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Sample Case Study Paper on Auditing Report on Taking Procedures

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Sample Case Study Paper on Auditing Report on Taking Procedures

exercise that needs to be carried out in any company. The stock which is one of the company’s non-current asset is an essential element in the preparation of the statements of comprehensive income and the financial position of Davis Hydraulics Ltd. The analysis of the stock is usually conducted at the start of the fiscal year and the end. It aims at identifying the opening and closing inventory(Hocking, 2000). Upon determination of the initial stock quantity, the newly acquired goods are added to the original stock and finally the final portion of stock is deducted from the resultant amount of inventory. The emerging difference is the cost of sales.

 The process of stock taking is majorly involved; inspecting the inventory to ascertain its existence and evaluate its condition, and performing test counts(Hocking, 2000). Also, perceiving acquiescence with management’s guidelines and the act of procedures for recording and controlling the results of the bodily inventory tally. Furthermore, obtaining audit evidence as to the consistency of administration’s tally events. There should be relevant procedures as outlined by the international standards of auditing, (ISA)(Hocking, 2000). The management of Davis hydraulics should ensure that only qualified staff are assigned to the responsibility of stock count. Also, they should have in place duly signed stock sheets with the clear description of the stock items and the employee in charge of a given area.

The procedures are carried out under close monitoring of the warehouse supervisors and warehouse assurance manager to ensure no discrepancies arise(Hocking, 2000). As an auditor of Hydraulics Ltd, my presence during the stock count is important because; I would be able to record in my audit working papers the details of the items counted before me and follow this to the stock sheet to see if they are accurately recorded. Additionally, to list down the items counted in my presence to note down the defective, damaged and obsolete items of stock and see if they are accurately recorded in the stock sheet. It would, therefore, be essential for the organization to offer stock sheets and not the plane papers to the staff conducting the stock computation.

There is growing the need for separation of work and gaining expertise. It would upsurge the level of accountability and honesty between the employees and the management(Hocking, 2000). The Davis Hydraulics company will ensure that each employee is assigned a specified area of specialization to ensure quality, and accurate results are achieved during the stock count process.

   There has been an increasing need for auditing and assurance of both the fixed and current assets. The property plant and equipment is a key capital asset for Green Brown manufacturing company and there is need to appropriately account for its existence and depreciation. Several audit procedures are carried out to answer these three questions:

  1. a) Describe the audit procedures to ensure the accuracy of the summary of property, plant, and equipment.

For Green Brown Ltd to ensure the accuracy in the summary of property, plant, and equipment, there are audit procedures to be carried out. The methods include:

Inspect the existence of the physical assets.

 It is aimed towards ensuring that proper examination of the documents relating to acquisition and disposal to determine appropriate recording period (Saroyan and Amundsen, 2001). Besides, vouch for a sample from accounting records to underlying documentation.

Check for completeness and reflection of PPE assets in the periods balance sheet.

 It could be achieved through performing analytical review procedures, reconciling subsidiary and general ledger. A schedule of PPE assets from the subsidiary ledger or client worksheets for testing, including the auditor’s working papers.

Review of the rights and obligations.

The management of Green Brown manufacturing company should ensure that there is an adequate examination of title and lease agreements. The contract should be evaluated as either operating or capital leases. Additionally, vouch entries in PPE with the insurance company and the government to ascertain ownership (Pease, 1998).

Valuation and allocation.

Testing if depreciation has been recorded and if the applied auditing principles have been adhered to accordingly. Besides, give an undertaking of the additions and disposals by examining documentation about authorization of purchase, recording of purchase, PPE schedules for assets.

Presentation and disclosure.

Ensure that the PPE assets are adequately presented and that there are footnote disclosures relating depreciation methods, collateralized assets, commitments of assets and that the lease terms are adequate.

  1. b) Describe audit procedures to ensure all items of a capital expenditure are included in additions for the year and that no revenue expenditure has been capitalized.
Capital expenditure items.

They are the non-current assets which are intended to remain productive over several accounting periods. There should be proper measures to ensure that the additions of fixed assets are recorded under the PPE. The disposals, on the other hand, should be deducted from the PPE account and the proceeds debited in the company’s bank account. The capital expenditure should only be charged to expense gradually through depreciation over an extended period of time.

