Guidance Note on Audit of
Inventories
The following is the text of the
Guidance Note on Audit of Inventories issued by the Auditing
Practices Committee of the Council of the Institute of Chartered
Accountants of India. This Guidance Note should be read in conjunction
with the Statements on Standard Auditing Practices issued by the
Institute. 1
1. Para 2.1 of the "Preface to the
Statements on Standard Auditing Practices" issued by the Institute of
Chartered Accountants of India states that the "main function of the APC
is to review the existing auditing practices in India and to develop
Statements on Standard Auditing Practices (SAPs) so that these may be
issued by the Council of the Institute." Para 2.4 of the Preface states
that the "APC will issue Guidance Notes on the issues arising from the "SAPs
wherever necessary."
2. The Auditing Practices
Committee has also taken up the task of reviewing the Statements on
auditing matters issued prior to the formation of the Committee. It is
intended to issue, in due course of time, SAPS or Guidance Notes, as
appropriate, on the matters covered by such Statements which would then
stand withdrawn. Accordingly, with the issuance of this Guidance Note on
Audit of Inventories, Chapter 5 of the Statement on Auditing Practices,
titled "Inventories", shall stand withdrawn. In due course of time, the
entire Statement on Auditing Practices shall be withdrawn.
INTRODUCTION
3. Inventories are tangible
property held for sale in the ordinary course of business, or in the
process of production for such sale, or for consumption in the production
of goods or services for sale, including maintenance supplies and
consumable stores and spare parts meant for replacement in the normal
course.2 Inventories normally comprise raw materials including
components, work-in-process, finished goods including by‑products,
maintenance supplies, stores and spare parts, and loose tools.3
4, Inventories normally constitute
a significant portion‑of the total assets, particularly in the case of
manufacturing and trading entities as well as some service rendering
entities. Audit of inventories therefore assumes special importance.
5. The following features of
inventories have an impact on the related audit procedures:
(i) By their very nature,
inventories normally turn over rapidly.
(ii) Inventories are
susceptible to obsolescence and spoilage. Further, some of the items of
inventory may be slow‑moving while others may follow a seasonal pattern of
movement.
(iii) Inventories are
normally movable in nature, although there may be some instances of
immovable inventories also, e.g. in the case of an entity dealing in
real‑estate.
(iv) All the items of
inventory may not be located at one place but may be held at different
locations such as factories and warehouses, or with third parties such as
selling agents.
(v) The individual items of
inventory may not be significant in value, but taken together, they
normally constitute a significant proportion of total assets and current
assets of manufacturing, trading and certain service entities.
(vi) Physical condition
(e.g. stage of completion of work‑in‑process ir certain industries) and
existence of certain items of inventories may be difficult to determine.
(vii) Valuation of inventories may
involve varying degrees of estimation., including expert opinions, e.g.,
in the case of jewellery.
INTERNAL CONTROL EVALUATION
6. The auditor should study and
evaluate the system of internal control relating to inventories, to
determine the nature, timing and extent of his other audit procedures. He
should particularly review the following aspects of internal control
relating to inventories4:
(a)
The control procedures should provide for segregation of such
functions whose combination may permit the commitment or concealment of
fraud or error; for example, persons undertaking physical verification of
stocks should be different from those responsible for store‑keeping in
respect of those stocks.
(b)
The stores procedures should provide for the use of pre‑numbered
standardized forms.
(c)
There should be a system of cross‑checking the data generated by
different operating departments.
7. The auditor should also review
specific controls over receipts, issues, physical inventories, and
inventory records.
VERIFICATION
8. As in the case of other assets,
the responsibility for properly determining the quantity and value of
inventories rests with the management entity. It is therefore the
responsibility of the management of the entity sure that the inventories
included in the financial information are physical existence and represent
all inventories owned by the entity. The management satisfies this
responsibility by carrying out appropriate procedures which will normally
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.
9. In any auditing situation, the
auditor employs appropriate procedures to obtain reasonable assurance
about various assertions (see Statement on Standard Auditing Practices 5,
Audit Evidence). In carrying out an audit of inventories, the auditor is
particularly concerned with obtaining sufficient appropriate audit
evidence to corroborate the management's assertions regarding the
following:
Existence -
that all recorded inventories exist as at the year-end.
Ownership - that all inventories owned
by the entity are recorded and that all recorded inventories are owned by
the entity.
Valuation - that the stated basis of
valuation of inventories is appropriate and properly applied, and that the
condition of inventories is recognised in their valuation.
