AUDIT OF FINANCIAL STATEMENT ITEM: (Vouching and verification)

VOUCHING
A voucher is documentary evidence used to support the transaction in the books
of account. Vouching is the examination of vouchers to ensure that:
1. They are properly authorized
2. They are properly recorded
3. They are for the business and
4. They are for the current financial period.

Vouching is the process of matching documentary evidence with the details

recorded in the accounting records and provides evidence as to the accuracy,
completeness and validity of account balances or class of transactions. All profit
or loss account items are vouched while balance shelf items are verified.

Examples of voucher include:

 Supplies invoices and statement
 customers’ orders
 sales invoice
 purchase order
 cancelled cheques
 payment vouchers
 sales contract
 lease agreement
 depreciation schedule
 impairment schedule
 loan agreement
 confirmation letter from lawyers
 bank standard letter
 Reply from debtors circularization.

The work done during vouching includes:

a) Decide on the audit test and audit check to be carried out. An audit test is a
procedure that aims at providing evidence on the accuracy, validity and
completeness of the records. There are two types of audit tests i.e.
i) Primary audit test which include compliance test and substantive test.
ii) Secondary audit test which includes walk through test, rotational or
surprise tests, audit in depth, and evaluation audit test.

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Furthermore, an audit check is a procedure that provides evidence about the
occurrence of an error or fraud. These checks are: complete or total check,
interim check, surprise check and test check
b) Decide on the reasons of performing the audit test or the audit check.
c) Carry out vouching of the transaction to confirm for authority, recording, date,
amount or the name.
d) Draw conclusions on the truth of the profit and loss account items.

Rotational or surprise test

Where the company has branches or subsidiaries, the accounts are kept at
different locations and each must be examined by the auditors. When checking
the accounts of each continuously and going to the other branch to check for
errors and frauds, this is called rotational testing. The purpose of a rotational test
is to ensure that borrowing is not done from one branch to another to cover up a
fraud or losses are not transferred from one branch to another. It is done without
prior notice of the client.
Evaluation audit tests
These are audit procedures which are carried out by the auditor to provide
evidence about the strength weaknesses of the ICS. They include the internal
control evaluation questionnaire.
Test check
This is where only few transactions are checked from the beginning till the end. It
is carried out to help the auditor to obtain the general view about the accuracy
and reliability of the records. It is carried out on those transactions or account
balances which the auditor suspects to have error or frauds.

Why the auditor would examine a voucher

1. To check whether the voucher is properly authorized with the rightful
authority.
2. Check whether the voucher is properly recorded in the books of accounts.
3. Confirm whether the voucher is in the name of the business.
4. Check whether the dates in the voucher agree with the current financial
period under audit.
5. Confirm whether the amounts in the voucher are in agreement both in words
and in figures.
6. Detect any alterations, falsification or cancellation of documents.
7. Confirm whether the expenditure or cost incurred in the voucher fall within
the ordinary activities and financial limitation of the client.
8. Ensure that any additions or subtractions in the voucher are arithmetically
correct.
9. Confirm whether the vouchers are serially numbered and filed accordingly.

NB: Any voucher that does not meet the above requirement is referred to as
irregular vouchers.

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Vouching therefore involves tracing a transaction from the initial stages through
the books of prime entry to the financial statements.

The degree of vouching will be determined by:

1. Size of the organization and volume of transactions.
2. Strength of the ICS.
3. Audit risk involved.
4. Auditor’s past experience with the client.
5. Materiality of the item involved.

Vouchers that should not be accepted by the auditor

1. Duplicate vouchers.
2. In case the date is wrong i.e. it does not correspond with the dates in the
records.
3. If the voucher is in personal name because it is benefiting the individual
named therein and not the company.
4. Vouchers that have not been authorized or passed by a responsible officer it
could be a fraudulent voucher.
5. A cancelled voucher as it may represent double transaction.
6. If the amount differs in words and in figures. It will not be possible to know
which one is correct.

What to bear in mind when vouching

1. All vouchers must be serially numbered and filed properly.
2. The auditor must pay attention to:
a) The date of the voucher which must be for the current financial year.
b) The party to the voucher.
c) Amount in the voucher with should be reasonable and authorized.
3. Accepted vouchers must be cancelled using a big tick or stamped across the
voucher.
4. Attention should be paid to vouchers in personal names of the company
officer if so, the accounts should be debited.
5. Attention should be paid to the amount in words and in figures which should
tally.
6. Duplicate of missing vouchers should only be accepted with a reason from a
responsible officer and this should be mentioned in the representation letter.

Advantages of vouching
1. Enable the auditor to obtain evidence in respect to the source document.
2. Through vouching, the auditor is able to apply audit tests and procedures.
3. It facilitates completion of the final audit and the signing of the audit reports.
4. Enables the auditor detect errors and frauds.
5. Through vouching, the auditor can identify weaknesses in the ICS.
6. It helps the auditor to minimize exposures to the audit risk.

