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.

Please drop us an email at myauditing@gmail.com if you require any further clarification.

Auditors' poor soul

Do you as an auditor feel that you have a poor soul in most of the times? While the surrounding people are busy with their life, you are burying yourself in piles of working papers.

Reminders from partners, chasers from audit clients, juggling to meet the time-line - do you feel poor?

Review of cash flow statement: operating activities, investing activities, financing activities

In cash flow statement prepared on an indirect method, the preparer is required to assess the cash flow activities belongs to which categories: operating, investing or financing activities. It is important to have a clear mind and exercise cautious in reviewing the "classification" of cash flow activities.

To illustrate, during the year, a Company ABC received non-current funding from its holding company. It is the intention of the Company to borrow the fund from its holding company to run the opeartions. As such, the fund received from the holding company need to be disclosed as "financing activities" instead of "opearting activities". This will assist the financial statement user to understand the nature of fund received from holding company.

We also want to highlight the following items where the financial statement preparer may mess up:
Dividend received: this is part of investing activities, as it represents the return on investment the Company made
Dividend paid: this is part of financing activities, as it represents the return given to the shareholder - who had invested in the Company's shares
Acquisition of property, plant and equipment: investing activities- as this represent the company's investment in asset to generate return

In short, we propose the auditor to review the classification of cash flow activities cautiously to assess the reasonableness of the disclosure.

How to identify provision for warranty / goods returned - credit notes review

During the course of your audit, you may note that there is high % of goods returned or customer utilised the warranty provision. Goods returned / utilisation of warranty could be quite common in certain industry, e.g. retail / electornic / mass production industry. What will be the implication to our audit?

In this instance, we should request our audit client to perform a retrospective review of the history of goods returned and determine how many % of total goods sold had been returned to the Company in the past. A provision for goods returned or warranty should be recorded on a monthly basis. This is because, based on historical experience, the Company will not be able to earn 100% of its goods sold / delivered.

A good way for auditor to test / review the goods returned history is to check the credit note issued during the year and check the nature of the credit note. If there is high volume of credit notes being issued for goods returned, then it is important for us to emphasize to client to accrue for provision for gooods returned.