Audit evidence for Inventory - Specific considerations

 

If inventory is material to the financial statements, the auditor must obtain sufficient appropriate audit evidence regarding the existence and condition of inventory.

Obtaining audit evidence about the existence and condition of inventory the auditor could face four situations:

1.           Physical inventory counting is taking place at the date of the financial statements.

2.           Physical inventory counting is taking place other than at the date of the financial statements.

3.           The auditor is unable to attend physical inventory counting due to unforeseen circumstances.

4.           The auditor attendance at physical inventory counting is impracticable.

1.      Physical inventory counting is conducted at the date of the financial statements

If the physical inventory counting is conducted at the date of the financial statements the auditor should:

(a) Attend at physical inventory counting to:

·        Evaluate management’s instructions and procedures for the company’s physical inventory counting.

·        Observe the performance of management’s count procedures.

·        Inspect the inventory; and

·    Perform test counts (by tracing items selected from management’s count records to the physical inventory and tracing items selected from the physical inventory to management’s count records); and

(b) Perform audit procedures over the company’s final inventory records to determine whether they accurately reflect actual inventory count results.

 2.  Physical inventory counting is conducted other than at the date of the financial statements

If physical inventory counting is conducted at a date other than the date of the financial statements, the auditor must, in addition to the procedures describe above, perform audit procedures to obtain audit evidence about whether changes in inventory between the count date and the date of the financial statements are properly recorded.

3.      The auditor is unable to attend physical inventory counting due to unforeseen circumstances

In this situation the auditor should make or observe some physical counts on an alternative date and perform audit procedures on intervening transactions.

4.      The auditor attendance at physical inventory counting is impracticable

This may be due to factors such as the nature and location of the inventory, for example, where inventory is held in a location that may pose threats to the safety of the auditor. In this situation the auditor shall perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory. For example, inspection of documentation of the subsequent sale of specific inventory items acquired or purchased prior to the physical inventory counting may provide sufficient appropriate audit evidence.

IF is not be possible to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by performing alternative audit procedures, the auditor to modify the opinion in the auditor’s report as a result of the scope limitation.

If inventory  is under the custody and control of a third party is material to the financial statements the auditor must:

(a) Request confirmation from the third party as to the quantities and condition of inventory held on behalf of the company.

(b) Perform inspection or other audit procedures appropriate in the circumstances. (Inspecting documentation regarding inventory held by third parties, for example, warehouse receipts).

ISA 501