Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AA Exams › inventory count unattended… depreciation not charged
- This topic has 4 replies, 2 voices, and was last updated 3 years ago by Kim Smith.
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- January 9, 2021 at 6:29 am #605316
Hello Mam, I hope you are having a good day,
Kindly explain: if an auditor is unable to attend y/e count and inventory is material… and to consider its impact on audit report: is it technically correct to mention that try alternative procedures and then only if we’re unable to obtain sufficient appropriate evidence, issue a qualified opinion. Otherwise our final impact is to issue an unmodified opinion.
or
Is it better to simply qualify the opinion…… (that’s weird) because that’s like if inventory count is unattended we can’t confirm existence?
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If I’m the auditor and the director has refused to charge depreciation on for instance buildings of $15m, and I need to design further procedures.. can we gather evidence on whether any covenants are present would that be a valid procedure in relation to maybe loan covenants breached and material uncertainty in respect to going concern….. keeping in mind the examiner has made no mention of covenantsJanuary 9, 2021 at 8:37 am #605322The auditor should always consider whether alternative procedures can be used to verify an assertion – to qualify the audit opinion should not be a foregone conclusion (!)
So, for example, suppose the y/e was 31-12-20 – how does the business trade/raise sales invoices in January if inventory doesn’t exist? Answer – inventory does exist – and the auditor must obtain sufficient evidence to confirm that. So, for example, goods shown to have been received (GDN/purchase invoice) at the end of December would have existed.What the auditor can do by way of alternative procedures will depend on the specific circumstances of the client – in particular, whether the client keeps continuous (“perpetual”) inventory records or not. If yes, and they are accurate (as shown by test counts throughout the year) then the “full physical count” may not be necessary in any case.
The problem will be where a y/e count is necessary because there are no reliable stock records and the CLIENT has not been able to count inventory (e.g. if due to a pandemic the client did not have sufficient resources to perform stock counts) – in this case, management will have a hard job to come up with an inventory figure for the financial statements because inspection does not only confirm existence of quantity but condition (which affects valuation).If, however, the client has been able to perform a count but the auditor was unable to attend it due to circumstances outside MANAGEMENT’s control (e.g. covid restrictions) the auditor might reasonably be expected to obtain sufficient evidence of existence through a combination of procedures. As I’ve suggested already – purchase before y/e and after-date sales – also comparing inventory quantities of major stock lines to the prior year quantities and analytical procedures (e.g. comparing gross profit margins by major product type with an expectation based on known margins).
January 9, 2021 at 8:53 am #605325Re your depreciation question I would ask you to what end are you considering covenants and going concern? If you’re thinking about the management’s reason/motivation for non-depreciation then considering whether debt covenants exist related to gearing would be relevant to risk assessment (i.e. existence of covenant would confirm increased risk) – but that is not a further audit procedure to confirm the non-depreciation. I don’t think that going concern risk is relevant in the absence of explicit mention of covenants – as it would have to be linked to potential withdrawal of finance – nothing to do with non-depreciation itself because there’s no cash flow.
In summary I don’t think either are relevant to further audit procedures (which would be substantive procedures). To be able to provide an estimate of the error arising from non-depreciation the auditor would seek to obtain evidence of depreciation methods/rates used for similar assets in the industry (e.g. from published financial statements of other companies).
January 9, 2021 at 1:55 pm #605367Thank you so much mam, I understand now.
I always appreciate and get highly motivated to study even harder by such comprehensive explanations from your side. Thank you once again.
January 9, 2021 at 5:12 pm #605383It is always a pleasure to help you 🙂
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