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Disadvantages of vouching
1. Consumes the auditor’s time hence expensive to the clients.
2. Some of the vouchers may not have been properly filed.
3. Some vouchers may be missing as a way to cover up fraud.
4. Client employees may fail to co-operate during vouching.
5. It is not possible for the auditor to vouch all transactions therefore vouching is
not standardized.

Why it is not possible for the auditor to vouch all the transactions
1. Vouching depends on the nature of the ICS i.e. when it is weak, the auditor will
have to do detailed vouching while when it is strong the auditor will use
system based approach.
2. Some of the financial statement items do require verification and not
vouching.
3. The main objective of the audit is to prove for the true and fair view and
therefore vouching can only be carried out as a subsidiary procedure in
detecting fraud.

VOUCHING OF PROFIT AND LOSS ACCOUNT ITEMS

1) Vouching of purchases
1. Check the internal control system and pay attention to internal check on
ordering, receiving and recording of purchases through ICQ, flow charts
and compliance tests.
2. Select a number of invoices and check their signing and note the amounts
on the invoices.
3. Trace the invoice to goods received notes and goods retuned notes to
ensure for agreement.
4. Check computations and extensions of the invoices and agree this with the
goods received notes.
5. Ensure that the invoice have been entered into the purchases day book
and trace the costing to the purchases ledger or to control accounts.
6. Trace the invoices to orders and requisitions notes to ensure that
purchases were genuine.
7. Trace the items in the inventory records and ensure that they’re up to date
and properly recorded.
8. Ensure proper allocation of capital and revenue expenditure.
9. Check the invoices with monthly reconciliation of control accounts and
compare with the balance on the list of purchases and investigate any
differences.

2) Vouching of sales
1. Test for approval of credit sales by someone responsible.
2. Test the prices with those on the price list or quotations.
3. Test check details on the delivery notes with order forms and inventories.
4. Check computations on the delivery notes and invoices.

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 5. Test a number of items in the stock records to ensure proper deductions.
6. Check sales analysis to detect the sale of assets treated as an ordinary sale.
7. Test check postings to the sales day book, journals, ledgers and control etc.
8. Reconcile debtors’ ledger with the debtors control account.
9. Check for the ICS on sales in respect to authorization and approval,
segregation of duties and supervision.
10. Check additions and calculations on the credit notes and invoices.
11. Perform an independent check on:
a) Recording returns.
b) Preparation of invoices and credit notes.
c) Maintaining of the sales ledger account.
d) Reconciliation of sales ledger and control accounts.
12. Check for authority of credit to customers by a responsible officer.

3) Vouching of wages and salaries

1. Test the ICS in particular the internal check on wages and salaries.
2. Examine the salaries book with payment vouchers for net salaries.
3. Check for increment, promotions and allowances and ensure that they
were authorized.
4. Increment must be checked with engagement letters to see if the
increments have been effected when they are due and ensure that they are
genuine.
5. Ensure that any allowance or special increments have been authorized by
the board or someone responsible.
6. Check statutory deductions and ensure that they are properly recorded
and confirm that they were submitted to the relevant authorities on time.
7. Counter check the cheques paid with the bank statement.
8. The auditor should verify salaries paid with returns to domestic taxes
departments which should agree in all respects.
9. Confirm the cheques drawn in favour of the employees and ensure that the
amounts therein are consistent with the amounts in the payroll.
10. The auditor should prepare to visit the company on the payday to observe
the payment of wages to casual workers purposely to detect dummy or
ghost workers.

Ways of identifying dummy workers

1. They do not count their money.
2. They are shy when receiving wages.
3. They are not sociable with other workers during the pay day.
4. Dummy workers do hesitate in their signatures.

Detection of dummy workers

1. Compare the personnel records with the wages sheet for consistency.
2. Request for ID cards from the casual workers and determine whether there
are dummy workers.

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3. Check signatures for different periods for consistency. Dummy workers
signatures will not be consistent.
4. Check the wages sheet for different periods and when some names don’t
appear in different wages sheet these must be investigated.
5. Obtain a list of retired, dead, or employees who have left the company and
ensure that their names don’t appear on the wages sheet.
6. Pay a surprise visit on pay day and observe the payment of wages to ensure
that it is made on production of ID cards.
7. Take a sample of ID cards compare the names on them with those on the
wages sheet.
8. Compare actual wages with budgeted wages and obtain explanations for any
variance.
9. Examine the employment procedures to see if they can give room for dummy
workers.
10. Ensure that the name of a given employee don’t appear on the unpaid wages
more than once.

