The Institute of Chartered Accountant of India (Institute of Chartered Accountant of India) has issued many advisory on various matters of Audit and Accounting. Institute of Chartered Accountant of India has also issued one advisory on important matter i.e. Physical Verification of Inventory for Auditing complied with SAs, Companies Act and others various legal compliances. The primary responsibility of the auditor is to physically attend the inventory counting either at/prior to/ post the balance sheet date as required by SA 501. Even in situations where the auditor opts for alternative audit procedures as envisaged in paragraph B.3 above, the auditor is not absolved from the primary responsibility in respect of attendance at physical inventory counting and thus cannot include a division of responsibility in the auditor’s report in respect of alternative audit procedures carried out.

Due to various restrictions imposed due to COVID-19 outbreak, in certain cases it could be impracticable for auditors to physically attend the inventory counting. In such cases, the auditor would need to comply with the procedures given in SA 501.

The SA 501 has prescribed many alternative audit procedures.

“Such audit procedures include:

  • Evaluation of control design in respect of inventory process and testing whether such controls have operated effectively during the period of audit. Such controls would encompass the processes around purchase and sales which eventually impact the stock balance held at the date of the financial statements.
  • Verification of documentation supporting purchases and subsequent sale of specific inventory items. These procedures would indirectly provide evidence that stock balance which was not physically verified actually existed as on the date to enable subsequent sales and indirectly support and corroborate the assertion of existence.”

These Procedures includes one procedure which can be done very effectively in this scenario which is;

Use of technology in inventory counting

In certain situations where physical attendance by auditors at inventory counting is not possible, they may be able to observe the inventory counting remotely via video call with the help of technology. Auditors would need to ensure the security on these applications. Auditors would need to understand the technological and practical constraints to observing an inventory counting remotely. If auditors are observing an inventory counting remotely, they would need to perform the same procedures as required in case of physically attending the inventory counting. 

Virtual attendance

If the entity intends to conduct a full inventory counting, auditors may be able to attend virtually, for example using video call facilities. This method of gathering audit evidence should be approached with caution as there are inherent weaknesses with this. For example, obsolete or damaged stock may be hidden from view and records-based alternative audit procedures may not detect this. This should be used only in circumstances wherein the inventory items can be identified with a unique reference number etc. so that there are no chances of replacement of inventory during/ after inventory counting. Further, auditors may carry out additional procedures to mitigate the increased risk which might include increasing sample sizes and following up on items tested at a later date. Also, auditors should consider the previous experience while conducting inventory counting at an earlier date (e.g. inventory counting conducted at an interim date before the year end). 

Leveraging technology to help with inventory counting

Standards on Auditing do not prohibit use of technology when performing inventory observations. If auditors are satisfied with the inventory counting process, they may be able to utilize technologies to observe these counts. Of course, auditors may need to ensure there is some level of comfort that the videos are live feeds of client inventory locations, perhaps by confirming visually with key staff and using voice technology to have cameras moved to specified locations on command and direct certain boxes to be opened.

Auditor’s opinion in Report

However, if it is not possible to perform alternative audit procedures to obtain sufficient appropriate audit evidence in relation to material inventory balances, the auditor should modify the opinion in the auditor’s report in accordance with SA 705(Revised). In many cases, this will result in a modified auditor’s opinion due to a limitation of scope. Nature of modification i.e. qualification visà- vis disclaimer would depend on whether the matter is pervasive to the financial statements.

Read further alternative procedure https://resource.cdn.icai.org/59498aasb48418.pdf

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Qualification: CA in Practice
Company: Goyal Kumar & Co.
Location: Agra, Uttar Pradesh, IN
Member Since: 20 May 2020 | Total Posts: 2
Having an articleship experience with Chartered Accountant Firm for 2 years working on Direct Tax and Indirect Tax, Statutory Audit and Internal Audit and Other compliance work and 1 Year of Industrial Trainee in PSU company Bharat Heavy Electricals Limited, Bhopal working in Foreign Purchase Depart View Full Profile

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