Verification of inventories may be
carried out by employing the following procedures:
(a)
examination of records;
(b)
attendance at stock‑taking;
(c)
obtaining confirmations from third parties;
(d)
examination of valuation and disclosure; and
(e)
analytical review procedures.
The nature, timing and extent of
audit procedures to be performed is, however, x of professional judgement
of the auditor.
Examination of Records
10. 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 issfie notes, bin cards, etc.) depends upon the facts and
circumstances of each case.
11. The auditor may come across
cases where the entity does not maintained detailed stock records other
than the basic records relating to purchases and sales. In such
situations, the auditor would have to suitably extend the extent of
application of the audit procedures discussed in paragraphs 12‑22 and 30.
Attendance at Stock-taking
12. Physical verification of
inventories is the responsibility of the management of the entity.
However, where the inventories are material and the auditor is placing
reliance upon the physical count by the management, it may be appropriate
for the auditor to attend the stock‑taking. The extent of auditor's
attendance at stock‑taking would depend upon his assessment of the
efficacy of relevant internal control procedures, and the results of his
examination of the stock records maintained by the entity and of the
analytical review procedures.
13. The procedures concerning the
auditor's attendance at stock‑taking depend upon the method of
stock‑taking followed by the entity.
14. There are two principal
methods of stock‑taking : periodic stock-taking and continuous
stock‑taking. Under the first method, physical verification of inventories
is carried out at a single point of time, usually at the year-end or at a
selected date before or shortly after the year‑end. Under the second
method, physical verification is carried out throughout the year, with
different items of inventory being physically verified at different points
of time. However, the verification programme is normally so designed that
each material item is physically verified at least once in a year and more
often in appropriate cases. The continuous stock‑taking method is
effective when a perpetual inventory system of record‑keeping is also in
existence. Some entities use continuous stock‑taking methods for certain
stocks and carry out a full count of other stocks at a selected date.
15. The auditor is expected to
examine the adequacy of the methods and procedures of physical
verification followed by the entity. Before commencement of verification,
the management should issue appropriate instructions to stock‑taking
personnel. Such instructions should cover all phases of physical
verification and preferably be in writing. It would be useful if the
instructions are formulated by the entity in consultation with the
auditor. The auditor should examine these instructions to assess their
efficacy. An illustrative set of instructions which may be useful in most
cases is given in Appendix I to this Guidance Note.
16. Where the auditor is present
at the time of stock‑taking, he should observe the procedure of physical
verification adopted by the stock‑taking personnel to ensure that the
instructions issued in this behalf are being actually followed. The
auditor should also perform test‑counts to satisfy himself about the
effectiveness of the count procedures. In carrying out the test counts,
the auditor should give particular consideration to those stocks which
have a high value either individually or as a category of stocks. Proper
attention should also be paid to the physical condition of inventories
17. Ideally, there should be no
movement of stocks when the physical verification is being carried out. On
occasions, however, it may be necessary for the entity to continue the
pr4ction, receiving, or despatch operations during physical verification.
In such circumstances, it is essential that the entity has the procedures
to identify and record such movements. The auditor should review the
procedures adopted by the entity to account for the movement of
inventories from one location to another within the entity during
stock‑taking (e.g. issues from stores to production departments).
18. The auditor should also
examine whether the entity has instituted appropriate 'cut-off
procedures' to ensure that:-
(a)
goods purchased but not received have been included in the
inventories and the liability has been provided for;
(b)
goods sold but not despatched have been excluded from the
inventories and credit has been taken for the sales.
The auditor may examine a sample
of documents evidencing the movement of stocks into and out of stores,
including documents pertaining to periods shortly before and shortly after
the cut‑off date, and check whether the stocks represented by those
documents were included or excluded, as appropriate, during the
stock‑taking.
19. The auditor should review the
original physical verification sheets and trace selected items ‑ including
the more valuable ones ‑ into the final inventories. He should also
compare the final inventories with stock records and other corroborative
evidence, e.g., stock statements submitted to banks.
20. The auditor should examine
whether the discrepancies noticed on physical verification have been
investigated and properly accounted for.
21. Where continuous stock‑taking
methods are being used by the entity, the auditor should, in addition to
performing the audit procedures discussed in paragraphs 16-20 above, pay
greater attention to ascertaining whether the management:
(a) maintains adequate
stock records that are kept up‑to‑date;
(b) has satisfactory
procedures for physical verification of inventories, so that in the normal
circumstances the programme of physical verification will cover all
material items of inventories at least once during the year; and
(c) investigates and
corrects all material differences between the book
records and the
physical counts.
