S.P over 3rd party inventory- December 2011- 3bi

OK – so it says “Attend the inventory count (if one is to be performed) at the third party warehouses to review the controls in operation to ensure the completeness and existence of inventory.” So “controls in operation” is just referring to adherence to count instructions – two people counting, items clearly labelled, etc, etc. If you spend a day in a warehouse watching a count – yes, “observance” of control procedures is a test of control – but I think you would have substantive evidence of the completeness and existence of inventory. As you have concluded.
I do not think it was necessary to mention controls here – you could just have said to physically inspect inventory.

With regard to “Inspect any reports produced by the auditors of the warehouses in relation to the adequacy of controls over inventory …..”

This is incomplete – it should add “… for ensuring that inventory is properly counted (i.e. as at the reporting date) and adequately safeguarded”. i.e. this would be an alternative procedure if the auditor cannot attend the physical count at the warehouse – to get a confirmation from the auditor who does attend the physical count at the warehouse.

You are absolutely spot on – the “procedures” are as specified in ISA 501 where they are not specifically labelled “substantive”.

Also I think you should bear in mind that this Q is nearly 10 years old; since then, the examining team’s expectations have become more prescriptive (i.e. are spelt out in the examiner’s reports) and so answers may be more “exact” now.