Annual Audit Manual
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7067 Unable/impractical to attend physical inventory counting
Jun-2019
Overview
This topic explains:
- Situations where we are unable to attend physical inventory counting due to unforeseen circumstances
- Situations where attending physical inventory counting is impractical, including alternative audit procedures
CAS Requirement
If the auditor is unable to attend physical inventory counting due to unforeseen circumstances, the auditor shall make or observe some physical counts on an alternative date, and perform audit procedures on intervening transactions (CAS 501.6).
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 CAS 705, Modifications to the Opinion in the Independent Auditor's Report (CAS 501.7).
CAS Guidance
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. Further, as explained in CAS 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Canadian Auditing Standards, 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. See CAS 200.A48. (CAS 501.A12)
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 (CAS 501.A13).
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, CAS 705, Modifications to the Opinion in the Independent Auditor’s Report, requires the auditor to modify the opinion in the auditor’s report as a result of the scope limitation. See CAS 705.13. (CAS 501.A14)
OAG Guidance
In certain situations it will be impracticable or not feasible to observe management’s inventory count procedures. Such situations may include:
- Initial audits
- Appointment as auditors after period-end
- Audits of acquired companies
- Situations where observation would introduce safety risks
In situations where observation of the entity’s physical count is impracticable or is not feasible during the period under audit, we design other tests such as observation of inventory in the current period and a test of activity in the roll-back period or inspection of documentation of the subsequent sale of specific inventory items acquired or purchased prior to the date of the inventory count.
Where the prior period was audited by another auditor, we may be asked to audit financial statements covering the current period and one or more periods for which we had not observed or we had made only some physical counts of inventories. We may, nevertheless, be able to become satisfied as to prior inventory balances through appropriate procedures, such as tests of prior transactions, reviews of the records of prior counts, and the application of gross profit and other analytical tests, provided we have been able to obtain sufficient appropriate audit evidence regarding the existence and condition of inventories at the end of the current reporting period. The effectiveness of such alternative procedures is affected by the length of the period the alternative procedures cover (i.e. the longer the period, the less effective alternative procedures will likely become).
Developing such an audit approach to address the existence of inventory can be challenging and complex. In some circumstances, we may determine that we are not able to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by performing alternative audit procedures.