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

During the audit of Mehra Engineering Pvt Ltd, the auditor could not attend the physical inventory count on 31 March because she was appointed only in May. Inventory is material. The management's count records are available and the goods are still largely on hand at the date of her appointment. What is the most appropriate audit response under SA 501?

The auditor should perform alternative procedures, such as observing a later count and reconciling movements back to the balance sheet date. If these do not provide sufficient appropriate evidence on material inventory, she must modify the opinion. Skipping procedures or relying only on representations is not acceptable.

  1. AAccept the management's count sheets as sufficient evidence since the auditor was not appointed in time
  2. BPerform alternative procedures such as observing a later count and rolling back to the balance sheet date, and if sufficient evidence is not obtained, modify the opinionCorrect
  3. CIssue a disclaimer of opinion immediately without any alternative procedures
  4. DRely only on a management representation letter regarding inventory quantities

Explanation

Where attendance at the count is impracticable, SA 501 requires alternative procedures, for example testing subsequent sales or a later count with roll-back reconciliation, to get sufficient appropriate evidence. If that is not possible, the opinion is modified. An immediate disclaimer skips the required procedures, and representations alone are not sufficient evidence.

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