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John Selwood's Q & A's

Questions this month focus on audit evidence relating to stock, and land and buildings

Question: An audit client has subcontracted out the holding of all its stock. Previously it used its own warehouse, which has been sold, and now it is using a company that holds stock for a number of different suppliers. This stockholder undertakes the year-end stocktake and produces the year-end stock valuation. Now that an expert is being used to count stock, do I need to attend the year-end stocktake? The stock is located at the opposite end of the country from my office, so not needing to attend the stocktake would be welcome.

Answer: Arriving at the answer to this question is somewhat involved. First, there are two broad audit issues relating to stock – existence and valuation. The audit of the stock valuation will not be particularly different where the stock is held by a third party. As an aside, I am not sure that I would regard the stockholder as ‘management’s expert’ from an audit perspective, unless the valuation of stock requires particular expertise. I suspect that management will finalise the stock valuation, in terms of stock provisions, and this is often where the audit risk is. The fact that a third party assisted with the valuation might affect audit risk, but it is unlikely to change the nature of the audit procedures to be planned.

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