The responsibility for properly determining the quantity and value of inventories rests with the management of the entity. It is therefore the responsibility of the management of the entity to ensure that the inventories included in the financial information are physically in existence and represent all inventories owned by the entity. The management satisfies this responsibility by carrying out appropriate procedures which will include verification of all items of inventory at least once in every financial year. This responsibility is not reduced even where the auditor attends any physical count of inventories in order to obtain audit evidence. Verification of inventories may be carried out by employing the following procedures :
- examination of records;
- attendance at stock-taking;
- obtaining confirmations from third parties;
- examination of valuation and disclosure; and
- analytical review procedures.
The nature, timing and extent of audit procedures to be performed is, however, a matter of professional judgment of the auditor.
Examination of Records : The entities usually maintain detailed stock records in the form of stores/stock ledgers showing in respect of each major item the receipts, issues and balances. The extent of examination of these records by an auditor with reference to the relevant basic documents (e.g., goods received notes, inspection reports, material issue notes, bin cards, etc.) depends upon the facts and circumstances of each case.