4) Vouching of rent and rates

1. Check for the company’s policy to do with payment of rent and rates i.e. is
it monthly, quarterly or yearly and ensure that the policy is consistently
followed.
2. Obtain the schedule of rent and rates prepared by the company and
examine this for disclosures and materiality.
3. Examine vouchers used for payment of rent and rates and check for
authority and recording.
4. Write to third parties to whom the rent has been paid to confirm directly
from them how much was paid.
5. Obtain the counterfoils of the cheque paid and ensure that it is in the name
of the payee.

5) Vouching of electricity and water bills

1. Check the company’s policy to do with payments of electricity and water
bills and ensure that the policy is consistently followed.
2. Obtain electricity and water bills vouchers and examine these for
authority, recording, dates, name and amounts.
3. Confirm for any changes in respect to the current bills with the previous
bills. Confirm mater reading/consumption to determine any unusual
variance that may call for investigations.
4. Write to KPLC and NCC water department (or Nairobi Water and Sewerage
Services) directly the total amounts owing in respect to the clients.

6) Vouching postage and stationery

1. Confirm the company’s policy to do with the above payments.
2. Obtain the schedule of postage and stationery and examine these for
materiality in disclosures.
3. Obtain the cheque book used for payment to confirm these for authority,
recording, name, date and amounts.

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7) Vouching of rent received
1. Obtain the rent agreement between the landlord and the tenants to
confirm the following:
i) Amounts of rent receivable.
ii) Due dates.
iii) Interest for late payments.
iv) Terms and conditions of the agreement.
2. Examine the cash book for the total rent received.
3. Agree the receipts for dates and amounts with bank statement records.
4. Check the ledger for proper entry of these items in particular the period
for which it was due.
5. The auditor should set to examine the rent earning asset by physical
inspection.
6. In case rent is received by an agent, check the agent’s accounts with the
company and any corresponding between the company and the agent.
7. For rent outstanding for some time, write to the tenant and request him to
confirm his position.

8) Vouching interest paid on loans

1. Examine the loan agreement to ascertain:
i) The rate of interest charged.
ii) The date when it is due.
2. Compute the interest and ensure it is correct.
3. Check the recording of this interest on the ledger.
4. Obtain the counter-foil of the cheque paying this interest. Confirm dates,
names, amounts and authority.
5. Check the item in the bank statement.

9) Vouching item in the bank statement

1. Check the company’s policy to do with the above and ensure that such a
policy is practiced consistently.
2. Examine the schedule of accruals and prepayments and consider these for
materiality and disclosures.
3. Obtain the vouchers in support to the accrued and prepaid expenses and
examine this for dates, names, and amounts.
4. Confirm with third parties whose names are included in the vouchers to
agree this for dates and amounts.

10) Vouching depreciation

1. Obtain the companies policy on depreciation and confirm that it is
consistently applied.
2. Obtain the fixed assets register and vouch for additions, disposals and
scrap and treatment of profits or loss on disposal.
3. Confirm arithmetic accuracy of depreciation for the year and carry out
analytical review of comparison provision for depreciation for various
periods.

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11) Vouching directors fees
1. Examine the policy governing directors’ fees for consistency.
2. Examine the legal documents to ascertain that the fee payable to the
directors is paid in the amounts and manner provide for.
3. Examine minutes of meeting of shareholders and/or directors for
authorization.
4. Check the attendance register for directors to ensure that they receive
their fee as a result of attending meetings.
5. Examine disclosure of directors’ fees in the financial statements.
6. Confirm that the director’s fees are paid net of tax from supporting
documents.
7. Ascertaining whether the payments have been properly approved in
accordance with the legal framework of the company and that they are not
prohibited by the Companies Act.
8. Confirm that all money payable and benefits in relation to the current
account have been properly accounted for.
9. Consider whether the most common types of benefits e.g. company cars
have been omitted.
10. Review directors service contracts by inspecting copies of the service
contracts and ensure that they are kept at:
i) Registered office.
ii) Principle place of business.
iii) The place where the register of members is kept if not the register
office.
11. Review the company’s procedures to ensure that all directors advise the
board of all disclosable emoluments.
12. Review the procedures for ensuring that any payments made to the former
directors of the company are identified and properly disclosed.
13. Verify that long term service contracts i.e. lasting for more than five years
have been approved in the general meetings.

VERIFICATION OF ASSETS AND LIABILITIES

At the end of the financial period the auditors are required to carry out
verification of financial statement as a standard audit procedures.
Verification is the process of proving the authenticity or genuineness of items
reflected in the financial statements.
The client normally prepares schedules for all the items contained in the financial
statements which are extracted from the books of accounts.
The auditors are then required to verify that such schedules are consistent with
the books of accounts by considering factors such as cost, authorization,
valuation, beneficial ownership, presentation and disclosure.

