- June 13, 2020 at 5:52 am
What is the procedures should be form for auditing a company with online sales where the stocks consigned at distributors warehouse? If the said distributor is not returning the stock confirmation, is it result to a qualify financial report?June 13, 2020 at 8:19 am
If I understand you correctly you are asking whether failure to obtain a confirmation of inventory held by a third party is grounds for modification of the auditor’s report.
If the amount is not material to the financial statements – no. If the amount of the inventory is material – possibly – but there are lots of other factors to consider. First and foremost whether the the potential misstatement is material. If for example, the third party will not confirm because it cannot confirm exact quantities – does that mean it holds no quantities? (I suggest it is unlikely to mean the latter.) Did the same third party hold inventory last year? Did they confirm previously? Do analytical procedures (e.g. on gross profit margins) suggest that inventory is overstated (a reason for which could be that it doesn’t exist).
Can the auditor obtain sufficient other evidence that the inventory existed at the third party at the reporting date? Quite possibly. The client will have documentary evidence of the inventory having been purchased/manufactured in the first place. It should also have evidence that it was sent to the third party – that might include the third party having signed for receipt of the inventory and/or a supplier having invoiced and been paid for transporting the goods to the third party. What about evidence obtained by examination of subsequent events? Particularly relevant to consignment goods is whether they have been subsequently sold or returned – if sold, the client should have received proceeds from the third party – if returned, it will have the physical inventory.
As long as the auditor can obtain sufficient evidence that inventory in not materially misstated, the audit opinion will not be qualified. If evidence is not sufficient, a qualified (“except for”) opinion would be called for.
If you would like a tutor response to other questions, please remember to use the tutor forum.
You must be logged in to reply to this topic.