Page 119 - CA Final PARAM Digital Book.

Part 2 -SA 501

QNO Physical Verification on different date Old Course – (N20E)
59.000 TITANIUM CNO--SA501.060
Moon Ltd. is a dealer in electronic appliances. The Company has a centralized warehouse at the outskirts
of Mumbai. The Auditors of the company M/s JK Associates normally attend the physical verification of
stocks carried out by the Management at the end of the financial year. However, on account of certain
disturbances in the region, the physical inventory counting could not be carried out at the year end.
The stock taking is decided to be done by management at some other date subsequently, after a
month.

In the light of the above facts:
Enumerate the audit procedures to be considered by M/s JK Associates if physical inventory counting
is conducted at a date other than the date of the financial statements with reference to the relevant
Standard on Auditing.
As per SA 501 “Audit Evidence- Specific Considerations for Selected Items”, when inventory is
material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence
regarding the existence and condition of inventory.
For practical reasons, the physical inventory counting may be conducted at a date, or dates, other
than the date of the financial statements. This may be done irrespective of whether management
determines inventory quantities by an annual physical inventory counting or maintains a perpetual
inventory system. In either case, the effectiveness of the design, implementation and maintenance
of controls over changes in inventory determines whether the conduct of physical inventory counting
at a date, or dates, other than the date of the financial statements is appropriate for audit purposes.

If physical inventory counting is conducted at a date other than the date of the financial statements,
the auditor, JK Associates, shall perform the following procedures:
➢ Physical Verification
➢ Attendance at physical inventory counting, unless impracticable, to:
• Evaluate management’s instructions and procedures for recording and controlling
the results of the entity’s physical inventory counting;
• Observe the performance of management’s count procedures;
• Inspect the inventory; and
• Perform test counts; and
➢ Performing audit procedures over the entity’s final inventory records to determine
whether they accurately reflect actual inventory count results.

➢ Reconciliation
In addition to above, auditor shall also perform audit procedures to obtain audit evidence
about whether changes in inventory between the count date and the date of the financial
statements are properly recorded.

Relevant matters for consideration when designing audit procedures to obtain audit evidence
about whether changes in inventory amounts between the count date, or dates, and the final
inventory records are properly recorded include:

• Whether the perpetual inventory records are properly adjusted.
• Reliability of the entity’s perpetual inventory records.
• Reasons for significant differences between the information obtained during the
physical count and the perpetual inventory records.

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