If stock is material, ISA (UK) 501 requires the auditor to attend the physical stock count unless that is impracticable, so it can evaluate the count instructions, watch the count, inspect the stock and do its own test counts. The count is the company’s, not the auditor’s: the directors organise it and the auditor observes. A missed or badly run count can leave the auditor without evidence it cannot recreate later, which may lead to a modified audit opinion.

Why do auditors attend stock counts?

Stock is easy to overstate and hard to check after the event. ISA (UK) 501 paragraph 3 sets the objective as obtaining sufficient appropriate evidence about the existence and condition of inventory. Paragraph 4 requires the auditor, where stock is material, to attend the physical count unless impracticable, and to:

  1. evaluate management’s instructions and procedures for recording and controlling the count;
  2. observe the count procedures being performed;
  3. inspect the stock;
  4. perform test counts;

and then to check that the final stock records accurately reflect the count results.

There is also a legal reason the count exists at all. Section 386(4) of the Companies Act 2006 requires a company dealing in goods to keep statements of stock held at the end of each financial year and all statements of stocktakings from which they were prepared. The count sheets are part of the company’s statutory accounting records.

Attendance gives evidence on quantity and condition, not on ownership or value. Paragraph A6 notes that inspection helps establish existence, though not necessarily ownership, and helps identify obsolete, damaged or ageing stock. Valuation is tested separately; see stock valuation.

What will the auditor look at in the count instructions?

Paragraph A4 lists what good instructions should cover, and it is a useful checklist for anyone writing them:

  • control over count sheets, including collecting used sheets, accounting for unused ones, and count and recount procedures;
  • identifying the stage of completion of work in progress;
  • identifying slow moving, obsolete or damaged items;
  • identifying stock owned by third parties, such as goods held on consignment;
  • how quantities will be estimated where items cannot be counted individually;
  • controlling movements between areas, and goods received and despatched before and after the count, so that cut off is correct.

Most firms ask to see the instructions a week or two in advance so they can raise points before the day.

What happens on the day?

Paragraph A5 explains that the auditor watches how the count is run, particularly controls over stock movements before, during and after the count, and may take copies of cut off information such as the last delivery notes and goods received notes. Paragraph A7 describes test counts in both directions: tracing items from the count sheets to the physical stock, which tests accuracy and existence, and from the physical stock to the count sheets, which tests completeness. Paragraph A8 notes the auditor may take copies of completed count records so it can later check the final stock listing has not been changed.

Illustration only. A builders’ merchant counts its stock on 31 March, its year end. The auditor selects 25 lines from the count sheets and counts them, and picks 25 items off the shelves and finds them on the sheets. One sheet shows 400 bags of cement where the auditor counts 40; the count team corrects it on the spot. The auditor also notes six pallets of damaged plasterboard, records the last goods received note number and despatch note number, and photocopies the sheets. At the audit, it checks the final listing still shows 40 bags, that the damaged plasterboard has been written down, and that invoices either side of the year end match the cut off numbers.

What if the count is not at the year end?

Paragraph 5 requires the auditor, where the count is at another date, to obtain evidence that changes between the count date and the year end are properly recorded. Paragraph A9 says whether this works depends on how effective the controls over stock movements are. Where a company runs a perpetual stock system with rolling counts, paragraphs A10 and A11 have the auditor look at how reliable those records are and why count differences arose. Large differences between book and physical quantities suggest the controls are not working. The difference between perpetual and periodic systems is covered in inventory systems.

What if the auditor cannot attend?

The standard draws a clear line between two situations:

Situation What ISA (UK) 501 requires
Unforeseen circumstances prevent attendance (paragraph 6) The auditor makes or observes some counts on an alternative date and audits the transactions in between
Attendance is impracticable (paragraph 7) The auditor performs alternative procedures; if these cannot give sufficient evidence, the opinion is modified under ISA (UK) 705

Paragraph A12 says impracticable means something like stock held where the auditor’s safety is at risk. General inconvenience is not enough, and difficulty, time or cost does not justify skipping a procedure for which there is no alternative. Paragraph A13 gives an alternative procedure: inspecting documents for the later sale of specific items bought before the count. Where nothing works, ISA (UK) 705 paragraph 13 requires a qualified opinion if the possible effects are material but not pervasive, and a disclaimer if they are material and pervasive. See audit opinions.

What about stock held by someone else?

Where material stock is in the custody of a third party, such as a bonded warehouse or a processor, paragraph 8 requires the auditor to request confirmation of quantities and condition from the third party, or carry out inspection or other procedures, or both. Paragraph A16 suggests other procedures where there is doubt about the third party, including attending its count, obtaining a report on its controls, or inspecting warehouse receipts. The confirmation process is explained in bank and debtor confirmations.

Why is the first year of an audit a problem?

Opening stock affects this year’s profit. ISA (UK) 510 paragraph A6 explains that audit work on closing stock gives little evidence about stock at the start of the year, so additional work may be needed, such as observing a current count and reconciling back to opening quantities, testing the valuation of opening items, or testing gross profit and cut off. The illustrative report in ISA (UK) 510 shows a qualified opinion where the auditor was appointed after the opening count and could not find alternative evidence. Companies newly needing an audit, for example because they have grown past the audit exemption limits, should appoint the auditor before the year end count.

How should a company prepare?

  • Agree the count date with the auditor early, and tell it promptly if the date or locations change.
  • Send written instructions in advance, covering the points in paragraph A4.
  • Tidy and label stock, and separate damaged, obsolete, returned and third party goods.
  • Stop or tightly control movements during the count, and record the last despatch and receipt document numbers.
  • Use prenumbered count sheets, count in teams of two, and recount differences.
  • Keep the signed count sheets with the year end records.

What are the common mistakes?

  • Forgetting to tell the auditor the count date, leaving no way to observe it.
  • Printing count sheets with book quantities already filled in, so counters simply tick them.
  • Counting goods already invoiced to customers but not yet collected, or omitting goods in transit that the company owns.
  • Changing the stock listing after the count without a documented reason.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.