Inventory Observation Memo

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INVENTORY OBSERVATION MEMO

1. Before commencement of verification, the management should issue appropriate instructions to stock taking personnel. Such instruction should cover all phases of physical verification and preferably be in writing

Auditor should examine these instructions to assess their efficacy

In the given Case; Manager, Andrew Jacobs issue said instructions to count team. But, while issuing instructions, no consideration was made to: • Stock held by company but related to other parties, like goods to be returned to the supplier but not yet done, Goods sold but delivery not yet taken by customer. • Stock in Transit

• Stock in Process
• Stock with customers, in case of sales return or in case of sales on the sale or approval basis. • Stock of obsolete items and scrap.
However, other issued instructions had been followed by count team. {Annexure I: Copy of these Instructions}

2. The procedures for identifying defective, damaged, obsolete, excess and slow moving items of inventory should be well designed and must operate properly. There should be appropriate policies regarding these. Write offs of either excess, scrap or obsolete stocks should be valid and authorized. As working capital blocked in Slow moving Goods lead to loss in interest and defective, damage and obsolete items also lead to financial loss to company.

In the given case, it had been observed that Company does not have any appropriate policies regarding these. Many instances of slow moving goods were identified. Also, there were some cases where slow moving goods were purchased; in spite of the fact that, such goods were already in stock in large quantities. {Annexure II and Annexure III}

Company does not have any policies regarding identification and disposal of obsolete goods. Some pallets of obsolete shoes were found near the back of the warehouse, with no written records. Such ineptitude of Company gives rise to risk of loss of obsolescence, non-identification of inventory theft, scrap of good inventory, etc. and inventory is subject to risk of physical deterioration and from unauthorized use or disposal

3. In order to ensure the effectiveness of the count procedures, there should be at least one person who is independent of the regular storekeepers and the auditor should also perform test- counts. 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. Thus there is need of proper sampling.

In the given Case, none of the persons involved were independent of the regular storekeepers. Out of the total 98 count sheet, 7 attached count sheets are rechecked. These 7 count sheets were selected on Random basis, without being pre-information to Apollo Personnel. No differences had been observed between test counts and those counted by the client. Also numbers of boxes throughout the warehouse were made open to ensure that shoes were in each of them.

4. Ideally there should be no movements of stocks when the physical verification is carried out. On occasions, however, it may be necessary for the entity to continue the production, receiving or dispatch operations during the physical verifications. In such circumstances, it essential that the entity as the procedures to identify and record such movements. It should also be examined whether the entity has instituted appropriate ‘cut-off Procedures’ to ensure that – Good purchased but not received have been included in the inventories and the liability has been provided for. – goods sold but not dispatched have been excluded from the inventories and credit has been taken for the sale

In the given Case, It was instructed that there should be no sales and no movement of inventory during the count. However, shipment of shoes costing...
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