How Auditors Can Test Inventory in the Coronavirus Times

As per SA 501 “Audit Evidence – Specific Consideration for Selected Items”auditor is required to conduct Physical Inventory at least once a year. Due to coronavirus pandemic auditors could not attend Physical Inventory at the year end thus posing a threat to integrity of Financial Statements and audit credibility.

Conducting Physical Verification

There are two principal methods of physical verification of inventories: periodic and continuous. Under the periodic physical verification method, physical verification of inventories is carried out at a single point of time, usually at the year-end or at a selected date just prior to or shortly after the year-end. Under the continuous physical verification method, physical verification is carried out throughout the year, with different items of inventory being physically verified at different points of time.

But in many areas right now, we are likely unable to go out to a client location and physically observe inventory like we’ve done in the past.

There are, however some alternatives available.They all have their pros and cons, but it’s important for auditors to recognize that there are alternatives.

Alternative Methods
Roll Forward and Roll Back:
 The auditor could count inventory and observe it at a point in the future when it is possible and then perform additional testing on the sales subsequent to year end as well as subsequent purchases, which probably aren’t extensive in this environment. One could effectively roll back the inventory to the year end, even if it was counted subsequent to year end.

Cycle Count Procedure: Another alternative procedure can be performed if the client is using a cycle count procedure and a perpetual inventory system. A cycle count procedure is where the client essentially has controls in place where on a periodic basis they will conduct their own test counts of just a portion of their inventory.  With cycle counting, the client doesn’t perform one huge year-end, wall-to-wall count in most cases. If the auditor had been testing those controls and relying on them to establish the existence of inventory, the auditor may be able to go back to the last prior cycle count that was taken and then be able to roll forward to year end, again using sales transactions and purchase transactions and testing those during that interim period.

Video Count:  A GoPro camera can be strapped to a person, and they can walk around and perform counting. A lot of warehouses also have security cameras that record and can be remotely controlled to focus in on different areas of the warehouse

Additional supporting evidence: There are other audit procedures that are normally performed that might lend some audit evidence about the existence of inventory. For example, inventory price-testing is performed on almost every audit, and the primary objective of inventory price-testing is, of course, to address the valuation assertion. However, you’re always looking at the quantity in the inventory, the price at which it was purchased, and what the cost was.

The bottom line is that while these are challenging times with respect to observing inventory on-site, there are ways for auditors to get sufficient, appropriate evidence about inventory that will allow them to perform a successful, high-quality audit.

Disclaimer: This content is meant for information only and should not be considered as an advice or opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.

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