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OBJECTIVES OF VERIFICATION
1. Verify cost: Generally cost represents the original monetary amount at which
an asset was acquired or a liability was incurred. Auditors may verify cost by
examining various documents including the cashbook, bank statement,
invoices, suppliers’ statements, contractual documents, correspondence with
the third parties, etc.
2. Authorization: The acquisition of assets or incurring of liabilities or the
occurrence of transactions and events require approval by responsible
officials as control measure to safeguard the entity position. It’s also
important for purpose of minimizing errors and fraud. Authorization may be
verified by auditors through inspection of documents e.g. for evidence of
signatures of responsible officials, review of the entity constitutive documents
e.g. the memorandum and articles of associations.
3. Valuation: All items reflected in the financial statements i.e. balance sheet
and the income statement should be shown at their appropriate carrying
amount and the appropriate carrying amount should relate to the suitability
of the accounting policies used. The auditors should evaluate valuation by
determining whether the accounting policies used are appropriate in the
entity circumstances e.g. whether such policies are consistently applied or
whether they are commonly adapted in the client system and whether they
are consistent with the relevant accounting policies.
4. Existence: All the items reflected in the financial statement especially the
tangible, assets should have physical existence. The auditor verifies the
existence of assets and recording through physical inspection, observation,
confirmation e.g. by circularizing the relevant parties.
5. Verify beneficial ownership: The assets and liabilities which are reflected in
the financial statement should be those that are pertaining to the clients
operations and should also be benefiting the entity. The auditor verifies the
ownership of assets and the genuineness of the liabilities by reviewing
documents such as title deeds, logbooks, invoices, suppliers statement
correspondence with the external parties etc. the auditor also considers
subsistence of transaction in determining beneficial ownership.

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6. Presentation and disclosures: At the end of the financial period the client
entity is expected to present their accounts in proper manner in order to
facilitate the understanding of the of accounts by e.g. ensuring proper
classification of items and disclosures. The auditor verifies this by confirming
whether the accounts have been presented in accordance with clients
reporting framework. The auditor may use an audit completion checklist to
determine compliance with the relevant accounting standards, relevant
statutory provisions and other requirements affecting the client’s entity e.g.
the stock exchange rules.
VERIFICATION OF THE FIXED ASSETS
(a) LAND AND BUILDING (FREEHOLD LAND)
1. The auditor should review the documents of title i.e. the title deed to
confirm that the property is in the client’s name.
2. Where there are any additions in the year the auditor should review cost
and authorization by checking all supporting documents and reviewing the
director’s minute book.
3. In terms of valuation of land and building the auditor should consider the
reasonableness by looking at the prevailing market values by the property.
In addition auditors should also check the appropriateness of the
depreciation policies by confirming that there is a split between the cost of
land and cost of building and ensuring the buildings have been depreciated
over the useful life.
4. Where there have been any disposals during the year the auditor should
check the correctness of the accounting entries raised e.g. for the sales
proceed check the cashbook and for gains/loss on disposal as per the
profit and loss disposal account.
5. Where there have been any revaluations of the property the auditor
should review relevant provisions of ISA 620 regarding various aspects of
the values e.g. their independence, qualification and natural work
performed. They should also consider correctness of the accounting
treatment of any revaluation.

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 6. In terms of existence the auditor should carryout physical inspection of the
property to determine their condition and any possible impairment or loss
of value.
7. The auditor should check the presentations and disclosures of land and
building and also review the contents of the fixed assets register to
determine that such properties have been currently reflected in the
financial statements.

(b) LEASEHOLD LAND AND BUILDING

1. The auditor should obtain the lease agreement and review the contents e.g.
the terms of the lease
2. The auditor should check the value of the leased property to be able to
determine the reasonableness of such value.
3. The auditor should also distinguish the lease in terms of whether it is a
financial or operational lease.
4. The auditor should then check the reasonableness of amortization of the
lease rental
5. The auditor should check the depreciation policy in case of finance risk if its
reasonable i.e. it should be based on the lower of the asset useful life and the
lease period.
6. The auditor should confirm that the presentation and disclosure of the leased
assets comply with provisions of IAS 17.

PLANT AND MACHINERY

1. The auditor should review the ownership of machine by checking documents
such as supplier’s statement and invoices to confirm that they are in the
client’s name.
2. In terms of existence they should carryout physical inspection to determine
the condition of machine
3. In a situation where plant and machinery maybe of high technical nature the
auditor may involve other experts e.g. in determining the operational capacity
of the machine and the useful life.

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4. The auditor should also review the schedules prepared by the clients and
compare this with detail of fixed assets ledger and the nominal ledgers.
5. The auditor should review the suitability of the depreciation policy for the
plant and machinery.
6. The auditor should also review the capitalization policy with regard to the
major repairs of plant and machinery.
7. For all the addition during the year the auditor should review the supporting
documents and the minutes of directors to confirm authorization.
8. For all disposals the auditor should check the correctness of the accounting
treatment for the sales proceeds and gain/loss on sale.
9. The auditor should review the presentations and disclosures of plant and
machinery in the financial statement.

