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CA Ravi Taori

QNO Inventory-Physical Verification by auditor- Master Old course -- (P16M/N19E
501.05 Answer Bhaskar CNO SA501.040 /M20M/M18M/N18M/M19M/N21M)
ABC Ltd is engaged in manufacturing of different type of yarns. Ongoing through its financial statements for
the past years, it is observed that inventory is material to the financial statements. You as an auditor of the
company wanted to obtain sufficient appropriate audit evidence regarding the existence and condition of
the inventory as appearing in the financial statements. Discuss, how would you proceed as an auditor.
OR
Krishna Cycles Ltd is engaged in manufacturing of different type of Bicycles. On going through its financial
statements for the past years, it is observed that inventory is material to the financial statements. You as
an auditor of the company wanted to obtain sufficient appropriate audit evidence regarding the existence
and condition of the inventory as appearing in the financial statements. Discuss, how would you proceed

as an auditor.
OR
How would an auditor proceed to obtain sufficient appropriate audit evidence regarding the existence and
condition of inventory? Also state reporting requirements for the same in the case of a company.
OR
Write a short note on Physical attendance by auditor during inventory taking.
OR
While vouching, Aman auditor of Vee Ltd, found that some goods are lying with third party from a long
period, Advise Aman how will he vouch/verify them.

Answer ➢ When inventory is material to the financial statements, the auditor shall obtain sufficient appropriate
audit evidence regarding the existence and condition of inventory by:
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 procedures
• 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.

QNO Inventory Custody and Control With Third Party Old course – (SM21)
501.07 Bhaskar CNO SA501.100 New course – (S24R)
Paramount Exports Ltd is a manufacturer exporter having its own production capacity and also gets the job
work done through various job workers. The auditor of Paramount Exports Ltd. Considers that inventory
held with job workers is material to the financial statements. Suggest the audit procedures in the given
case.
OR

Quality Products Limited is engaged in manufacturing of bicycles. As part of manufacturing activities, it
sends raw material to some business entities and procures finished components from them. As on 31st
March 2024 inventories lying with such business entities are material. Being statutory auditor of Quality
Products Limited, how you will obtain sufficient appropriate audit evidence regarding existence and
condition of inventories lying with such business entities?
Answer ➢ 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:

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