Physical Inventory Verification
Key Audit Considerations amid COVID-19
Auditing and Assurance Standards Board (AASB)
The Institute of Chartered Accountants of India
A. BACKGROUND
Physical verification of inventory is the responsibility of management of the entity. Management is required to establish procedures under which inventory is physically counted at least once a year to ensure existence, condition and support valuation of inventory.
The Companies (Auditor’s Report) Order, 2016 (CARO 2016) also requires auditors to comment on “Whether physical verification of inventory has been conducted at reasonable intervals by the management and whether any material discrepancies were noticed and if so, whether they have been properly dealt with in the books of account”.
SA 500, “Audit Evidence” prescribes that the objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion. When inventory is material to the financial statements, SA 501, “Audit Evidence – Specific Considerations for Selected Items” requires that the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by:
(a) Attendance at physical inventory counting, unless impracticable to:
i. Evaluate management’s instructions and procedures for recording and controlling the results of the entity’s physical inventory counting;
ii. Observe the performance of management’s count procedures;
iii. Inspect the inventory; and
iv. Perform test counts; and
(b) Performing audit procedures over the entity’s final inventory records to determine whether they accurately reflect actual inventory count results.
The term “impracticable” has been explained in paragraph A12 of SA 501 as below:
“A12 In some cases, attendance at physical inventory counting may be 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. The matter of general inconvenience to the auditor, however, is not sufficient to support a decision by the auditor that attendance is impracticable. Further, as explained in SA 200, the matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive.”
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Compendium of Auditing Guidance Issued by Auditing and Assurance Standards Board on Various Aspects amid COVID-19
| S. No. | Title | Date of Issue |
| 1. | Impact of Novel Corona Virus (COVID-19) on Audit of Financial Statements for the Financial Year ending March 31, 2020 (Issued jointly with Accounting Standards Board of ICAI) | March 27,2020 |
| 2. | Going Concern – Key Considerations for Auditors amid COVID-19 | May 10,2020 |
| 3. | Physical Inventory Verification – Key Audit Considerations amid COVID-19 | May 13,2020 |
| 4. | Auditor’s Reporting – Key Audit Considerations amid COVID-19 | May 17,2020 |
| 5. | Subsequent Events – Key Audit Considerations amid COVID-19 | May 23,2020 |
Good article , but no word on valuation and inventory in detail as per AS 2 and IFRS , We require as per IFRS.