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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Auditing, Assurance and Professional Ethics

Case: Kaveri Agro Foods Ltd, a listed company, has appointed M/s Rao & Co as statutory auditor. During the year, the company's inventory of packaged spices lies in three godowns, one of which is in a remote hill district. The auditor was appointed after the year-end and so could not attend the physical count on the balance sheet date. Under the Standards on Auditing, what should the auditor primarily do regarding inventory existence?

The auditor should perform alternative procedures, such as attending a count on a later date and testing transactions between that date and the year-end. A disclaimer arises only if sufficient appropriate evidence still cannot be obtained; representations alone are not adequate evidence of inventory existence.

  1. AReport a disclaimer of opinion automatically because the count was missed
  2. BPerform or observe alternative procedures, such as a count on a later date with roll-back testing, to obtain sufficient appropriate evidenceCorrect
  3. CRely solely on the management representation letter on inventory quantities
  4. DAccept the book records as correct since the inventory is stored in a godown owned by the company

Explanation

When the auditor could not attend the count at the year-end, SA 501 requires alternative procedures such as a later count combined with testing of movements between the count date and the balance sheet date. A disclaimer is considered only if sufficient appropriate evidence still cannot be obtained. Relying only on representations is not sufficient evidence.

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