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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
$8,434,889.09 was received on December 31 from the Anglonesia Rehabilitation
and Reprogramming Institute these are also counted in inventory.
5. Count Tag on every pallet was observed to avoid double counting of single item.
But information listed on tags was not subject to review by any second count team
6. Proper consideration should be paid to the physical condition to the inventories
In Given Case, some pallets of shoes stacked were near the back of the warehouse
which were covered with dust and looked very old.
7. Various other procedures were followed, in order to ensure working of controls
and to test their adequacy.

Original physical verification sheets were reviewed and some valuable
items were traced and selected into the final inventories.

Details of final inventories were compared with stock records and other
corroborative evidences like stock statement submitted to banks for
hypothecation.

The procedures adopted by the entity to account for the movement of
inventories from one location to another within the entity were reviewed.

Inquiry had been made relating to the security procedures to prevent
unauthorized removal or materials from the site by either employees or
others.

It was being ensured that warehouse or storeroom was orderly arranged
and maintained and the stock adequately protected against the weather or
other losses.

Examination of sample of documents was made for evidencing the
movement of stock into and out of stores, including documents pertaining
to period shortly before and shortly after the cut-off dates, and checked
whether the stock represented by those documents were included or
excluded as appropriate.
These were the Control objectives:

To ensure that all the adjustment to stock valuations are suitably
investigated and authorized

To ensure the accounting system and statutory accounts accurately reflect
the value of current inventory stocks

To ensure that all stock purchases, issues and other movements are valid
and correctly reflected in the inventory accounts
.

That inventory items utilized in either production or customer sales
activities are correctly charged out of the inventory accounts and
accounted for in target system

To ensure stocks are correctly priced
Annexure I
Apollo Shoes
Inventory Count Instructions
1.
Counts will be performed in teams of two, consisting of a counter and a writer.
2.
For each bin, identify the item located in it and the count of that item. If more
than one item is in the bin, write in the bin number, the additional item
description, and the count in the open space at the bottom of your count sheet.
3.
After counting a bin, place an inventory count tag on the bin to mark it as having
been counted.
4.
After a team finishes its counts, each count team member should write his/her
name in the "Count Team" line on each count sheet and the team should then turn
in the sheets to the inventory manager.
5.
After receiving the count sheets(s), the inventory manager will review and sign
them, and then submit them to the inventory clerk for processing.
6.
The inventory clerk will enter the counts into the computer system, run a variance
report, and submit the variance report to the inventory manager.
7.
The inventory manager will assign recounts for variances to the count teams.
Each team will then recount the assigned bins and initial beside the recount on the
count sheet.
8.
The recounts will be resubmitted to the inventory manager, who will review and
sign them, and then submit them to the inventory clerk for final entry.
9.
There will be NO sales and NO movement of inventory during the count.
Annexure II
Slow Moving Inventory
Sku#
10080
20060
20070
30260
Style
Type
Siren
Men's
Speaker
Men's
Speaker
Men's
Spotlight Women's
Size
10 1/2
8 1/2
9
8 1/2
Quantity
4585
15,273
15,425
4,489
Unit Price
139.76
116.71
116.71
205.27
Ext Price
640,799.60
1,782,511.83
1,800,251.75
921,457.03
Annexure III
Gratuitous Purchase of Slow Moving Goods
Description
20050
Speaker
Men's- 8
Invoice
No.
Date
6116
4162
1954
1004346
Dec 2
6902
0
8856
1004347
Dec 26
2684
0
11540
15702
4162
11540
1004345
Aug 8
2013
179
1834
1004346
Dec 2
1945
0
3779
Dec 26
0
0
3779
3958
179
3779
1004345
Aug 8
2580
1648
932
1004346
Dec 2
2936
0
3868
1004347
Dec 26
1132
0
5000
6648
1648
5000
TOTAL
10210 Siren
Women's7
Balance
Aug 8
TOTAL
10200 Siren
Women's6.5
Sold
1004345
TOTAL
30250
Spotlight
Womn's-8
Unit
Purchased
1004345
Aug 8
3027
1470
1557
1004346
Dec 2
2896
0
4453
1004347
Dec 26
1328
0
5781
TOTAL
7251
Assumption: First in First out basis
5781