BACKGROUND: 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 Accountant. (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. INVENTORY AT THIRD PARTY: Reliance may be placed on confirmation received from third party regarding the quantities and condition of the inventory held on behalf of the entity. CONCLUSION: 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 opinion. 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. 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