It is not the auditors' mandate to take inventory or control the taking since that is the organization management's role. The work of an auditor is to observe the taking of stock in the client organization. The auditors attend physical counting of inventory and actively get involved in inspecting the stock to articulate its existence in the company, examine its condition, and take test counts. During the observation, auditors select some inventory items where they perform test counts. The test counts may vary depending upon the degree of risks in inventory misstatement and the clients' inventory value. The test counts will be traced back to the quantities recorded by the organizational counters and ensuring all the inventory’s count tag are accounted for in general ledger.
The purpose of test counts of inventory is to reconcile the inventory count recorded in the company's general ledger. Also, the test counts are used to test the items of higher value in the company. Such is because, for the higher value items, auditors will spend a lot of time test counting them to determine that they are valued correctly in the evaluation report. The auditors are also able to identify errors made during physical counts (Whittington & Pany) . Comparing the test counts to the inventory tags, the auditor will identify a mistake in quantities and identify mistakes in other aspects of inventory, such as part numbers, units of measure, and descriptions. I f the auditor finds deficiencies based on the test counts, one will need to request a further recount. However, the auditor should conduct a tracing exercise of their test counts to the completed physical count. During the tracing, the auditor can spot any indication of inventory tags alterations or fictitious tags that the counting team may have created. Therefore, test counts are very beneficial when it comes to inventory analysis.
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References
Whittington, R. O., & Pany, K. (n.d.). Principles of Auditing & Other Assurance Services (25 ed.). MC Graw Hill Education.
