In this guide
What to Have Ready Before the Auditor Arrives
Have four things ready and most of the friction disappears: a system stock extract as at the cut-off, the movement documents on either side of it, the reconciliations you have already done, and confirmed physical access to every location holding stock. The extract has to come from the system rather than a spreadsheet somebody maintains, because the first thing tested is whether the two agree. Movement documents mean the goods receipt notes, delivery challans and transfer notes for the days around the cut-off, which is where timing differences live. Reconciliations mean the work already reconciling the stock ledger to the general ledger. What cannot be prepared on the day is the part that matters: stock physically arranged so it can be counted, an obsolescence view somebody has actually formed, disclosed godowns, and current insurance. Good preparation does not produce a better opinion; it stops avoidable differences from being reported as real ones.
Records That Must Be Current
Three records have to be current on the cut-off date rather than assembled afterwards, and the difference between a business that maintains them and one that does not is most of the engagement. The stock ledger posted to the cut-off is the first. A ledger that stops several days short means the position being verified does not exist in any record, and it has to be built before anything can be compared, which is reconstruction work performed at counting rates. Purchase and sales cut-off documentation is the second. The goods receipt notes, delivery challans and invoices for the days either side of the cut-off are what resolve timing differences, and they resolve them in minutes when they are filed in sequence and in hours when they are not. This is the single most examined set of documents in the engagement, because the boundary is where the errors are. Goods in transit supported both ways is the third. Stock dispatched and not yet received, and received and not yet booked, each need the document from the other end, since a transit balance supported from one side only cannot be distinguished from a difference somebody has parked there.
Reconciliations to Do First
Three reconciliations done in advance convert a discovery exercise into a confirmation, and each one removes a category of exception that would otherwise have to be investigated during the visit. Physical to book by location is the first and the most useful. Counting internally, location by location, against the system position tells you where the differences are before anybody external arrives, and most of what it finds is put-away and posting error that can be corrected while the stock is in front of you. Stock statement to the ledger is the second, and it is the reconciliation most borrowers have never performed. The statement filed with the bank and the ledger in the accounting system are frequently prepared by different people from different sources, and nobody compares them until an auditor puts them side by side. Doing it yourself means any difference is explained rather than found. Creditors for unpaid stock identified is the third. Establishing which payables relate to goods actually held at the cut-off, rather than producing the whole trade payables balance, is fiddly work that has to be done by somebody who knows the purchases, and doing it in advance prevents a deduction being estimated on the day.
The Site Itself
The physical preparation matters as much as the records, and it is the part that determines how long a team spends on site. Stock arranged so it can be counted means goods stacked accessibly, identified, and not mixed across items within a location. A team that has to unstack a pallet to establish what is in it, or separate two similar items from one heap, is spending counting time on handling. Where stock cannot be arranged, saying so in advance lets the team plan for it rather than discover it. Third-party stock segregated and labelled is the second requirement and it protects the borrower rather than the auditor. Goods belonging to somebody else, held on consignment, at job work, or in storage for a customer, are not the borrower's security, and stock that cannot be distinguished on the floor will either be excluded conservatively or become a question that delays the report. Access, security and staff availability complete it. Somebody has to open every location, accompany the team, answer questions about what is where, and be able to authorise a recount, and a count arranged without confirming who that person is loses its first session finding out.
What the Auditor Will Ask For on Day One
Three documents are requested at the opening meeting, and having them ready sets the tone for everything that follows. The first is the stock statement submitted to the bank for the period, because that is the assertion being tested and the whole engagement is a comparison against it. Producing a different statement at this point, or one that has been revised since submission, is itself a finding. The second is the last audited financial statements, which supply the independently opined closing position that every subsequent statement should reconcile back to, and which establish the valuation basis and the accounting policies the interim figures are supposed to follow. The third is the previous audit report together with its open points. Prior observations that were accepted and then not acted on are the fastest route to a repeat finding, and repeat findings carry disproportionate weight in a credit file. A borrower who can produce the earlier report and show, point by point, what was done about each observation has answered the most damaging question in the engagement before it is asked.
Preparing Without Dressing the Window
There is a clear line between preparation and manipulation, and it is worth naming because businesses cross it without meaning to. Preparation means the records are complete, the reconciliations are done, the stock is arranged so it can be counted, and access is arranged. Manipulation means the position on the count date is made to look different from the position on any other date: goods brought in temporarily, dispatches held back, obsolete stock moved out of sight, or a location left undisclosed. The first saves everybody time; the second is the thing the audit exists to detect, and it is generally detected, because the movements either side of the cut-off are examined precisely for it. Disclose a known problem before it is found. An obsolete balance identified by management, quantified and provided for, is a controlled position; the same balance found by an auditor is a finding that raises questions about everything else. Running your own count first is worth it where you genuinely do not know the position, and a stock audit commissioned on your own terms is the cheapest way to find out.