Revenue expenditure items.

They are the costs related to the specific operating period (Pease, 1998). The management of Green Brown Ltd should evaluate debits in repairs and maintenance of the property plant and equipment account to determine proper recording.

  1. c) Describe audit procedures to ensure the depreciation rates are calculated appropriately.
Buildings: 2–4% straight line

The building is capital assets and hence need to be depreciated on the historical cost it was acquired plus any other additional expenses incurred in the improvement of the property. Also, it is important to evaluate on the ownership fo the building, whether lease or rented. You cannot depreciate a rented building since it is not legally owned by the business.

Plant and machinery: 5–10% straight line

Plant and machinery are company’s capital assets, and the depreciation should be charged on the historical cost plus the installation costs. The range would be applied as from 5% to 10% in the subsequent years. When the plant and machinery are disposed of, there is need to record the disposal proceeds plus the accumulated depreciation against the original cost to determine whether there are disposal gains or losses (Saroyan and Amundsen, 2001).

fixtures fittings and equipment: 5–20% straight line.

The office fixtures and equipment should be depreciated on the cost of acquisition plus the cost of transporting them and also the installation costs. The total value is then subjected for depreciation until the time it is disposed of.

 

 

 

 

Weaknesses in the stock count procedures of Davis Hydraulics Ltd and relevant improvements

 During stock take of Davis Hydraulics, there were some stock take procedures which I witnessed. These procedures were marred with various weaknesses which I have summarized in the table below with their possible corrective measures.

 Weaknesses   

Improvements.

Delegating excessive authority to the subordinates.   

The management of Davis Ltd has to ensure that those who give the stock details don’t participate in the physical counting of inventory.

 

   Lack of professionals to conduct the real stock take.   

There should measure to ensure that only qualified personnel are assigned the duty of counting the stock and not just every employee who works in the warehouse

 

Improper stock valuation.

Davis Hydraulics company should employ professional valuers to make sure the stock counted is correctly valued and recorded.

 

  Lack of clearly defined stock sheets.

Davis Hydraulics Ltd should ensure that the warehouse staff conducting the stock count are provided with the clearly outlined stock sheets to avoid confusions and even second recording on a particular stock item.

 

Poor methods of assigning duties and responsibilities.   

The management of Hydraulics should ensure each employee is assigned his/her area of the count to facilitate accountability and answerability.

 

Lack of expert to conduct the stock count process.   

The work of supervisor should be to monitor the process and not to assess the stock sheets. The management should hire an expert to conduct the tally and finalize the process.

 

Incorrect inventory layering.   

Ensuring that the system has assigned a cost of an item based on the inventory layer in which it’s located. The inventory layer can either be First in First out, (FIFO) or Last in First out,(LIFO).

Delegation of excessive authority to the subordinates

The management of Davis company has issued blank papers to the employees conducting the stock take(Leventis, Weetman, and Caramanis, 2005). It is clear evidence that the employees are given the powers to write down the stock details and the figures counted. Such a procedure would lead to errors of omission as the employee may intentionally or unintentionally leave out some items of stock. It could result in wrong representation and valuation of the business(Leventis, Weetman, and Caramanis, 2005). Also, the employee will not be able to list down those items which are out of stock as the personnel will be recording and counting only those commodities he/she can recognize in the store. The problem could be corrected by:

Providing stock details to the employee

It is necessary for the management of Hydraulics Ltd to provide the employees with the stock details(Leventis, Weetman, and Caramanis, 2005). The list provided should contain all the stock items in the company’s warehouse. It should have the column for obsolete, damaged and defective stock items alongside the real inventory(Leventis, Weetman, and Caramanis, 2005). The persons preparing the stock details should not be participating in the inventory count as this will ensure all the stock items are recorded and counted.

Reconciling the prepared stock details.

After writing down the stock description, there should be the internal auditor who cross-checks the written list with the original catalog of the company to ensure all stock items are well described and that none is left out. It will make sure that customers don’t miss products and also give the correct position of the company’s financial status.

