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CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements

During the audit of Kaveri Textiles Ltd, the auditor wishes to verify the existence of inventory lying with a third-party warehouse keeper in Surat, which is material to the financial statements. Which audit response is most appropriate under the Standards on Auditing?

The auditor should obtain direct confirmation from the third-party custodian and, if needed, inspect the goods or obtain assurance on the custodian's controls. Inventory held by others still belongs to the entity, and internal records alone are less reliable evidence than external confirmation.

  1. ARely only on the management's stock register since the goods are not in the company's premises
  2. BObtain direct confirmation from the warehouse keeper and, where considered necessary, inspect the goods or obtain assurance on the custodian's controlsCorrect
  3. CIgnore the inventory because it is not in the entity's physical possession
  4. DAccept a photocopy of the delivery challan held by the company as conclusive evidence

Explanation

Where material inventory is held by a third party, the auditor obtains direct confirmation from the custodian and may also attend a count or obtain a report on the custodian's controls. Management's own register is internal evidence and is less reliable. Goods held by others remain the entity's assets if it owns them, so they cannot be ignored.

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