Page 121 - CA Final PARAM Digital Book.

Performing audit procedures over the entity’s final inventory records to determine
whether they accurately reflect actual inventory count results.

• Suitable for both as Test of Controls or Substantive Procedures
These procedures may serve as test of controls or substantive procedures depending on the
auditor’s risk assessment, planned approach and the specific procedures carried out.
(b)
➢ Reasons for Impractical Inventory Counting: - Nature & Location of Inventory
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, for example, where
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.

➢ Example of Alternative Procedures: - Verify Subsequent Sale
In some cases where attendance is impracticable, alternative audit procedures, for example
inspection of documentation of the subsequent sale of specific inventory items acquired or
purchased prior to the physical inventory counting, may provide sufficient appropriate audit
evidence about the existence and condition of inventory.

➢ Alternative Procedures Doesn’t Give S&A Evidence – Modify Opinion as per SA 705
In other cases, however, it may not be possible to obtain sufficient appropriate audit evidence
regarding the existence and condition of inventory by performing alternative audit procedures. In
such cases, SA 705 requires the auditor to modify the opinion in the auditor’s report as a result of
the scope limitation.

➢ SA 501 Specific Principle: - If impractical Perform Alternative Procedures / If not possible
then modify as per SA 705
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 in accordance with SA 705.

➢ SA 200 General Principle: - Difficulty / Time / Cost is no itself valid basis to omit audit
procedure for which there is no alternative or evidence available is less than persuasive
In SA 200, the matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor
to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence
that is less than persuasive.

QNO Inventory under the Custody and Control of a Third Party Old Course--(N19R)
60.050 TITANIUM CNO -- SA501.100 New Course--(SM23)
Your firm has been appointed as the statutory auditors of GBM Private Limited for the financial year 2018-
19. While verification of company’s inventories as on 31st March 2019, you found that the significant
amount of inventories belonging to the company are held by other parties. However, the company has

kept all the records of the inventories maintained by other parties. What is your duty as an auditor in order
to ensure that third parties are not such with whom the stock should not be held and the stock as disclosed
in company’s records actually belongs to them?
Answer ➢ Basic Principle
Basic Principle – If Custody & Control of Third Party then Request Confirmation or Other

Audit Procedures
When inventory under the custody and control of a third party is material to the financial statements,
the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of
that inventory by performing one or both of the following:
• Request confirmation from the third party as to the quantities and condition of inventory held
on behalf of the entity.
• Perform inspection or other audit procedures appropriate in the circumstances.
➢ Confirmation

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