Apurva Maheswari CA

Akash Sanghai CA


Standards on Auditing (SA)- 500 explains what constitutes audit evidence

and SA 501 deals with specific considerations by the auditor in obtaining

sufficient appropriate audit evidence. (Like inventory)

SA -501 requires the auditors to obtain sufficient appropriate evidence for

inventories. The guidance note specifies:

(a) Attendance of auditors at physical inventory counting to

evaluate and observe the management’s count procedures;

inspect the inventory; and Perform test counts.

(b) Performance of audit procedures to determine accuracy of

inventory count results.

Due to COVID-19 outbreak conducting physical verification of inventories

on 31-03-2020 by the management and its attendance by the auditors

would be not only challenging but impracticable also. The followings are

the possible challenges:

(1) Where the management is unable to conduct physical inventory

counting as at the year end, it should inform the auditors the

reasons thereof.

(2) It is also suggested that the Physical inventory may be

conducted by management at a date other than the date of

financial statements and for that.

• the auditors should adopt the approach of Roll-Forward

or Roll-Back procedures which would be a viable option

under the circumstances. Of course the existence of

internal control over inventories must be examined by

the auditors. This approach of ROLL system should not

be applied blanket on all the clients.

Further where physical counting is impracticable then Alternative audit

procedures is required to be complied with as given in SA 501 . These are

primarily to obtain sufficient and appropriate audit evidence regarding the

existence and condition of inventory. However, if it’s not possible to apply

such alternate audit procedures, the auditor shall modify the opinion in

the auditor’s report in accordance with SA 705.

Examples of Alternative Audit Procedures. :

(a) Inspection of documentation of the subsequent sale of

specific inventory items acquired or purchased prior to the

physical inventory counting, may provide sufficient appropriate

audit evidence about the existence and condition of inventory.

(b) Using the work of internal auditor: SA 610permits to use

the work of internal auditor regarding inventory verification.

However, external auditor’s responsibility is not reduced by

using of the work of the internal audit function. The external

auditor still needs to perform and evaluate the competence,

independence and objectivity of the internal auditor, its plan etc.

Finally, a report should also be received from the internal

auditor such as the inventory counting reports, memorandum of

observations on the inventory counting, conclusions reached, etc

(c) Engaging other Chartered Accountant to attend

physical verification :

The auditor (after discussion with the management) may

appoint other Chartered Accountant to attend physical counting.

The Guidance note suggest that the external auditors where

feasible, may virtually participate in physical verification

through video applications. A written agreement should be

made with the management for the use of another chartered


(d) Use of technology in Inventory Counting

Where physical attendance by auditors is not possible, then the

inventory counting may be conducted remotely via video call

with the help of technology. Auditors would need to ensure the

security, practical constraints etc on these applications. It is

Virtual attendance. Caution is needed for obsolete or

damaged stock. Further, auditors may carry out verification for

certain items on test basis at a later date. It is a Leveraging

technology to help with inventory counting. confirming

visually with key staff and using voice technology are some of

the measures for this system.


Reliance may be placed on confirmation received from third party

regarding the quantities and condition of the inventory held on behalf of

the entity.


1. The primary responsibility of the auditor is to physically attend

the inventory counting. Even in situations where the auditor

opts for alternative audit procedures, the auditor is not absolved

from the primary responsibility in respect of attendance at

physical inventory counting and thus cannot include a division

of responsibility in the auditor’s report in respect of alternative

audit procedures carried out.

2. Where alternative audit procedures are adopted which provide

sufficient appropriate audit evidence to conclude that inventory

is free from material misstatement, the auditor’s opinion need

not be modified.

3. Where it is not possible to perform alternative audit procedures

and the auditors is unable to obtain sufficient appropriate audit

evidence for inventory balances, the auditor may modify his


Disclaimer Information in this publication is intended to provide only a

general outline of the subjects covered. It should neither be regarded as

comprehensive nor sufficient for making decisions, nor should it be used

in place of professional advice. The Authors accepts no responsibility for

loss arising from any action taken or not taken by anyone using this



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