MOTOR VEHICLES
1. The auditor should examine the motor vehicle, logbook to be able to confirm
various details e.g. date of manufacture, engine capacity and also to confirm
that the vehicles are in the name of the client’s entity.
2. The auditor should carry out a physical inspection to confirm their existence
and condition.
3. Where the log register are maintained to control the movement of motor
vehicles, the auditor should examine such registers to confirm movement
routes, fuel consumption and other details which may have implication on
certain expenditure.
4. The auditor should examine the depreciation policies of motor vehicles to
determine whether such polices are reasonable and also review the
capitalization policies on major repairs.
5. For additions in the year the auditor should review the supporting documents
and directors minute book for authorization.
6. For all motor vehicle disposed during the year the auditor should check the
correctness of the entries made regarding the sales proceeds and the
treatment of gain or loss on sales.
7. Check the presentation and disclosure in the financial statements

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LOOSE TOOLS
1. The auditor should review any register maintained in respect of loose tools to
be able to understand their nature and description.
2. Confirm their existence through physical inspection.
3. Review their invoices in suppliers statement
4. Review their useful life and check the suitability of any depreciation policies
of the loose tools.
5. Check the authorization procedures by responsible officials.
6. Check the presentation and disclosures in the financial statement.

FIXED ASSETS REGISTER

This is an important record maintained by the client for controlling assets
especially where they are movable and also for purpose of periodic comparison
of the details with those in the nominal ledger.

Importance of fixed assets Register to the client

1. It may serve to help the management in the identification of the individual
assets especially during disposals.
2. It may also serve to control expenditures such as repairs and maintenance
3. It’s useful in controlling the movement of assets within the client’s premises
4. It’s a form of control which may be used in safeguarding the assets from
misappropriation.

Importance of the Auditor

1. It’s useful as evidence to the auditor of the existence of a strong ICS.
2. May be used by the auditor during the verification of fixed assets e.g. in
comparing details contained in the schedules and the books of account
3. May be useful for purpose of re-computing the assets value
4. May be used by the auditor in identification of all purchased assets during the
year and of the ones disposed.
5. May be useful in determining relevant capital allowance for tax purposes.

Contents of the Register

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1. Dates of purchase and description of each assets
2. Identification number of the assets
3. Details of the location of the assets
4. Cost of the asset and any additions to date.
5. Any revalued amount and date of revaluation.
6. Assets estimated useful life, method and rate of depreciation
7. Amount of depreciation charged in the year and the accumulated depreciation
to date.
8. Where an asset was disposed during the year, dates and the amount of
disposal and the relevant sales proceed is also recorded.
9. Any related capital allowance for tax purposes e.g. wear and tear for capital
deduction.

Audit of Stocks/ verification of stocks

The objective of the audit of stock includes:
1. To enable the auditor to verify the existence of stock in the clients system.
2. To enable the auditor to confirm ownership of stock by the client.
3. To test the accuracy and correctness of stock valuation as at the balance
sheet date.
4. To enable the auditor to confirm whether cut-off procedures were followed
at the balance sheet date.

N/B:
The respective responsibility for stock management may be considered as
follows:
1. The management of the entity are responsible for ensuring that the
inventory figures reflected in the accounts reflect the correct values of the
inventories held and also that all inventories are correctly accounted for.
2. The auditor have a responsibility of obtaining sufficient evidence regarding
the appropriateness of the clients inventory system and the appropriateness
of the values reflected in the financial statement.

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Challenges of verification of stock/problems by the auditor when verifying
stock.
In a large manufacturing company, the auditor will invariably discover that,
there’s no other item in the business that presents verification problems to the
auditor to the extent that stock does. The reasons for this include:-
i. In the business, stock will invariably be the single largest item i.e. they are
always material, meaning that a small error in stock is in percentage terms
could have a material effect on reported results on financial position.
ii. Unlike all other balances in the financial statements and books of account
unless the client maintains an integrated accounting system the figures for
stock don’t result from the normal double entry system i.e. stock isn’t
subjected to the normal routine of balances as debtors, creditors or bank
balance stock is counted at the year end, then valued and any differences
disappear in the cost of sales account.
iii. Stock consists of many different items at different stages of production and
of very many diverse classifications. This creates problems of controlling
the existence and the condition of the stock items.
iv. Stock items are portable and valuable. They are therefore very attractive to
both staff and outsiders opening themselves to misappropriation.
v. There are many different acceptable methods that can be applied for
costing or valuing stocks each of which could result in significant
differences in the value for the same item. Suitability of methods and
consistency of application of that method requires serious auditor
consideration.
vi. There’s a significant amount of subjective judgment
vii. Involved in the area of stocks and because stocks have a one for one effect
on the report profit, management and auditors can easily disagree on these
areas of subjectivity. Most of these arguments arise in the area of valuation
rather than costing because determining the Net Realizable Value is highly
subjective.

