CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements
While auditing Sundaram Traders Pvt Ltd, the auditor wants evidence that all goods actually owned by the company at year end are included in inventory, including goods lying with a third-party warehouse in Pune. Which procedure is the MOST appropriate response?
The auditor should obtain direct written confirmation from the third party holding the goods and consider inspecting the inventory there. External confirmation is more reliable than internal records or management representations, which cannot independently establish the existence of inventory at the third-party location.
- AExamine the warehouse-wise inventory register maintained by the company's own accountant
- BObtain direct confirmation from the third party holding the goods, and consider attending or arranging inspection at that locationCorrect
- CRely on the management representation letter that all inventory is owned and recorded
- DVerify the purchase invoices for goods received in the last month
Explanation
Under SA 501, when inventory is held by a third party, the auditor should obtain direct confirmation from that party and consider inspection or other suitable procedures. The company's own register and representation letter are internal or management-generated and are weaker evidence. Reviewing last-month purchase invoices does not establish physical existence at the warehouse.
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