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A company has audited their year ended 31 December 2021 financials by us( the audit firm) – and unmodified opinion has been issued
For the audit year ended 31 December 2022 – the engagement was signed in June 2023 and the audit has begun after that
The company had inventory at 31 december 2022 which was around 15 percent of all assets
Because the audit began in June 2023 , we were not able to count the inventory or verify it. The company has provided their system generated detailed closing inventory list at 31 December 2022 and a confirmation certificate from management of inventory.
Because we as auditors verified and counted their inventory for the year ended 31 decemeber 2021 which was fairly stated , we do think that their inventory for the year ended 31 december 2022 are fairly stated as well and we do Not want to qualify the report , stating that we were not present in the premises to physically verify the inventory as at 31 decemeber 2022
So the question , can we mention this in other matter ? Stating that the inventory was physically counted and verified by the management as at 31 december 2022. Our opinion is not qualified in respect of this matter.
Would the above statement be wrong ? , because we would just like to be on the safe side and draw to the users attention regarding the inventory , without qualifying the report
Short answer – NO – it would be wrong.
Our notes – albeit brief – are comprehensive on the topic of auditors reports. Every para/section has a proper purpose – there is no para/section for a “mention” of anything “just to be on the safe side”.
See in our notes – where you will also find three examples of the proper purpose of the other matter para:
3.7 Other matter paragraph (if one)
This paragraph is used, if necessary, to communicate a matter that is not required to be presented or disclosed in the FINANCIAL STATEMENTS which is relevant to the user’s understanding of the AUDIT, the auditor’s responsibilities or the auditor’s report.Opening inventory balance affects only profit/loss for the current period – not only would the total amount have to be material – but the auditor’s assessment of potential misstatement in that amount would have to be material. (Otherwise it is of no interest to the users of the financial statements.)
The only “mention” that would be made is if the auditor cannot obtain sufficient audit evident so there may be potential misstatement – in this case the audit opinion is “except for” and the circumstances (included appointment during the current period) are part of the basis of opinion.
As professionals, auditors should be able to form opinions and not sit on fences/seek to hedge their bets.
ok , can this be removed from other matter and be disclosed in the notes to the accounts of inventory ? will this be okay ?
and if NO , then what if we as auditors think that inventory is fairly stated even though we physically didnt verfify it at 31 decmber 2022 , because we were appointed as auditors in june 2023 , then what is to be done ?
Do we have to qualify the report stating that we were not physically present to verify the inventory ? or can there be any other solution to it ?
Why do you want “a solution”? If an auditor has done a proper audit and concluded that opening inventory (also opening trade receivables/payables, non-current assets ….) is not misstated – why does it have to be brought to users attention that the auditor was not last year’s auditor?
The shareholders/members will already know this because they appoint the auditor (!)
Thank you for your replies , this is a client where we have been auditors for the past few years, and we have always issued unmodified reports as their accounts have always been fairly stated in all aspects including inventory as well.
So my question was not about opening inventory , it is about closing inventory at 31 december 2022
”WE were last years auditors as well for the year ended 31 December 2021 , and for 31 December 2021 we were physically present during the inventory count and verified it to be fairly stated , and an unmodified report was issued for 31 december 2021.”
We are CURRENTLY doing the audit for the year ended 31 december 2022 , BUT we have been appointed as auditors in June 2023, and so all the accounts and transactions balance we have audited are fairly stated , but now the issue is only for closing inventory.
From our past experience as auditors for this client , we know that their inventory has always been fairly stated and also we were always physically present at year end to do the inventory count for the past several years, but for the year ended 31 december 2022 , we started the audit in june 2023 , so we could not physically verify the inventory closing balances.
so my question was, if we do think that inventory was fairly stated at 31 december 2022 from past experience with the client , the only thing is that we were not able to physically verify it ,
can we just state anywhere in the report like in other matter or in the notes to the financial statements ? that the CLOSING inventory was physically verified by management for 2022? or do we have to qualify the report ?
the thing is we tried to physically verify the inventory during 2023 which is for the current period , and they are fairly stated right now as well BUT from assumptions and past experiences with client we can only assume that inventory was fairly stated at 31 december 2022
And for 31 decmeber 2022, we can only obtain a inventory list from management and they have done so , the only problem being we were not physicaly present to verify them
I understand what is the practical issue – but if you have sufficient other evidence to physical attendance, there are no grounds for qualification and therefore no grounds for “mention”.
Sufficient other evidence can come from numerous souces – not only the inventory list and management’s representation – but purchase invoices at the beginning of the year will be for inventory received before the y/e and sales invoices at the beginning of the year will be of y/e inventory … combined with analytical procedures – like comparable inventory days for major lines of inventory.
If you you don’t think you have enough evidence you should be qualifying your opinion(!)
Sorry I missed your post about this being about closing inventory. My argument is the same – either there is sufficient evidence… unmodified opinion – or there is not… qualify except for.
If a listed client it could be a KAM if it meets the criteria to be reported as such.
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