22. The auditor should determine
whether the procedures for identifying defective, damaged, obsolete,
excess and slow‑moving items of inventory are well‑designed and operate
properly.
Confirmations from Third Parties
23. Where significant stocks of
the entity are held by third parties, the. auditor should examine that the
third parties are not such with whom it is not proper that the stocks of
the entity are held. The auditor should also directly obtain from the
third parties written confirmation of the stocks held. Arrangements
should be made with the entity for sending requests for confirmation to
such third parties. A pro forma letter of request for confirmation to be
used in such cases is given in Appendix II to this Guidance Note.
Similarly, the auditor should also obtain confirmation from such third
parties for whom the entity is holding significant amount of stocks.
Appendix Ill to this Guidance Note gives a pro forma letter of request for
confirmation to be used for this purpose.
Examination of Valuation and Disclosure
24. The auditor's objective
concerning valuation is to obtain evidence that amount at which
inventories have been valued is computed on an appropriate basis.
25. The auditor should satisfy
himself that the valuation of inventories is in accordance with the
normally accepted accounting principles and is on the same basis as in the
preceding year. The generally accepted accounting principles, involved in
the valuation of most types of inventories are dealt with in Accounting
Standard (AS) 2, "Valuation of Inventories" issued by the Council of the
Institute of Chartered Accountants of India.
26. The auditor should examine the
methods of applying the basis of inventory valuation. Thus, with regard
to determination of cost, the auditor should examine, inter alia, the
stock sheets, records of physical verification, invoices, costing records
and other relevant documents and also examine and test the treatment of
overhead expenses as a part of cost of inventories.
27. Wherever feasible, and
particularly where only a single or a few major products are produced,
the auditor may call for a reconciliation of the total cost of production
for the year as determined by the cost records with the total expenses as
per the financial books and review this reconciliation. Where standard
com are used or where overheads are charged at standard rates or
percentages, he may examine the variances from actuals and, where these
are significant, ensure that appropriate adjustment is made to the
inventories.
28. The auditor should examine the
evidence supporting the assessment of net realizable value. In this
regard, the auditor should particularly examine whether appropriate
allowance has been made for defective, damaged and obsolete and
slow‑moving inventories in determining the net realizable value.
29. The auditor should satisfy
himself that the inventories have been disclosed properly in the
financial statements. Where the relevant statute lays down any disclosure
requirements in this behalf, the auditor should examine whether the same
have been complied with.
Analytical Review Procedures
30. In addition to the audit
procedures discussed above, the following analytical review procedures may
often be helpful as a means of obtaining audit evidence regarding the
various assertions relating to inventories:
(i) reconciliation of
quantities of opening stocks, purchases, production,
sales and closing
stocks;
(ii) comparison of
closing stock quantities and amounts with those of the
previous year;
(iii)
comparison of the relationship of current year stock ~ties and
amounts with the current year sales and purchases, with the corresponding
figures for the' previous year;
(iv)
comparison of the composition of the closing stock (e.g., raw
materials as a percentage of total stocks, work‑in‑process as a
percentage of total stocks) with the corresponding figures for the
previous year;
(v) comparison of
current year gross profit ratio with the gross profit ratio for the
previous year;
vi) comparison of
actual stock, purchase and sales figures with the corresponding budgeted
figures, if available;
,vii) comparison‑ of yield with
the corresponding figure for the previous year;
(viii) comparison of significant
ratios relating to inventories with the
similar ratios for other firms in
the same industry, if available;
(ix) comparison of
significant ratios relating to inventories with the industry norms, if
available.
It may be clarified that the
foregoing is only an illustrative list of analytical review procedures
which an auditor may employ in carrying out audit of inventories. The
exact nature of analytical review procedures to be applied in a specific
situation is a matter of professional judgement of the auditor.
SPECIAL CONSIDERATIONS IN CASE OF WORK-IN-PROCESS
31. In general, the audit
procedures regarding work‑in‑process are similar to those used for raw
materials and finished goods. However, the auditor has to carefully assess
the stage of completion of the work‑in‑process for assessing the
appropriateness of its valuation. For this purpose, the auditor may
examine the production/costing records (e.g. co,.' sheets), hold
discussions with the personnel concerned, and obtain expert opinion,
where necessary.
