The Role Of Internal Auditors In Stock Taking



Internal auditing has been described as an independent appraised activity written an organization for the review of accounting financial to management. It may form an important part of the internal control system, but it is not an indispensable part thereof.  It was however, the development of joint stock companies that brought about the rapid growth of auditing.

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Since the share holders delegate management to the board of directors and periodically, the management submits to the share holders the accounts of the company in order that members may see that financial position of the bearing in mind that most of the shareholders do not have the ability to really understand these account, the need arose for some satisfied that the accounts presented did show on an objective view of the financial position of the company’s operations. It was for this reason that entirely independent professional auditor were appointed to verify the genuineness of the accounts presented by management.

However, having seen briefly the emanation of auditing generally in chapter one, our attention is going to be concentrated on the review of internal auditing.

Some authors like Howard F. Steler – Auditing principles, second edition, page 69 of university of Kansas, U.S.A. dealt on the historical background of Internal auditing. He is of the view that the principle factor in its emergency was the extended span of control faced by management in business firm employing thousands of people and conducting operation from widespread locations. Defalcation and improperly maintained accounting records wee obvious problems under these circumstances. The solution was of, course, to provide the need auditing services on an internal basis particularly as the magnitude of the problem made it possible for one or more person to specialize in such auditing services and devote their full time to the need of a single company.

Other advantages also resulted from an internal approach to the problem. Interned auditors tended to become better acquitted with the procedure and problems of the company and the auditing activity could be carried on continuously rather then once a year when auditing services were utilized.

He is of the opinion that the growing recognition by management of the benefits of good internal control and the complexities of an adequate system of internal control in a large business have led to the developing of internal auditing as a form of control over all other internal controls.

On further review, the researcher discovered that internal audit is an area of auditing that has been neglected for long.

Most accounting write-ups are on accounting theory and the external audit functions. The neglect of internal auditing by accounting writers does a great deal of injustice to a tool with according to the institute of chartered accountants of England and Wales has the major concern of assuming that the internal check and accounting system are effective in design and operation.

  1. D. Mark – Auditin in depth. The professional account, Vol, iv, 1998 page.

One of the important functions of internal audit department is to objectively repot its findings to management and recommend corrective action where necessary.

If an internal auditor cannot objectively report, communicate and follow up his recommendations, than he is not assisting management in promoting he efficient attainment of the organizational objective.

Recently, many organization have started to realize the importance of having internal audit department because of it’s contribution to management efficiency, especially in stocktaking.

According to the American Institute of internal Auditors Internal auditing was seen as the independent appraisal activity with an organization for the review of the accounting, financial and other operations as basis for protective and constructive services to management.

From the viewpoint of this body, internal auditing is a firm of control, which functions by measuring and evaluating the effectiveness of other kinds of control. Therefore, the independent of the internal auditor, should not be compared with that the independent accountant and since he (internal auditor) receives authority from management, he should retained the same view point and objectives of management but at the same time, should posses sufficient independence in order to make objective recommendations to management without bothering whose horse is gored.

In another review, A. D. chamber in his work titled “internal auditing theory and practice” (London, pitman books, 1981) page 5 described internal auditing as the eyes and ears of management.

This slogan crystallized the change of emphasis of internal auditing from a check of detailed compliance with laid down accounting procedures on behalf of the chief accountant to an aid to management in achieving efficiency and effectiveness in all its operations. The management primary objective of internal audit is to assist management to manage better. The internal audit, if properly staff and if attains independence within an organization, can be a very effective tool that would and management in its function of control and thereby enhance management efficiency.

Furthermore, he emphasized that the internal auditor should be an expert in internal control since he appraises its effectiveness and not responsible for the establishment of the controls. That it is always management, which should identify whether or not these contacts are being exercised and if not, specify appropriate recommendations and follow them up. Naturally, a large part of the work of the internal audit department will be of the routine vouching and verification type but the system approach is regarded as being more valuable. The basis idea is that one appraises the system of control to see whether it is effective.

When examining system of internal control, the internal auditor will have regard to the basic principle of internal control, that is ensure that collusion becomes essential before Frauds can be perpetrated as well as appraising the operating of the control itself.

In this book, A. D. Chambers, Ibid page 6 went on to relate internal auditing to internal control by using the definition of internal auditors; For United States of America. Though this definition has earlier been given, but to put across this man’s view point, the definition has earlier been given, but to put across this man’s view point, the definition runs thus “internal auditing is an independent appraisal of activity within an organization for the review of accounting, financial and other operations a basis for service to management”.

