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

During the audit of Mahesh Pharma Ltd, the auditor observes that the physical verification of inventory was conducted by management on 20 April, three weeks after the balance sheet date of 31 March, and the auditor could attend only on that day. Which is the most appropriate audit response under SA 501?

The auditor should attend the count and test the transactions between the count date and 31 March, such as purchases, sales and production records, to reconcile counted quantities back to the year-end. A modified report is needed only if sufficient appropriate evidence still cannot be obtained.

  1. ADisclaim an opinion since inventory was not counted on 31 March
  2. BAccept the management's inventory records as audit evidence without any further procedures
  3. CQualify the opinion automatically, as a count after the year-end is never acceptable
  4. DAttend the count and perform procedures on the movements between 31 March and the count date, such as testing purchases, sales and production records for that interval, to roll back to the year-end quantitiesCorrect

Explanation

Where the count takes place at a date other than the balance sheet date, SA 501 requires the auditor to obtain evidence on whether changes in inventory between the count date and the year-end are properly recorded. A report modification is needed only if sufficient appropriate evidence cannot be obtained. Accepting records without testing, or disclaiming at once, is wrong.

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