32. In certain cases, due to the
nature of the product and the manufacturing process involved, physical
verification of work‑in‑process may be impracticable. In such cases, the
auditor should lay greater emphasis on ascertaining whether the system,
from which the work‑in‑process is ascertained, is reliable. It may also be
useful for the auditor to examine the subsequent records of
production/sales.
MANAGEMENT REPRESENTATIONS
33. The auditor should obtain from
the management of the entity a written statement describing in detail the
location of inventories, methods and procedures of physical verification
and valuation of inventories, While such a representation letter serves as
a formal acknowledgment of the management's responsibilities with regard
to inventories, it does not relieve the auditor of his responsibility for
performing audit procedures to obtain sufficient appropriate audit
evidence to form the basis for the expression of his opinion on the
financial information. A sample management representation letter regarding
.inventories is given in Appendix IV to this Guidance Note. It may be
mentioned that the representations made in the letter can alternatively
be included in a composite representation letter usually issued by the
management to the auditor.
DOCUMENTATION
34. The auditor should maintain
adequate working papers regarding audit of inventories. He should maintain
on his audit file a summary of each inventory as also the details
regarding the extent of his verification. The management representation
letter concerning inventories should also be maintained on the audit
file.
APPENDIX I
ILLUSTRATIVE SET OF
INSTRUCTIONS TO BE ISSUED BY THE
CLIENT TO ITS STAFF RESPONSIBLE
FOR STOCK‑TAKING
(Ref. Paragraph 15)
This appendix contains an
illustrative set of instructions which may be issued by the client to the
staff responsible for stock‑taking. The appendix also lists special
instructions in respect of stocks held by others and work-in-process.
The annual physical examination of
inventories of the entity is to be carried out on 31st March.
The work will commence at 8.00 a.m. on 31st March, and there
will be no movement of inventories during their physical examination.
- Mr. AB will be in overall
charge of the physical counting.
- Messrs....., Auditors, will
depute their staff to Observe the work performed by us. It should be
remembered that they are not responsible for any part of the
stock‑taking.
- You are responsible for the
physical counting of all stocks in (state here the exact area for which
the person is responsible e.g., Block B of Godown No. 2, or in the open
yard on south of factory, etc.). You are not concerned with similar
items of stock which may be stored at other locations.
How to proceed with the work
- At 8 a.m. you should present
yourself in the office of Mr. AB where you will be handed over a bunch
of inventory tags. You should ensure that You have in your possession a
sufficient number for your needs. You should also have in your
possession a pen, blank papers, a measuring tape, ... (state here any
other instrument which is required for measurement, counting, weighing
etc.). Please ensure that for all items in your area for which weighing
or measuring is required, the necessary apparatus is available.
Procedure for tagging
5.1 You should place a tag
on each pile, box, bin, etc., which is counted by you after recording the
quantity, description, part number, condition of the stocks to the extent
known (e.g., damaged stocks), etc., on the tag. You should proceed in
proper order so as to ensure that no items are r ‑fitted. When the work of
counting is completed you should hand over the rem‑ ming tags including
soiled and damaged tags to Mr. PQ.
5.2 All items are required
to be measured, weighed or counted in order to ascertain the exact
quantity on hand. However, in respect of small items of insignificant
value, such as bolts, nuts (state here any other items known to be of
small value), the quantities on hand may be estimated without actual
counting etc. In the latter case please state "estimated" on the tag.
5.3 Please ensure that
proper identification is made by part number, description, etc., and that
in the case of work‑in‑process the last operation performed is clearly
specified in accordance with the schedule attached to this Memorandum. No
movement of any stock from one location to another should take place
during the period of stock checking.
5.4 Where bin cards are
kept on the bins or job tickets are attached to iterns in process, you
should not merely copy the quantities shown on those documents to the tag
without verification. All alterations made to the tags should be
initialled and quantities should be recorded in ink.
5.5 Mr. PQ is responsible
for the control over tags in use. For this purpose, he should prepare a
schedule in the attached Form.
5.6 After obtaining the
permission of the auditors6, instructions issued for the
removal of the tags and a suitable person should be in each department to
detach the detachable portion of the tags, counterpart in the proper
position. When they are collected, al should be brought back to a central
location, placed in serial order with the schedule prepared by Mr. PQ.
After this has been done, the tags will be released to the Accounts
Department which is concerned with the preparation of the inventory. Later
on, when the inventory has been prepared, a check should be possible to
see whether all the tags have been listed.
