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

While auditing Kaveri Textiles Ltd for the year ended 31 March, the auditor observes that the company's stock of yarn is held in a godown of an independent warehouse keeper at Surat, and this stock is material. Management has refused the auditor access for physical verification on the ground of cost. Which audit response is most appropriate under the Standards on Auditing?

The auditor should obtain direct confirmation from the third-party custodian and, where appropriate, inspect or attend a count by other suitable means. Material inventory held by outsiders still needs sufficient appropriate evidence, and management's cost objection does not remove that duty. A confirmation alone or ignoring the stock is inadequate.

  1. AAccept the warehouse keeper's confirmation letter alone and treat the matter as fully resolved
  2. BRequest a confirmation from the custodian and, where appropriate, arrange attendance at the count or inspection by another suitable means, since inventory held by a third party is materialCorrect
  3. CIgnore the stock because it is not in the company's own premises
  4. DReduce the audit risk by reporting the stock as a key audit matter without any further procedure

Explanation

Where material inventory is held by a third party, the auditor obtains direct confirmation from the custodian and considers other procedures, such as inspecting or attending a count, as needed. Relying on a letter alone is not enough when risks are high. Ignoring the stock or merely reporting it as a key audit matter does not give sufficient appropriate audit evidence.

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