal double entity system, it is arrived at by stock taking carried out at the year- end.
  4. Stocks are portable and valuable opening themselves to pilferage and deterioration either intentional or accidental.
  5. The number of items involved is usually numerous creating verification problems as far as existence and condition is concerned.
  6. Although stocks are valued at the lower of cost and net realisable value, what constitutes cost can vary from one management to another and the basis of determining that cost can be subject to so many different methods all resulting in different values for the same items.
  7. It is an area that is susceptible to manipulation by management provision for obsolescence, slow moving and damaged stocks is a question of judgement therefore it is easy for the auditor to disagree with management.
  8. Stock is normally made up of different items e.g. work in progress, raw materials all these can be valued on a different basis and amalgamated and described as stocks.
  9. Stock may be overstated by inclusion of goods sold but not dispatched to customers.