Types of Inventory System

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There are two types of inventory system that may be used by an entity. These
are:
1. Perpetual inventory system
2. Periodical/year-end inventory system

Perpetual Inventory system

This is a system in which inventories records and physical items are maintained,
recorded and updated as the movement of inventories occur in the system. In
such a system the counting and valuing of stock items is carried out periodically
i.e. every month, every six months or every three months. During the counting
proper procedures are put in place to ensure the authorization of stock
movement and also to ensure cut-off arrangements are observed. The
management of the entity take any actions on any variations and discrepancies
between stock records and the physical items.
Auditor’s Procedures
The auditor should carry out the following procedures to ascertain whether the
system can be relied upon in the determination of the correct inventory values at
the end of the financial period.
1. Review the ICS with particular emphasis on segregation of duties
authorization of procedures.
2. Confirm evidence of the periodic counting of the inventories as per the
entities policies.
3. Review the stock’s counting procedures and instructions to confirm that such
procedures are appropriate and are being followed during every count.
4. Confirm that proper cut off procedures are maintained in relation to stock
movement.
5. Confirm that the clients management have taken the relevant measures to
investigate situations where discrepancies exist between stock items and
the physical items.
6. Confirm that the stock values are correctly estimated as required by the
provisions of IAS.

NB:
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Where the auditor is satisfied with the operation of the perpetual inventory
system to be able to provide correct values of inventories, the auditor may decide
not to attend the year end stock taking counting function.

Periodical/year-end inventory system

This is system in which the client entity carryout their normal function by
turning over their stocks in terms of procedures and sales without stopping
till the year end when they close their business for a day or two to be able to
carry out a stock-take function . During the counting of stock the client’s staff is
required to follow stock taking instruction and to separate slow moving or
damaged stock.

They are also required to follow cut-off procedures by ensuring that movement
of all stocks either within the entity or involving external parties are restricted.
During the counting the external auditor should also attend to be able to observe
the process and satisfy themselves regarding the function.

Responsibilities of the Auditors during the stock taking function

The auditor responsibilities with respect to the client’s stock taking functions
may be considered at three levels namely:
 Responsibility before stock take
 Responsibility during stock take
 Responsibility after stock take

A. Responsibility before stock take

1. The auditor and management should incorporate their plans to ensure that a
stock take that the auditor can rely upon would be carried out. Therefore the
management must prepare a documented plan for the stock take
instructions. The auditor must thoroughly inspect these stock take
instructions and be satisfied that they are adequate or else the auditor
should make recommendations for improvement.

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2. The auditor should review the previous year’s working papers and
familiarize himself with the locations from which the client operates the
nature and volume of the client stock items and the potential difficulties in
measuring or weighing the stock items. He will also be able to ascertain ICS
over stock stocks and any changes.
3. The auditor should plan for the visit to attend the stock take and observe.
Sometimes this planning calls for a visit to the client premises well before the
stock take takes place.
4. The auditor should select and incorporate into the audit program the high
value and fast moving items to test count.
5. The auditor should identify the third parties who may be holding some of the
clients stocks and arrange to write confirmation letters to them so that
replies can be received in good time for the final audit visit.
6. If the client has many locations and effective internal audit function. The
auditor should consider coordinating attendance with the internal auditors
so that they can minimize duplication of efforts in that the internal auditor
can visit some locations and the external auditor can visit other locations.

Qualities of Good or Adequate stock take instructions /matters or contents

1. The instructions should identify the overall coordinator of the exercise who
ideally should be the head of finance but not the head of stores department
2. The instructions should identify the count team. In an ideal situation, even
count team should have three persons. One from the stores department and
the other two from another department. As such the one firm in the stores
department will identify the product, one of the other two will count the
quantity and the other one will re-count and record the quantity. No team
should be composed entity of persons from the stores department.
3. The instructions should call for the adequate prior preparation such that the
stores personnel should ensure that all similar items are counted and
arranged in one location, that if weighing and measuring instruments are
required they are obtained well in advance.
4. The instructions should provide for the mode of counting and recording the
stock items. The preprinted per numbered rough stock take sheets
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 identifying all known stock items should be prepared so that the quantities
counted would just be filled in. the count teams can then be allocated specific
locations well in advance and the markings to be used to indicate when an
item has been counted can also be determined well in advance to ensure
there’s no omission or duplication.
5. The instructions should provide for the closing down of the stores for the
stock take so that there’s minimum movement of goods again to reduce
chances to ensure there’s no omission or duplication.
6. The instructions should deal with arrangements for identifying and isolating
damaged slow moving and obsolete stock items which may not have a value
that equals to the cost.
7. The instructions must deal with mode of correcting the cut off information
which is basically the last numbers of all accountable pre-numbered
documents such as goods received notes, the invoice, dispatch note, debit
note, credit notes, etc.
8. They should also provide for pre-stock take brief meeting which would
usually be held a few days before the actual stock take and this will be
equivalent to a rehearsal for the real thing.