He attributed the definition to management control, which functions by measuring and evaluating the effectiveness of other controls.

Sometimes, a look at modern internal auditing seems as if the changes in auditing procedure and philosophies, which have occurred over the past decade amounted to something basically different from its old counterpart.

The word internal auditing according to A. d. Chambers, not now in business circles but the present in business circles but the present concept of the internal auditors scope and objectives is very new.

Few universities, polytechnics and colleges have recognized that fact that a new and different branch of accounting is firmly entrenching itself through its deeds in the accounting divisions of our Forward – Looking business organization, many of which even yet, has not fully understand and appreciate an internal audit functions or confuse it with routine checking.

These brief comments suggest that internal auditors are no longer satisfied to stop with a more confirmation of the mathematical accuracy of the amounts reported in a company’s financial statement.

Instead, they are more concerned with a detailed appraisal of the various company operations that are responsible for the figures in the accounts.

Essentially, the primary purpose of an internal audit investigation today is to determine whether proper safeguards have been established by management at all operating level so that the company will receive full value for each naira of expense incurred.

The new orientation makes a lot of difference in perception of the audit functions. It is one thing for the auditor to be satisfied after verify the naira of the reported inventory; but quite another thing for him to determine whether established procedure are being followed by competent operating personnel in order to minimize the amount of slow – moving stocks, scrap and absolute items and also determine if purchasing procedures themselves are being carried out effectively.

But however, different these levels of investigation may be and despite the more exhaustive inquiry by the modern functional or business type – audit, the fact remains that the same underlying documents are used.

Dr. P. A. boating, the graduate Accountant, vol 11 page 14, described the types of audits undertaken by the internal auditors under two headings.

  1. The accounting and financial audit
  2. Operational audit


In this case, Dr. P. A. Boateng said that the internal auditor’s objective in accounting and financial audit is usually to appraise the adequacy of the system of internal control.

According to him, in this type of audit, the emphasis is primarily on adequacy of the accounting control including organization plans to ensure the separation of duties concerned with record keeping and reporting from those concerned with custody of the asset and system of authorization and approval.


His analysis of operational audit went down to say that natural out growth of the functional approach to internal auditing has been to expand the internal auditing has been to expand the internal auditing horizon beyond traditional accounting and financial activities. He said that the term operational audit refers to appraised of the administrative control over activities other than those included in accounting and financial audit.

That the operational audit concentrates on seeking out aspect of operations in waste, inefficiency and cost would be subject to reduction by this introduction or improvement of operating controls. The internal auditor’s objectives are based on the need of the management he serves. In attempting to meet managerial needs, the internal auditor samples the work performed to see whether it is done in accordance with approved procedures. He verified the accuracy and the consistency of the information contain in operating report and studies the format of these records to a meaningful form. In operation auditing according to Dr. P. A. boating (a managerial too for effective internal control the graduate accountant vol. 11, page 15, 1981). The internal auditor is seen as part of management team taking management approach in closing operating areas to be reviewed in evaluating the method of operations and the control that he finds.

Mr. A. W. Holnes, the internal auditors and the management. “The professional account” vol. 5 page 15, in his publication in the magazine of institute of chartered accountants England and Wales, dealt with the relationship between the internal auditing and management in an organization. In this piece of work, he was saying that the overall objective of internal auditing is to assist all members of management in the effective discharge of their responsibilities function, them with objective analysis, appraised, recommendations and pertinent comments concerning he activities reviewed. He also said that the internal auditor should therefore be concerned with any phase of business activity where in he can be of service to management.

The attainment of this overall objectives of services to management appraising the Soundness adequacy and application of accounting, financial and operating controls ascertaining the extent of compliance with established policies, plans and procedures, ascertaining the extent to which company assets are accounted fro, and safeguard from losses of all kinds, ascertaining the reliability of accounting and other data developed within the organization and appraising the quality of performance in carrying out assigned responsibilities.

In this view, he is saying that management expects the following from internal audit:-

  1. The internal auditor is expected to look at the various functions of the business and evaluate then as one overall function.
  2. They should also be thoroughly familiar with corporate policies and internal controls and to know the fact upon which he is reporting.
  • He has to present findings in a clear, concise written report and to instigate corrective action as soon as it is obviously necessary.
  1. The internal auditor should be available on demand to all areas of the company for consultation on matters and techniques of contract.
  2. He should have the time to evaluate, analyze and recommend. In addition, he should be ethical and competent.

