- 10 Marks
Question
ISA 501: Audit Evidence – Additional considerations for specific items requires that, if inventory is material to the financial statements, the auditor should obtain sufficient appropriate audit evidence by, among others, being present at physical inventory counting unless impractical. The Managing Director of MLT Ltd is at a loss as to why in this age of technological advancement, auditors insist on being present during physical inventory count.
Required:
i) Explain FOUR (4) reasons for conducting physical inventory counts.
ii) Discuss the responsibilities of Management and Auditors with respect to physical inventory counts.
Answer
i) Reasons for conducting physical inventory counts:
- Physical counts provide evidence of the actual existence of inventory, enhancing the reliability of financial statements.
- Discrepancies between the physical count and inventory records may reveal weaknesses in inventory management or control processes.
- Physical counts can help assess the physical condition of inventory and detect deterioration or damage.
- They are essential for verifying the accuracy of inventory records, particularly when continuous inventory systems are used.
(6 marks)
ii) Responsibilities of Management and Auditors in physical inventory counts:
- Management’s responsibility: Management is responsible for arranging the physical inventory count, ensuring procedures are in place for a complete and accurate count, and maintaining reliable inventory records.
- Auditor’s responsibility: The auditor must observe the physical count, gather audit evidence about the existence and condition of inventory, and ensure that inventory is correctly valued and recorded in the financial statements.
(4 marks)
- Topic: Audit and Assurance Evidence
- Series: DEC 2022
- Uploader: Theophilus