B. Responsibility during stock take

During the counting of stocks, the auditors are required to attend the stock-take
to be able to establish various aspects e.g. Existence of stocks, nature and the
stock values.
The following are some of the functions to be performed by the auditors:
1. Observe whether the counting procedures are being followed as per the stock
taking instructions.
2. Take note of details of any damaged, obsolete, slow moving stock items and
discuss this with the client’s officials.
3. Test-count some stock items and determine whether your counting is
consistent with those of the clients officials.
4. Pay particular attention to any stock items which may be held on behalf for
third parties and therefore should not be included in the counting

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5. Confirm that cut-off procedures are being observed during the counting i.e.
that any stock movement into and out of the entity are restricted and
monitored.
6. Take photocopies of sample of rough stock sheets used during the counting
for the purpose of reference after the stock taking exercise.
7. The auditor should form a mental impression as to the quantity and quality of
stock held by the client to be able to conclude whether the counting can be
relied upon.
8. It should be noted that the physical existence of stock can be verified by the
auditor’s attendance to the function. However, ownership of stock items
require the auditor to inspect documents e.g. suppliers, statement and
invoices and also to obtain representation from the client’s officials.

C. Responsibility after stock take

After the stock-take exercise the auditor has a responsibility of making follow-
ups to ensure that the stocks values are correctly reflected in the financial
statements. The auditor may perform some of the following functions:
1. Confirm that all details which were corrected using the rough stock sheets
have been correctly transferred onto the final value stock sheets
2. Trace the entire items which were test-counted by the auditor to the final
values stock sheet.
3. Confirm that the cut-off procedures were correctly observed by reviewing
these numbers of both good inwards and outwards notes.
4. Where circulars were sent to any 3 rd parties holding stocks on behalf of
the clients the auditor should review their response.
5. Confirming whether the correct information has been reflected in the
final value sheets which should indicate cost of items and not realizable
value and as per IAS 2.
6. The auditor should also make follow up of any queries raised during the
counting and problems encountered so that the management may take
appropriate measures to rectify the situation

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7. The auditor should also obtain written representations from the
management regarding the stock values as well as ownership as at the
balance sheet date.

Situations of non-attendance to stock-take functions.

These are situations where the auditor may fail to attend the client’s stock take
functions:
1) Where the auditors have many clients with the same accounting period end or
auditors
2) Lack sufficient staff
3) Where the client stocks may be located in a remote areas

In such a situation the auditor may take the following appropriate measures:
1) Discuss with the clients and vary the dates of such functions for the auditors
conveniences
2) Arrange with other auditors in the localities to be able to act or agents of the
extend audit
3) Arrange with the clients internal auditor to attend such functions especially at
remote branches
4) Carryout a detailed review of the clients perpetual inventory system to be
able to satisfy yourself that stock values as at the balance sheet dates are
correctly reflected.

VERIFICATION OF STOCKS
1. Review the clients ICS in areas of purchases and stock departments to be able
to determine the nature of controls in such departments.
2. Confirm the accuracy of recording stock quantities which come into the
entities and during the release from the store department.
3. Carryout physical inspection to determine the conditions of stock items and
confirm items that have lost value are separated.
4. Review the correctness of information contained in the final value stock
sheets

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5. Obtain management representation letters regarding the stock valuation as
well as ownership.

VERIFICATION OF DEBTORS (TRADE RECEIVABLES)

1. The auditor should obtain schedules for the debtors preferably aged debtors
schedule reflecting balances and the arrears position.
2. Check the correctness of the costing of the schedules and compare the details
with those in the general ledger.
3. Circularize the debtors to confirm their existence and the balances
outstanding.
4. Obtain a separate schedule in respect of the specific positions made and
compare them with the aged debtor schedules
5. Check the relevant correspondence between the debtors and the clients or
between the clients and their lawyer to establish appropriateness of position.
6. Check time presentations and disclosures of debtors in the financial
statements.

VERIFICATION OF LIABILITIES
The verifications of liabilities normally pose the problem to the auditors
particularly in respect to the assertion of completeness. This is because some
clients tend to exclude liabilities from the records.