Although the auditor is deeply concerned with the existence and quality of all significant control features, he should never give management the impression that the audit function itself acts as a substitute for effective management control. He responsibilities of management in this direction are paramount and are based upon statutory requirements derived from the principles of stewardship.

The presence of internal auditor should never therefore will the management into attitude of compliancy. He also saw internal auditing as a staff function rather than a line function. Therefore the internal auditor does not exercise direct authority over other persons in the organization whose work he reviews and appraise polices, plans, procedure and records, but his review and appraisal do not in any way review other person in the organization of the responsibilities assigned to them. Still on his work, he saw saying that any benefits to be derived from the internal auditor’s activities will be accomplished through the medium of report on his findings and recommendation. That it is important that the internal auditor should report as soon as clear distinction between two types of activities.

The first of these is related to the question of responsibility. The independent public accountant’s responsibility is directed towards several different segment of society including stockholders, creditors, various government agencies, sometimes employees and their bargaining agents and the general public. The internal auditor, on the other hand, is responsible only to the management of the company by which he is employed. He is frequently directly responsible to one or move of the top offices of the company. His concern is primarily to assist manager in doing a first race job, of running the company’s affairs of providing them with assurance that the various control mechanisms on which they depend are sound and are working as intended.

Secondly, the difference between the audit work of the internal auditor and the independent public accountant is in their respective approaches to an examination. The independent auditor is concerned with the verification of the statements representing the company’s financial condition at a specific date and the operating result for a specific period. The internal auditor is more concerned with the question of whether or not the record. Keeping system is sound or will provide accurate information on the continuing basis rather than only at certain fixed dates.

He is also concerned with whether the method for accumulating the information unto various regular reports issued ensure that management will have reliable date as a basis for current action rather than as a historical note.

Thirdly, the factor distinguishing the worm of the interest in the company’s system of internal control. The definition of internal control issued by the American Institute of certified Accountants identified two types of internal control, namely, financial and administrative.

The independent public accountant is concerned with the system of financial controls and must be an expert in this field. The internal auditors, while interested in financial control must also be on expert in various types of administrative control since his responsibility runs not only to the accounting and financial executives but across the board of all areas of management. His major function is to provide the necessary assurance to corporate management that the entire system of internal control, both financial and administrative, is sound is operating as intended in all respect.

Thus he must be familiar with he organizational controls, statement and directives, general policy statement and directives, procedures firm operations standards of performance against standards and of all other control media, which go to make up the system of administrative control over the entire area of operations. In this sense, the work of the internal auditor will cover a boarder field than that of the independent auditor.



Stocking is defined as the counting and checking the price and physical quantities of goods or items in the store by selected officials of the company in order to know whether the physical numbers and prices tally with what is written in the bin cards.

The writer kids his hands only on textbooks that dealt on stocktaking and such books are Emile woof “Auditing Today” (Prentice Hall International Inc, London, 1982) page 112.

In this book the author is saying that of all the items that may appear in the balance sheet or trading and manufacturing companies, which requires special attention, is stocks or inventories. Accounting to the author, this item (stock) has always been a problem area during verification of assets by the author.

Readers have been questioning this problem and the author gave some reasons for that as follows:-              

  1. The amounts at which the stocks are stated in the accounts is almost always material in relation to the accounts as a whole have shown that for many companies, the stock figure is the largest single item in the balance sheet. Materiality of this order is, of itself sound o increase the dimension of the verification problem.
  2. It is the only item in the published accounts, which does not also feature, in the closing trial balance. That is it does not arise from the double entry process itself. In certain accounting systems, product costing and financial accounting will be integrated to give a book figure of work in progress for examples but the majority of case, the determination of stock is largely dependent upon physical stocktaking procedures. This factor alone makes the stock figure the most susceptible manipulation.

On further review, Michael J. Prett, Auditing (London Group Limited, London 1982 page 217), in this book he summarized stocktaking under two headings as follows: – Perpetual and Periodic inventory.

  • Perpetual Inventory:-

He described this as a system whereby the quantities of stock are continually maintained through detailed stock record, which note the purchases and movement of individual stocks.  He suggested, that this is achieve through the use of “bin card” at the stock location or centrally maintained records based on goods may be used.  Whatever the system, for these records to have any value, they must be independently checked to the physical stock.  He described this process as “continuous stocktaking”. These internal auditors are the appropriate persons to carry out this task; such that all stocks are countered in rotation at least tow or thee times a year. Provided that this stocktaking reveals no significant errors or discrepancies, the auditors may rely on the figure thereby produced, subject to carryout out audit procedure, to ensure that control is the underlying documentation and observation of the continuous stocktaking procedure.


