Stocktaking of Packaged Materials (Barrels, Boxes or Bags) stacked in Solid Formation

What special procedures should an independent auditor adopt in the case of large quantities of packaged materials stacked in solid formation?

An independent auditor sometimes comes across a situation where packaged materials contained in barrels, boxes, or bags are stacked in a solid formation. In such cases, the possibility of fraud by
means of a so-called “hollow square” within the solid formation.
It should be kept in mind that we cannot solely rely on physical stocktaking for opinion. The physical
stock taking and the records are complementary and support each other.

• Where the records are defective, physical inventory is the principal source of reliance.
• On the other hand, where the reverse situation exists and especially where inventory checks are made on a surprise basis, the physical inventory is primarily a check on the records.

For example, a sugar refinery that kept its raw sugar (in bags) in piles for each lot, had received a
cargo of raw sugar within two weeks of the inventory date. The auditor had the evidence of the stock
records, the receiving records, the invoice and other documents as to the quantities involved. He was
also satisfied from his inquiries, that the sugar had been received. By means of this evidence and his
own inspection, he was able to satisfy himself without further precautions against a “hollow square.”

In cases, where the material amount of the inventory involved and the supporting evidence is not so strong, it is the duty of the Auditor

• To have someone for inspection of the stock or
• To require the client to move enough of the goods in solid formation to prevent the possibility of a “hollow square”.

This latter type of inventory situation requires the need for advance planning by the auditor with the
client, in order that stacked goods may be so “deployed” as to avoid the existence of a “hollow square”.
It is not possible to set up uniform procedures that will apply in all cases. The procedures must be
determined by the exercise of judgment in the light of all the circumstances of the particular situation.

Sahil Goyal, Audit Associate, SW India