Mastering the Art of Inventory Insights Unveiling the Secrets of SA 501

When inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding inventory existence and condition by:

A) Attend physical inventory counting: management establishes procedures for inventory counting at least once a year. This is to serve as a basis for the preparation of financial statements and, if applicable, to ascertain the reliability of the entity’s perpetual inventory system.

• Evaluate management’s instructions and procedures for recording and controlling physical inventory counting results of an entity's physical inventory counting.
• Observe management counting procedures: The auditor can obtain audit evidence that management's instructions and counting procedures are adequately designed and implemented by observing management's counting procedures, such as those that control inventory movement before, during, and after the count. Further, the auditor may obtain copies of cut-off information, such as details of inventory movement, to assist in auditing the accounting for such movements later.
• Inspect the inventory: Inspecting the inventory when attending physical inventory counting assists the auditor in ascertaining the existence of the inventory (though not necessarily its ownership), and in identifying, for example, obsolete, damaged, or aging inventory.
• Perform test counts: for example, tracing items selected from management’s count records to the physical inventory and tracing items selected from the physical inventory to management’s count records, provides audit evidence about the completeness and accuracy of those records.

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

Physical Inventory Counting Conducted Other than At the Date of the Financial Statements

If physical inventory counting is conducted on a date other than the financial statement date, the auditor shall additionally perform an audit procedure to obtain audit evidence about changes in inventory between the count date and financial statement date are properly recorded.

If the auditor is unable to attend physical inventory counting due to unforeseen circumstances

The auditor shall make or observe some physical count on alternative dates, and perform audit procedures on intervening transactions.

Attendance at Physical Inventory Counting Is Impractical

The auditor shall perform alternative audit procedures to obtain sufficient & appropriate audit evidence regarding inventory existence and condition. for example, where inventory is held in a location that may pose threats to the auditor's safety. The auditor then inspects the subsequent sale documents of specific inventory items acquired or purchased before the physical inventory counting. If it is not possible to do so, the auditor shall modify the opinion in the auditor’s report in accordance with SA 705.

Inventory under Third Party Custody and Control

• Request confirmation from a third party as to the quantities and condition of inventory held on behalf of the entity.
• If information is obtained that raises doubts about the third party's integrity and objectivity the auditor may perform additional audit procedures. For example, attending, or arranging for another auditor to attend, the third party’s physical inventory counting, if practicable.

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