5.7 After the work of
counting has been completed, Mr. AB who is in overall charge of
stock‑taking, will make a visit to each area in order to ascertain that
all bins, boxes, etc. bear a tag and make a check of the quantities shown
therein. At this point, the auditors will carry out further observation
make such test checks as they consider necessary.
5.8 The counterparts of the
tags should be left on the relevant bins or piles for a period of at least
one month and the quantity shown on the counterparts of the tag should be
used as the opening balance of the bin card for the subsequent period.
Procedure for preparing stock sheets
6. 1 Separate "stings under the
following broad heads should be prepared:
(i) Raw materials including
components
(ii) Work-in-process
(iii) Finished goods
including by‑products
(iv) Maintenance
supplies and stores and spare parts
(v) . Loose tools
Defective, damaged, obsolete,
excess or slow‑moving stocks should be listed separately under each of the
above categories.
6.2 It should be examined that the
stock cards, bin cards, tags or other stock records are posted up‑to‑date
so that items can be traced and verified in these records, simultaneously
with the physical checking of stocks.
6.3 A list of excesses and
shortages should be drawn up at the time of physical stock‑taking.
6.4 Stocks belonging to third
parties and remaining in custody of the entity should be separately
identified from the entity's own stock. A separate listing should be
prepared for all such items of stocks.
6.5 Defective, damaged, obsolete,
excess or slow‑moving stocks should be kept separate from other items.
6.6 Counters and checkers should
sign or initial the stock sheets for the work done by them.
Stocks held by others
7.1 The following steps be taken
for stocks belonging to the entity but held by others:
(i) A separate listing for
such stocks be prepared.
(ii) A letter should be
sent to such persons to confirm the stocks held by them directly to the
auditor.
(iii) An authority to
inspect stocks held by third parties should be given to the auditor where
the same is considered necessary by the auditor.
(iv) An independent record
for such goods be kept by the entity.
7.2 The above steps should also be
taken for stocks given on loan or received on loan.
Work-in-Process
8. 1 With regard to
work‑in‑process, the following instructions be given to the staff members
concerned.
(i) A separate listing for
work‑in‑process be prepared.
(ii) The internal records
kept by the entity be written up‑to‑date.
(iii) If the amount of
work‑in‑process is determinable from production records, the same be kept
up‑to‑date.
(iv) A list of opening
work‑in‑process be kept ready at the time of stock taking.
APPENDIX II
ILLUSTRATIVE LETTER OF
CONFIRMATION ‑ INVENTORIES
HELD BY OTHERS
[Ref. Paragraph 23]
(Letterhead of Entity)
[Date]
[Name and address of holder of
inventories]
Dear Sir,
For audit purposes,
kindly furnish directly to our auditors (name and address of the
auditors) details concerning our inventories held by you for [state here
the purpose of holding of inventories by the third party] as of the close
of business on ......
According to our
records, you held the following inventories as of that date:
Description Quantity
...... ......
...... ......
In case you identify
certain items of inventories as defective or damaged, the details thereof
may be furnished separately, indicating the quantities and giving a
general description of the condition of such items. Also, please confirm
that our inventories held by you are free of any charge or encumbrance.
A stamped envelope addressed to
our auditors is enclosed for your convenience.
Yours faithfully,
(Signature of responsible
official of the entity)
APPENDIX III
ILLUSTRATIVE LETTER OF
CONFIRMATION - INVENTORIES HELD BY THE ENTITY ON BEHALF OF OTHERS
[Ref. Paragrapf 23]
[Letterhead of the entity]
{Date]
[Name and address of the owner of
inventories]
Dear Sir,
For audit purposes,
kindly furnish directly to our auditors (name and address of the auditors)
details concerning your inventories held by us for [state here the purpose
of holding of inventories by the entity] as of the close of business on
__________.
According to our
records, we held the following inventories as of that date:
Description Quantity
...... ......
...... ......
In case you identify
certain items of inventories as defective or damaged, the details thereof
may be furnished separately, indicating the quantities and giving a
general description of the condition of such items. Also, please confirm
that our inventories held by you are free of any charge or encumbrance.
A stamped envelope addressed to
our auditors is enclosed for your convenience.
Yours faithfully,
(Signature of responsible
official of the entity)
APPENDIX IV
REPRESENTATION LETTER FOR INVENTORIES
[Ref. Paragraph 33]
The following is a sample
representation letter for inventories. It might be used to supplement the
general letter of representation or included therein. The letter should be
modified where appropriate.
