Question

The textbook tells us that, during an inventory audit, “the extent & timing of tests related to ending inventory can be reduced or altered, if the client has an accurate/well-controlled perpetual (inventory) system”. Please explain to me why “the timing of tests related to ending inventory can be altered, if the client has an accurate/well-controlled perpetual inventory system”

Answer 1

Answer:

When the inventory is so material to the financial statements, the auditor shall obtain sufficient & appropriate audit evidence related to the existence & condition of inventory.

For the audit of Inventory, the auditor shall consider the following points such as :

• Evaluate the management instruction & procedure for recording & controlling the results of entity inventory counting.
• Observe the performance of management count procedures
• Inspect & perform the test count of inventory

on the basis of the above factor, the auditor shall determine the nature, timing & extent to which audit of inventory needs to be carried.

If during an inventory audit, “the extent & timing of tests related to ending inventory can be reduced or altered, if the client has an accurate/well-controlled perpetual (inventory) system” as in such a case risk of material misstatement are very low hence auditor shall reduce the timing regarding the extent & timing of test of inventory details.

If on the basis of auditor's opinion & as per their experience they believe that internal control are not effective in such a scenario he needs to apply further audit procedure regarding nature timing & extent of the audit to reduce the risk of material misstatement.

But if Auditor find that internal control related to inventory are very effective, & accurate/well controlled in such a case they can reduce their nature timing & extent of audit procedure & focus on other material facts.