Physical Inventory Verification

Physical Inventory Verification

KORAH AND KORAH, CHARTERED ACCOUNTANTS

SA 501 – Audit Evidence – Specific Considerations for Selected Items

• SAAE – existence & condition of inventory
• Things to remember while attending PV
• When PV is on a date other than the date of FS
• When attendance at PV is impracticable
• Inventory lying with 3rd party

AS 2 – Valuation of Inventories

• Valuation – Cost or NRV
• Determination of cost

CARO Clause (ii) – Inventories

• PV at reasonable intervals
• Dealing with material discrepancies

EXISTENCE & CONDITION

Attendance at PV

• Evaluate mgmt’s instructions & procedures
• Observe
• Inspect
• Perform test checks

PV at a date other than the date of FS ➞ Perform audit procedures to get SAAE on the recording of changes between the 2 dates

Attendance at PV is impracticable ➞ Perform alternate audit procedures

POTENTIAL CHALLENGES IN THE CURRENT ENVIRONMENT

• Management is unable to conduct yearly PV
• PV by mgmt at a date other than the date of FS
• Where it is impractible for auditors to attend PV
• Inventory held with third party
• Inventory in transit

MANAGEMENT UNABLE TO CONDUCT PV

• Should inform TCWG and auditors with the reasons

INVENTORY HELD BY A THIRD PARTY

• Direct confirmation for quantities & conditions
• Not involving the mgmt
• Read and understand the contract with the third party

INVENTORY IN TRANSIT

• SAAE – location & condition
• Documentary records regarding purchase / sale

PV ON A DATE OTHER THAN THE DATE OF FS

Perform audit procedures to obtain SAAE about whether the changes between the 2 dates are properly recorded

SAAE for?

• Proper adjustment in records
• Reliability of records
• Reasons for differences between books and physical

What about internal controls?

• Check the effectiveness of controls over the conduct of PV [Section 143(3)(i)] including the quality of records and security of inventory

Performing “roll-back procedures” to the BS date

Q. How to arrive at the balance as on the BS date if PV is conducted on a date other than the date of FS?

BALANCE PHYSICALLY VERIFIED ON THE DATE
(+) ISSUES BETWEEN THE DATES
(-) RECEIPTS BETWEEN THE DATES
EXPECTED STOCK BALANCE AS ON DATE OF FS

WHERE IT IS IMPRACTICABLE FOR AUDITORS TO ATTEND PV

• “Impracticable” – nature & location of the inventory but not general inconvenience
• To perform alternate audit procedures to get SAAE about existence & conditions:
  • Inspection of documents for subsequent sale of items purchased prior to PV
  • Evaluation of controls with respect to the purchase and sale of items
• Using the work of an Internal Auditor
  • Direct assistance relating to observations of inventory counts
  • Understand & evaluate the competence
  • Obtain PV instructions from mgt and give it to IA for compliance
  • Issue own instructions to IA with sample size
  • Inform IA about deliverables
• Use of technology in inventory counting
  • Video Call
  • Inherent limitations – hiding of obsolete / damaged stock

REPORTING REQUIREMENTS