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

While auditing Kavya Textiles Ltd for the year ended 31 March, the auditor finds that the company's year-end stock was counted by its own staff on 28 March and the auditor could not attend the count. Management says the stock is large and well recorded. Which is the most appropriate audit response under SA 501?

When the auditor cannot attend the stock count, he should perform alternative procedures, such as testing later sales, purchases and count records, to verify existence and condition. If sufficient appropriate evidence still cannot be obtained, the audit opinion must be modified in accordance with SA 705.

  1. AAccept the management's count certificate as sufficient evidence since the stock records are well maintained
  2. BPerform alternative procedures such as testing subsequent sales and purchases and, if sufficient evidence cannot be obtained, consider a modification of the opinionCorrect
  3. CWithdraw from the engagement immediately without considering any other procedures
  4. DReport the matter only to the Board without any change to the audit report

Explanation

Where attendance at the physical count is impracticable, SA 501 requires alternative procedures to obtain sufficient appropriate evidence about existence and condition of inventory. If this is not possible, the auditor must modify the opinion. Relying only on management's certificate is not sufficient evidence.

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