Common Audit Failures - Inventory

01ISA 501 Audit Evidence

02Physical inventory count

Observation of physical inventory count was not performed, which includes the following procedures:

• Evaluate management's instructions and procedures for recording and controlling the results of the entity's physical inventory counting;
• Observe the performance of management's count procedures;
• Inspect the inventory; and
• Perform test counts.

03Alternative Test

For non-performance of the physical inventory count, no documentation to justify why the procedure is impracticable, nor suitable alternative procedures were performed to obtain sufficient appropriate audit evidence about the existence and condition of the inventory.

04Audit Procedures on Inventory

Gaps or inadequacies were noted in the performance of the following procedures:

• No tracing of the actual test count items to the final inventory listing
• Rolled backward/forward test was not performed for inventory count that was not observed on the financial year end.
• Testing of the costing method adopted
• Testing on the costing of work-in-progress and finished goods to ascertain the proper absorption of conversion costs
• Testing on the lower of cost and net realisable value
• Assessment on the slow moving or obsolete inventories.

05Improvement Proposals

SA 501 (4) requires the auditor to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by attendance at physical inventory counting and performing audit procedures over the entity's final inventory records to determine whether they accurately reflect actual inventory count results. When observation of inventories count is adequately performed, sufficient audit working papers must be prepared to document the procedures performed and the findings on deficiencies (which includes information like date and location of count, samples counted, basis of sampling adopted and reconciling or tracing to the final inventories listing).

Besides, pursuant to ISA501 (A7), performing test counts, for example, by tracing items selected from management's count records to the physical inventory and tracing items selected from the physical inventory to management's count records, provide audit evidence about the completeness and accuracy of those records.

06Impracticability?

A matter of general inconvenience to the auditor is not sufficient to support a decision by the auditor that attendance is impracticable.

Further, the matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive.

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