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CA Intermediate · Auditing and Ethics · Audit Evidence

While auditing Lakshmi Retail Ltd, the auditor attends the physical verification of inventory at the year-end and finds that a count could not be attended because of a flood at the warehouse on the count date. The inventory is material. Under SA 501, what should the auditor do first?

The auditor should make or observe counts on an alternative date and test the transactions in between. SA 501 requires alternative procedures when attendance at the count is impracticable; management representations or prior-year figures cannot substitute, and a modified opinion arises only if evidence remains insufficient.

  1. AMake or observe some physical counts on an alternative date and perform procedures on intervening transactionsCorrect
  2. BObtain a management representation letter and rely on it entirely
  3. CIssue a disclaimer of opinion without performing any procedures
  4. DRely on the previous year's closing stock figure

Explanation

Where attendance is impracticable, SA 501 requires alternative procedures, such as counts on another date with roll-back or roll-forward testing of intervening transactions. A representation letter cannot replace evidence. A modified opinion is considered only if sufficient evidence still cannot be obtained.

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