This will have to be employed in the event that the perpetual system is deemed unsatisfactory or if no such system exists. A periodic inventory system is based on the total counts of the stocks at the period ends, and perhaps at one or more other occasions during the year. This may than be compared to any total stock records that are maintained or reconciled to the known cost of sales figures.

In another review, Alex Morrison in this book entitled “storage and control of stock” analyzed stocktaking under various subheadings as would be seen as we read on. He went on to defined stocktaking as the complete process of verifying the quantity balances of the entire range of items held in stock. Comparing stock and cash, he suggested that since stock is the equivalent of cash, it should be carefully protected, counted and checked in a similarly way.

 PHYSICAL SECURITY                

Under here, he suggested that for an adequate safeguard of stock, it must be properly located in secured buildings or stockyards to which unauthorized persons will not be allowed access. Arrangements must be made for the custody of storehouse keys and security precautions exercised during non-working hours.

The person immediately responsible for the care and custody of stock should be clearly designated; it will normally be the storekeeper in charge of a storehouse or section. His responsibilities should be made known to all concerned, and he must be given proper authority and facilities to fulfill his duties. No stocktaking should take place unless he has been given an opportunity to investigate the position.


Below are number or reasons he gave for carrying out stocktaking exercise:

  1. To verify the accuracy of stock records
  2. To support the value of stock shown in the balance sheet by physical verification.
  • To disclose the possibility of fraud, theft
  1. To reveal any weakness in the system for the custody and control of stock.


Alex Morison, in trying to achieve a satisfactory stocktaking, set out a guideline for effective stocktaking, according to him, a programme should fist of all be drawn up agreed with all concerned, including the finance department and the auditors.

Secondly, stocktaking or cards have to be prepared in advance and all personnel concerned must be instructed in their duties. The arrangement made should deal with all aspects of the job and in particular, the following points:-

  1. Appoint one person to control the whole operations
  2. While stocktaking is in progress, do not have storehouse open for normal business.
  • After the end of the working day before the operation beings, no more issues should be made and no receipt recorded until the stocktaking is complete. The numbers of the last receipt and issue vouchers should be noted and all documents up to and including these numbers posted to the records. At this point, all the records can be ruled off and no further posting are made until the results of stocktaking have been entered.
  1. Take all normal stock including packages, scraps, residues, items on ban and goods under inspection.
  2. Have stocktaking sheets under the control of one individual, consecutively numbered and issued to the staff on duty as required. No duplicate should be allowed and at end of the job, all stocktaking sheets must be accounted for.
  3. Make each person taking stock responsible for a particular section or clearly defined area.
  • Stock takers should proceed in a orderly manner and mark each bin or rack as it dealt with to avoid the chance of checking only item twice and to ensue that nothing is missed.
  • Ay items held which are not the properties of the business ought to be marked or labelled in advance.
  1. List separately any goods, which have been received but not yet taken on charge.
  2. Special arrangement must be made include in the total list of stock, all items belonging to the business which are not on the promises at the time of the check. This concerns free issue stock in the hand of supplier, goods sent out for repair or processing or stock at outlaying operational sites. It is usual to write to the holders of such stock to obtain written confirmation that those items are in their possession.
  3. Return to store all items issued on loan either internally or externally before the stocktaking beings.
  • Show the method of check. That is whether by counting, weighting, measurement or estimation on the tock sheet for each item.
  • Record quantities in terms of the normal unit of issue for the stock concerned. This can be ensured by inserting the appropriate unit of issue on the stock sheet before distribution.
  • The method of pricing should be known and if possible, it is desirable to enter all prices in terms of units of issue on the stock sheet in chance.
  1. Where several widely dispersed stocktaking point exist, stress in transit at the rate of stocktaking must be taken into account.


He listed a number of information that are supposed to be found in a standard stock sheet or cards used or stocktaking s follows:-

  1. Serial number of stock sheet.
  2. Date of stock sheet
  • Location
  1. Vocabulary number
  2. Description
  3. Unit of issue
  • Quantity of stock found
  • Price per unit of issue
  1. Value of stock found
  2. Stock taker’s signature
  3. Remarks column for comment about condition of stock or any other special roles.

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