N/B: Examples of liabilities that may be excluded in the record

1. Outstanding claims by former employees for unfair dismissal
2. Claim relating to breach of the contract by the entity with the suppliers
3. Penalties for various different taxes
4. Claims for guarantees and warrantees

General procedures for verifying liabilities

1. The auditor should review the ICS with respect to the management of
liabilities including aspects such as segregation of duties.
2. Obtain a schedule for each of liability showing the make-up in terms of
balances brought forward, additional during the year, balances carried
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 forward and compare to the contents of the schedule to the details of the
general ledger.
3. The auditor should verify to confirm that cut-off procedures with respect of
liabilities were observed e.g. by confirming that where a service was
performed or resolved before the year end the corresponding liabilities was
set-up in the books and where a liability was set-up in the books the
corresponding services or benefits was received.
4. Most liabilities are normally a subject of some agreements or contract
between the client and some external parties e.g. suppliers, the auditor should
review the details of such agreements to be able to confirm the terms and
where the client is complying with such terms.
5. The auditor should review the authorization of all the liabilities by checking
the contents of the director’s minute book and evidence of signature of
responsible officials on documents.
6. Carryout physical inspection of documents relating to liabilities e.g. suppliers
statement, invoices, long agreement etc to check their correctness and
validity.
7. Most liability is usually secured in one way or another by either a fixed or
floating charges. The auditor should inspect the register of charges
8. The auditor should review all the accounting policies on liabilities to
determine whether they are suitable in the clients circumstances
9. The auditor should review any related evidence on liability to determine the
accuracy of such evidence e.g. in case of an outstanding loan the auditor may
calculate the interest expense
10. The auditor should carryout completeness test by reviewing the sequence of
the transactions to be able to detect any missing items and also review
transactions occurring after the balance sheet date which may have an effect
on the financial statement.

VERIFICATION OF SHARE CAPITAL

The verification of share capital normally depend on whether there was a
primary issue whereby money were received by the client’s entity and therefore

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accounted for in the books or where there were transfer in the stock market
between the buyer and seller of the company share.

The following procedures may be necessary for the auditor when dealing with a
situation of primary issue where money received e.g. by the entity.
1. The auditor should confirm whether the issuance of shares was within the
power of the company as stipulated by the memorandum and article of
association.
2. The auditor should review minutes of shareholder and dire tors to determine
authorization of the share issue.
3. The auditor should review the client’s entity cashbook and bank statements to
determine the actual lists of money in respect to share issue.
4. The auditor should also review the relevant accounts records e.g. the share
capital account and share premium account to confirm the correctness of the
entries raised
5. The auditor should compare the details of the shareholders register with
those on the general ledger account to be able to determine the consistency
between the two
6. If there was a prospectus issued the auditor should review the details of the
prospectus to confirm whether appropriate procedures were followed.
7. If the issue was subject to stock exchange the auditor should obtain copies of
correspondence indicating the approval of the stock exchange as well as the
capital marking authority
8. The auditor should also check presentation and disclosures and review the
correctness of the statement of equity charges contained in the financial
statement.

VERIFICATION OF LONG-TERM LOANS

1. Auditor should obtain the loan agreement and review the terms including
nature of the loan, purpose for which it was obtained, principal amount,
interest payable, commencement and expiry dates
2. Review the contents of memorandum and article of association to confirm
whether the loan was within the borrowing power of the company.
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3. Review the director’s minute book to confirm authorization and approval of
the long-term loan
4. Confirm the nature and details of the security offered
5. Review the client’s bank statement to confirm that the money was actually
received and also reverse the book keeping procedures.
6. Obtain a bank letter to be able to review independent evidence regarding the
balance outstanding, details of security offered and other terms e.g. interest
charged
7. In case the loan was issued through the guarantees the auditor may
communicate with the guarantor to obtain relevant information.
8. Confirm the presentations and disclosures of the outstanding loan in the
financial statements.

VERIFICATION OF CREDITORS (Trade Payables)

1. The auditor should review the clients ICS particularly concerning the controls
such as segregation of duties.
2. Obtain schedules of the creditors prepared as at the balance sheet dates,
check it for authentic accuracy and also compare the details with those in
general ledger.
3. Review all the relevant documents affecting the creditors account to
determine their validity e.g. invoices supplier’s statements, etc.
4. Check whether the cut-off procedures were correctly observed e.g by
establishing that where services were received the corresponding liability
was set up in the books.
5. Carryout circularization of creditors to determine their existence and the
correctness of the amount owing to them.
6. Review any agreement between the clients and suppliers to determine any
existence of breach of each agreement.
7. Check the presentations and distance in the financial statements.

VERIFICATION OF TAXATION

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1. The auditor should obtain the schedules of tax computation prepared by the
clients as at the financial period and check for correctness and accuracy as per
the requirement of the income tax act.
2. For the tax paid during the year the auditor should review copies of the
official receipts received by the clients from the tax authority.
3. In case of any disputed issues between the tax authority and the clients
regarding the taxes payable the auditor should consider whether sufficient
provisions were made relating to amount clearance by the tax authority.
Where necessary the auditor may consult with internal tax auditors within
audit firm.
4. The auditor should check the correctness of entries made in respect of tax
paid in the year as per the cashbook, provision made in respect of tax paid in
the P&I account and details of the outstanding tax in the tax payable account.
5. The auditor should confirm that the tax liability is currently reflected under
other liabilities in the balance sheet.
6. The auditor should compare previous year tax provisions to the current year
to determine the consistency between the laws.

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