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”.

Also Read- ICAI: Impact of Coronavirus on Audit of Financial Statements

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 physical inventory counting.

ii. Observe the management’s count procedures.

iii. Inspect the inventory.

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. 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, e.g. where inventory is held in a location that may pose threats to the safety of the auditor.

2 Auditor’s consideration in various scenarios

The COVID-19 outbreak could create several potential challenges for management of an entity to conduct physical inventory counting and for the auditors to attend these counts. With scenarios like lockdown, travel restrictions etc. as imposed by Government of India, physical inventory counting would be challenging and in some cases it would be impracticable. Possible challenges in this regard are discussed below.

1. Management unable to conduct physical inventory counting as on the date of financial statements: Due to Government imposed restrictions, inventory is held in locations which are closed due to Government imposed lockdown. In such a scenario, management should inform the auditors and those charged with governance the reasons of not conducting the inventory counting.

2. Physical inventory counting conducted by management at a date other than the date of financial statements: If auditor decides to observe physical inventory counting at the date other than the date of financial statement than he needs to perform roll-back and roll-forward procedures, it is viable option where the entity has continuous inventory counting system.

Auditor has to ensure that inventory counting being performed reflects the appropriate assessment of the physical condition of inventory. Auditor should have adequate controls and should exercise professional skepticism while observing inventory count.

3. Alternative audit procedures where it is impracticable for auditors to attend physical inventory counting: If attendance at physical inventory counting is impracticable, the auditor shall perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory. If it is not possible to do so, the auditor shall modify the opinion in the auditor’s report.

Following are the examples of alternate audit procedures adopted by auditor for verification of Inventory:

a. Using the work of Internal Auditor (SA 610).

b. Engaging other Chartered Accountant(s) to attend physical verification.

c. Use of technology in inventory counting (Virtual attendance i.e. video call)

4. Inventory held by a third party: Where the entity has inventory under the custody and control of a third party, it may be possible, to place reliance on confirmation received from that third party regarding the quantities and condition of the inventory held on behalf of the entity. In such circumstance’s auditor would need to exercise professional skepticism and perform careful evaluation of such confirmation since auditors themselves have not been able to attend the physical inventory counting. It would be preferable that such confirmations are obtained by the direct confirmation requests addressed to the auditor directly without the management being involved in the process

5. Inventory in transit / cut-off procedures: Due to the lockdown situation, it might be possible that inventory purchased or sold might be locked up in transit. Auditors should obtain suitable audit evidence regarding the location and condition of the inventory including documentary records about purchases/sales. Appropriate cut-off procedures need to be employed to ensure appropriate quantities are considered in the inventory.


The primary responsibility of the auditor is to physically attend the inventory counting either at/ prior to/ post the balance sheet date. But when situation like Covid-19 arise than it is impracticable for auditor to observe physical inventory counting, in this situation auditor should performed alternative procedures for verification of physical inventory (already discussed in above paragraphs), subject to alternative audit procedure should provide sufficient and appropriate audit evidence to conclude that inventory is free from material misstatement.

However, if it is not possible to perform alternative audit procedures or to obtain sufficient appropriate audit evidence in relation to material inventory balances, in this case auditor should modify the opinion in the auditor’s report in accordance with SA 705(Revised).

This article is based on guidance note issued by Auditing and Assurance Standard Board of ICAI.

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October 2020