Page 114 - CA Inter Audit PARAM

CA Ravi Taori
• 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
SA 505 establishes requirements and provides guidance for performing external confirmation
procedures.

➢ Other Audit Procedures
Depending on the circumstances, for example where information is obtained that raises
doubt about the integrity and objectivity of the third party, the auditor may consider it
appropriate to perform other audit procedures instead of, or in addition to, confirmation with
the third party. Examples of other audit procedures include:
• Inspecting documentation regarding inventory held by third parties, for example,
warehouse receipts.
• Requesting confirmation from other parties when inventory has been pledged as
collateral. (Warehouse Owner)
• Obtaining another auditor’s report, or a service auditor’s report, on the adequacy of
the third party’s internal control for ensuring that inventory is properly counted and
adequately safeguarded.
• Arranging for another auditor to attend, the third party’s physical counting of
inventory, if practicable.

Matter Relevant For Planning of Attending Physical Old course -- (N20M/M20R/N18E/SM20/SM21)
QNO Verification New course -- (SM25/ M24M)
501.09
Bhaskar CNO SA501.120
While performing statutory audit of Contra Industries Private Limited, a company engaged in manufacturing
and assembling of LED lights, CA Varun has decided to attend physical inventory count process of the
company on 30th and 31st March, 2024. The inventories are lying at three different locations - two such
locations A and B are in one city and third location C is in another city. Further, company also sends
inventories to some service providers for quality control and testing as such facilities are not available with
the company.

CA Varun is well-versed with this type of industry and has prepared a list of following matters which could
be relevant to him in planning attendance at physical inventory count process for discharging his
responsibilities in accordance with SAs: -

• Nature of inventories i.e. LED light components, parts, circuits, panels, body, WIP and finished
packed LED lights
• Materiality of inventories at different locations A, B and C
• Stage of completion of work-in-progress
• Maintenance of perpetual inventory system by company
• Materiality of inventories lying with service providers
• Timing of physical inventory counting i.e. year end

There are two important matters which do not find place in above list. Without considering these crucial
matters, it would be difficult for the auditor to properly plan his attendance at inventory count process in
accordance with relevant SA. Discuss such matters

OR

Briefly mention the matters that are relevant in planning attendance at physical inventory counting.
OR
Explain clearly the examples of matters relevant in planning attendance at physical inventory counting
Answer The list given in the question does not contain following important matters: -
➢ Whether adequate procedures are expected to be established and proper instructions issued for

physical inventory counting. The auditor has to evaluate management’s instructions for recording
and controlling physical inventory counting. It is important for the auditor to know beforehand how
the inventory count will be conducted so as to assess its effectiveness.
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