Lack of professionals to carry out the procedures

As for the Hydraulics business, it was the responsibility of every employee, every supervisor to perform the process of the stock count(Leventis, Weetman, and Caramanis, 2005). It is a clear indication that the management did not put in place effective measures to ensure an accurate stock take process is carried out. The use of unqualified staff in the process would lead to incorrect additions in the stock sheets, improper disclosure of the nature of stocks in the accounts, for example; raw materials, work in progress or finished goods.

Professional stock takers.

The company should ensure that the stock take is carried out by specific employees in the warehouse who have gained experience before(Leventis, Weetman, and Caramanis, 2005). They must be able to record the stock movements accurately within the correct action such as the stock cut off procedures. Also to note, they should be able to verify the existence of inventory through attendance of the real stock take.

Lack of stock valuation

Inventory count procedures provide information about the amount of inventory on hand, but don’t offer data about the cost of that inventory(Wunder, Engel, and Pagiola, 2008). In most cases, audit procedures are designed to test stock by performing separate audit procedures around the quantity and cost of inventory. By just assigning the warehouse staff the primary responsibility of the stock taking. It is most likely that the stock valuation will not be conducted(Wunder, Engel, and Pagiola, 2008). These staff members as outlined in the procedures I witnessed are only involved in the stock details and the physical count. They are not carrying out the stock valuation process.

Value inventory during the count

Davis Hydraulic Ltd should be aware that while the inventory count provides quantity information, price testing is needed to determine the cost per unit(Wunder, Engel, and Pagiola, 2008). It is important in determining the value of the business and also ensuring that the profitability of the company is not either overstated or understated. The over/understatement could give rise to a non-true and fair view of the financial position of Davis Ltd(Wunder, Engel, and Pagiola, 2008).

Lack of stock sheets.

The company should ensure that there is an availability of stock sheets. In my visit to my client’s premises, I discovered that the warehouse staff was provided with the plain working papers. It was a clear show that the stock sheets were not provided. It could create a great state of confusion during the stock count and may result into serious errors. Such errors could include overvaluation of stock. Overvaluation comes as a result of the obsolete, damaged and slow moving stock being recorded in the general stock column due to lack of professional expertise.

Provision of detailed working papers

The management of Davis Ltd should put in place measures to ensure that the stock sheets are provided. The warehouse manager should ensure that the various storekeepers in different departments have provided the stock sheets outlining the stock details as shown in the table below:

Unit number   

Good inventory   

Obsolete inventory   

Damaged inventory   

Defective inventory   

Slow moving stock

Supervisors comments and signature

 

 

     
Poor methods of assigning duties and responsibilities

In my encounter with Davis Hydraulic company, it is outlined in their procedures that the employees could assist their colleagues in finishing up their tasks(Wunder, Engel, and Pagiola, 2008). The idea of employees working faster to help their fellow members in completing their unfinished work could substantially result to malpractices and misappropriation of stock items. The fraud may arise because the first employee handling the count and the new assistant may incur errors. The errors could not be traced to an individual. There could exist blame games between employees involved in the physical count(Wunder, Engel, and Pagiola, 2008).

Specialization in job assignment

Each employee should be assigned the requisite area of jurisdiction(Saroyan, and Amundsen, 2001). It would enhance accountability amongst the employees. No employee should be allowed to assist the other irrespective of how first the employee completes the assigned duty. Measures should be put in place, and the supervisors should ensure that each employee accomplishes their work within the stipulated time frame. The policy helps in time, speed and accountability.

Lack of professional stock takers.

The lack of professional stock takers has greatly impacted the process of inventory analysis. The warehouse staff could not provide the stock analysis in the professional manner required since they lack the professional experience. It has led to the inability to check on the recording of the stock items in the stock sheets together with the additions or calculations of the totals if it’s correct or accurate(Saroyan, and Amundsen, 2001). It will as well hinder me as the auditor from checking the disclosure of the stock items in the statement of financial position as at the end of the accounting period.

Need for qualified staff to take stock

There is an increasing need to employ professionals who can follow instructions provided by the management of Davis Hydraulics Ltd(Saroyan, and Amundsen, 2001). The experts can check that the stock is properly valued at the year-end, for example, cost net realizable value of the stock item.

Incorrect layering

Ensuring that the system has assigned a cost of an article based on the inventory layer in which it’s located. The inventory layer can either be First in First out, (FIFO) or Last in First out, (LIFO)(Saroyan, and Amundsen, 2001). The incorrect layering has resulted in many companies getting wrong information about the stock value in the warehouses.

