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
If the auditor is unable to obtain SAAE by performing alternate audit procedures, then
Limitation of scope
Modified Audit Opinion
Qualified or Disclaimer depending on the level of pervasiveness