Question

In: Accounting

Is an auditor required to observe inventory counts if the company is a public U.K. corporation...

Is an auditor required to observe inventory counts if the company is a public U.K. corporation and what is the IAASB reference citation?

Solutions

Expert Solution

As per para 4 (a) (ii) of ISA 501 The auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory, if inventory is material to the financial statements,

The auditor shall obtain the evidences

by Attendance at physical inventory counting, unless impracticable to

a) Evaluate management’s instructions and procedures for recording and controlling the results of the entity’s physical inventory counting

b) Observe the performance of management’s count procedures;

c) Inspect the inventory; and

d) Perform test counts;

Observing the performance of management’s count procedures

a) Observe those performance relating to control over the movement of inventory before, during and after the count,

b) obtain copies of cutoff information, such as details of the movement of inventory

Observe Physical count on an alternative date

If the auditor is unable to attend physical inventory counting due to unforeseen circumstances, the auditor shall make or observe some physical counts on an alternative date, and perform audit procedures on intervening transactions.

If Attendance is impracticable

a) 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.

b) If it is not possible to do so, the auditor shall modify the opinion

Note: The impracticability may be due to factors such as

a) the nature and location of the inventory.

b) The 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

The following are the matters which are relevant in planning attendance at physical inventory counting

a) The risks of material misstatement related to inventory

b) The nature of the internal control related to inventory

c) The timing of physical inventory counting

d) Whether the entity maintains a perpetual inventory system

e) Locations at which inventory is held, including the materiality of the inventory and the risks of material misstatement at different locations, in deciding at which locations attendance is appropriate


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