Page 120 - CA Final PARAM Digital Book.

Physical Verification & Cases it is Old Course – (N09E, M13M, M15R, N15E, M16M, PM17, M17M,
QNO
60.000 Impractical M18R, M18M, M18E, M20R, SM21, N22M)
TITANIUM CNO--SA501.040/SA501.080 New Course – (SM23)
XYZ Ltd supplies navy uniforms across the country The company has 4 warehouses at different locations
throughout the India and 5 warehouses at the borders The major stocks are generally supplied from the
borders XYZ Ltd appointed M/s MNO & Co to conduct its audit for the financial year 2016-17 Mr O, partner
of M/s MNO & Co, attended all the physical inventory counting conducted throughout the India but could
not attend the same at borders due to some unavoidable reason.
You are required to advise M/s MNO & Co,
(a) How sufficient appropriate audit evidence regarding the existence and condition of inventory may
be obtained?
(b) How is an auditor supposed to deal when attendance at physical inventory counting is
impracticable?
OR
"RIM Private Ltd is engaged in the business of manufacturing of water bottles and is experiencing
significant increase in turnover year on year. During the financial year ended 31 March 2019, the company
carried out a detailed physical verification of its inventory and property, plant and equipment.

You are the auditor of RIM Private Ltd. The inventory as at the end of the year was ` 2.25 crores. Due to
unavoidable circumstances, you could not be present at the time of annual physical verification.
Under the above circumstances how would you ensure that the physical verification conducted by
the management was in order?"
OR
The Engagement Partner of the audit team of High Inventory Limited assessed that the inventory is
material with respect to the audit of the financial statement for the current period. Upon inquiring with
the management, the Engagement Partner identified that the management will be performing an annual
physical inventory count at all the warehouses where the entity stores and maintains its inventory.
Moreover, management confirmed in its written representation that they will be performing a 100%
physical count of inventory for the current period. As a result, the engagement Partner decided not to
perform any physical count of inventory as it will be a duplication of the work. Moreover, he decided that
the written representation from management stating “the inventory exists and is in appropriate physical
condition” will be sufficient and appropriate with respect to audit evidence to conclude that the inventory
balance in the financial statement is free from any material misstatement. In the light of SA 501, evaluate
whether the decision taken by the Engagement Partner is appropriate or not.

Answer Part I -- Relevant Standards & Laws
▪ SA 501, Audit Evidence- Specific Considerations for Selected Items

Part II -- Requirements of Relevant Standards & Laws
a)
➢ Sufficient & Appropriate Evidence: - When inventory is material obtain S&A evidence for
Existence & Condition
As per SA 501 When inventory is material to the financial statements, the auditor shall obtain
sufficient appropriate audit evidence regarding the existence and condition of inventory by:

➢ Two steps to obtain evidence
• Step 1: - Attend physical verification and perform following Evaluate Mgt
instructions & procedures, obtain evidence foe reliability of procedures / Observe
counting / Inspect inventory / Perform test counts
Attendance at physical inventory counting, unless impracticable
• Evaluate management’s instructions and procedures for recording and controlling
the results of the entity’s physical inventory counting; Obtaining audit evidence as
to the reliability of management’s count procedure
• Observe the performance of management’s count procedures
• Inspect the inventory; and
• Perform test counts; and

• Step 2: - Performing audit procedures on final inventory records and comparing
them with actual inventory count results

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