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Dear sir,
I had problems understanding the improper inventory count. Your clarification needed:
1) Year end inventory count is the responsibility of the management. Management performs the inventory count in the presence of the auditor based on auditor’s requested samples from the inventory list provided by management to the auditor. Auditor physically checks the process and evaluates the result.
2) What are the related real audit risks of such improper inventory count? I think the completeness and valuation of inventory will be incorrect.
3) How to extend audit testing for such poorly performed inventory count?
4) It is mentioned in answer that “it is possible that count instructions were not being followed or that some items had not been included in the count”. Does this mean the inventory count was not well organised which means some sample items had not been counted and some sample items missed from counting.
5) It is mentioned in answer that “the auditor shall evaluate management’s instructions and procedures for recording and controlling the results of the entity’s physical inventory counting.” Does this mean for auditor to evaluate management’s instructions and procedures for inventory count and whether the management bring any improvement in those?
6) This improper inventory count is “a significant control deficiency or only control deficiency” to be communicated as per ISA 265.Inventory procedures are assumed knowledge of AA – see Chapter 20 (page 96).
1) Auditor does not tell management what to do/count – or vice versa. Management performs the full count – the auditor observes the process and makes test checks.
2) A wrong count can be “over” (e.g. double counting – existence assertion) or “under” (e.g. omission – completeness assertion) – if the count is wrong the valuation is wrong – cut-off may also be wrong. This is all covered in AA notes.
3) It should have been identified at the time of the count so the auditor could request management organise a recount.
4) Yes
5) See in AA notes – if there are obvious shortcomings in the instructions for the count, the auditor would discuss these with management before the physical count and the instructions should be changed (by management obviously).
6) This is explained on page 46 of the AAA notes – please do download these and search key words for answers.Dear sir,
Thank you for clarifying.
For 4), It is mentioned in answer that “Given the comment that the inventory count appeared unorganised, it is possible that management’s instructions were not being followed or that some items were missed from counting.” It says only about omission and it does not say about the possibility of duplication of inventory count?
For 6), The inventory issues could be a significant control deficiency because it can lead to a material misstatement?
Best regards,
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