Apply correct layering

The application of FIFO and LIFO should be well understood by the stock takers to ensure that the resultant count is accurate.

Recommendations

The management should take into account measures that will ensure the stock take process is a success. There should be a specialization of duties and responsibilities as this will make sure that the final tally gives only a true and a fair view of the stock details. Also to note, the management of Davis Hydraulics Ltd should encourage the assignment of qualified professionals as this will aid the accuracy of the resultant stock value(Lawn, 2007). Additionally, there should be close monitoring of the employees conducting the stock take process to ensure they give the exact figures. The stock valuation should be taken into consideration, and the management should make sure that the stock counted is equally valued. It will enable the management accountant to advise the management properly on the financial position and the profitability of the company as a whole.

Conclusion.

I realized as an auditor of Davis Hydraulics Ltd; I need to attend the stock count exercise to; verify that the client owns the stock through inspection of the documents of the title. Also, to ensure that the stock number is carried out accurately, and obsolete or damaged items are properly recorded. Furthermore, to ensure that suitable accounting policy is adopted in the stock valuation and assess the consistency in the application of the system.

As an auditor, I should be able to trace the items that have been counted during the stock taking to confirm that they were finally transferred to the actual stock sheet. I would be in a position to bring to the attention of the management any problems encountered during the exercise and caution them not to experience the same in the future. The measures should be in such a way that the international assessing principles are applied to the later to avoid giving a misleading misrepresentation of the company’s non-current properties such as inventory items.

 

 

References

Blatchford, O. and Capewell, S., 1997. Emergency medical admissions: taking stock and planning for winter. BMJ: British Medical Journal, 315(7119), p.1322.

Cullinan, C.P., Du, H. and Jiang, W., 2010. Is compensating audit committee members with stock options associated with the likelihood of internal control weaknesses?.International Journal of Auditing, 14(3), pp.256-273.

Earley, P.C. and Gibson, C.B., 1998. Taking stock in our progress on individualism-collectivism: 100 years of solidarity and community. Journal of management, 24(3), pp.265-304.

Hasbrouck, J., Sofianos, G. and Sosebee, D., 1993. New York Stock Exchange systems and trading procedures. Director, 212(998), p.0310.

Hocking, C., 2000. Occupational science: A stock take of accumulated insights. Journal of Occupational Science, 7(2), pp.58-67.

Lawn, P., 2007. A stock-take of green national accounting initiatives. Social Indicators Research, 80(2), pp.427-460.

Leventis, S., Weetman, P. and Caramanis, C., 2005. Determinants of audit report lag: Some evidence from the Athens Stock Exchange. International Journal of Auditing, 9(1), pp.45-58

Maguire, M., Grubin, D., Lösel, F. and Raynor, P., 2010. ‘What Works’ and the Correctional Services Accreditation Panel: Taking stock from an inside perspective. Criminology and Criminal justice, 10(1), pp.37-58.

Marx, G.M., Steer, C.B., Harper, P., Pavlakis, N., Rixe, O. and Khayat, D., 2002. Unexpected serious toxicity with chemotherapy and antiangiogenic combinations: time to take stock!.Journal of clinical oncology, 20(6), pp.1446-1448.

Naidoo, V., 2009. Transnational Higher Education A Stock Take of Current Activity. Journal of studies in international education, 13(3), pp.310-330.

Parker, S.K. and Collins, C.G., 2010. Taking stock: Integrating and differentiating multiple proactive behaviors. Journal of Management, 36(3), pp.633-662.

Pease, K., 1998. Repeat victimisation: Taking stock. London: Home Office Police Research Group.

Saroyan, A. and Amundsen, C., 2001. Evaluating university teaching: Time to take stock. Assessment & evaluation in higher education, 26(4), pp.341-353.

Taffler, R.J., Lu, J. and Kausar, A., 2004. In denial? Stock market underreaction to going-concern audit report disclosures. Journal of Accounting and Economics, 38, pp.263-296.

Wunder, S., Engel, S. and Pagiola, S., 2008. Taking stock: A comparative analysis of payments for environmental services programs in developed and developing countries. Ecological economics, 65(4), pp.834-852.

 

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