[Letterhead of Entity]
[Date]
[Name and Address of the Auditor]
Dear Sir,
In
connection with your audit of the financial statements of X limited as of
..., 19., and for the year then ended, we make, to the best of our
knowledge and belief, the following representations concerning
inventories.
1. Inventories at the year‑end
consisted of the following:
Raw Materials (including
components) Rs. ________
Work‑in‑Process
Rs. ________
Finished Goods (including
by‑products) Rs. ________
Maintenance supplies and Stores
and Spare Parts Rs. ________
Loose
Tools
Rs. ________
Others (specify each major head
separately) Rs. ________
Total
Rs. ________
Rs. ________
3. Except as set out below, all
goods included in the inventory are the property of the entity and are not
subject to any charge, and none of the goods are held as consignee for
others or as bailee:
....
....
4. All inventories owned by the
entity, wherever located, have been recorded, including goods sent on
consignment.
5. Inventories do not include
goods sold to customers for which delivery is yet to be made.
6. Inventories have been valued on
the following basis/bases:
Raw Materials (including
components)
Work-in-process
Finished goods
Maintenance supplies and Stores
and Spare Parts
Loose Tools
Others (specify each major head
separately)
(In describing the basis/bases of
valuation, the method of ascertaining the cost (e.g. FIFO, Average Cost or
LIFO) should also be stated. Similarly, the extent to which overheads have
been included in the cost should also be stated.)
7. The following provisions have
been made in respect of excess, slowmoving, damaged, or obsolete
inventories and these, in our view, are adequate.
.....
......
8. No item of inventories has a
net realizable value in the ordinary course of business which is less than
the amount at which it is included in inventories.
9. The basis/bases of valuation
is/are the same as that/those used in the previous year, except as set out
below:
Class of Basis
of Valuation Effect of change in
Inventory This year Last year Basis of Valuation
...
.... ..... ...
...
.... ..... ...
Yours faithfully,
[Signature of responsible
official of the entity]
1
With the formation
of the Auditing Practices Committee in 1982, the Council of
the has been issuing a series of Statements on Standard Auditing Practices
(SAPs). Statements on Auditing Practices lay down the principles governing
an audit. These principles apply when
independent audit is carried out. Statements on Standard Auditing
Practices become mandatory
dates specified in the respective SAPs. Their mandatory status implies
that, while discharging tl function, it will be the duty of the members
of the Institute to ensure that the SAPs are following
audit of financial information covered by their audit reports. If, for any
reason,
a member has able to perform an audit in accordance with the SAPs, his
report should draw attention to the departures therefrom.
The Auditing Practices Committee has also been issuing, from time to time,
guidance notes issues arising from SAPs. The Guidance Notes provide
guidance on procedures to be employed, auditor in order to comply with the
principles laid down in SAPs. It is recognised that in deterrant
nature, timing and extent of audit procedures to he employed in a specific
situation, an auditor to exercise his professional judgment. The Guidance
Notes, therefore, are recommendatory. A member should ordinarily follow
the recommendations in a guidance note relating to an auditing mal where
he is satisfied that, in the circumstances of the case, it may not he
necessary to do so.
2
Servicing equipment, stand‑by equipment and specialised spares of
machinery (which are in the nature of 'insurance spares') are normally
capitalised.
3 The
audit procedures relating to shares, debentures and other securities held
as stock‑in‑trade (i.e. for sale in the ordinary course of business) are
similar to those followed for audit of investment, Accordingly, this
Guidance Note does not apply in respect of audit of shares, debentures and
other securities held as stock-in-trade.
4
The extent of review of controls would depend upon the facts and
circumstances of each case
Reference may be
made in this regard to the "Internal Control Questionnaire% issued by the
Institute of Chartered Accountants of India in 1976 which contains, inter
alia, an illustrative discussion on controls in relation to inventories.
5
It may be mentioned that the Manufacturing and Other Companies (Auditor's
Report) Order, 1989 uses the words "normally accepted accounting
principles".
6
It is presumed that the auditors or their representatives are present at
the time of stock-taking.
7
Where physical verification of inventories is carried out at a date other
than the closing date, this paragraph may be modified as below:
Inventories recorded in the books as at
............................... (date of balance sheet) aggregating to Rs
. .... are based upon the physical inventories taken as at ....
............................... (date of physical verification) by actual
count, weight or measurement. The material discrepancies noticed on
physical verification of stocks as compared to book records have
been properly dealt with in the books of account and
subsequent transactions recorded in the accounts fairly reflect the
changes in the inventories up to ........... (balance sheet date).
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