Audit Evidence- Specific Considerations for Selected Items
Introduction
This SA deals with specific consideration by an auditor to obtain sufficient & appropriate audit evidences with aspect to certain aspects of:-
v Inventory;
v Litigations & Claims;
v Segment Information
| Auditor’s Duty in regards to InventoryTo obtain sufficient & appropriate audit evidences regarding the existence & condition of inventory | ||
| Attendance at physical Inventory Counting | v The auditor should attend physical inventory counting, if practicable for him.v Matters to be considered by the auditor while planning for attend at physical inventory counting:-
Ø Nature of Inventory; Ø Stage of completion of work in progress; Ø Risk of material misstatement; Ø Materiality of Inventory; Ø Nature of Internal Controls in regards to inventory Ø Timing of physical inventory reporting; Ø Procedures established for counting by the management, Ø Requirement of any other person such as Expert etc. |
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| Procedure to be followed by the Auditor at physical count | ||
| Evaluate Management’s instructions & procedures | The auditor should evaluate management procedures for recording & controlling such asv Method of collection of used physical inventory counts records,
v Accounting for unused physical inventory counts records; v The accurate identification of the stage of completion of work in progress; v Procedures used to estimate physical quantities |
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| Observing the performance of management’s count procedures. | ||
| Inspection of Inventory | v The auditor should ascertain whether inventory actually exists physically or not.v The inspection helps in identifying obsolete, damaged or ageing inventory. | |
| Perform Test Counts | v The best example of performing test counts is 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.v It provides audit evidence about the completeness & the accuracy of those records. | |
| Some Cases to be dealt by auditor | Auditor’s Duty in such case | |
| If the physical inventory counting is conducted at the date other than the date of financial statements | To ascertain whether the changes in inventory between the count date and the date of the financial statements are properly recorded | |
| if the auditor is unable to attend physical inventory counting due to unforeseen circumstances | v Observe some physical counts on an alternative date;&v Perform audit procedures on intervening transactions. | |
| where the Attendance at Physical Inventory Counting Is Impracticable | v Adopt alternative audit procedures;v In case the auditor in unable to adopt alternative audit procedures, the auditor shall modify his opinion in the auditor’s report. | |
| Where the inventory is under the custody & control of the 3rd party | v Obtain external confirmation from that party on behalf of the entity in regards to the quantity & the condition of the inventory.v Perform inspection or other appropriate audit procedures. |
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Auditor’s Duty in regards to Litigations & Claims
Litigation means an action brought in court to enforce a legal right or process of taking legal action.
| Auditor’s Duty | Audit Procedures | |
| To identify litigations & claims | v Inquiring with Management, in-house legal counsel;v Reviewing minutes of meetings of those TCWG & correspondence between the entity & its external counsel;
v Reviewing legal expense accounts. |
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| If the auditor assesses the risk of material misstatement due to existing litigation or claims | v Seek direct communication with the entity’s external legal counsel through a letter of enquiry;v In case law, regulation or the respective legal professional body prohibits the entity’s external legal counsel from communicating directly with the auditor, the auditor shall :-
Ø Perform alternative audit procedures such as obtain legal advice from experts. |
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| To obtain written representation from | Who will obtain | Auditor |
| From Whom | v Management;v Where appropriate, TCWG | |
| Matter on which Written representation shall be taken | All known actual or possible litigation or claim having material impact on financial statements have been:-v Disclosed to the auditor &
v Properly accounted for & disclosed in accordance with the applicable FRF. |
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| Casev If management refuses to give the auditor permission to communicate or meet with the Entity’s external legal counsel, or
v The entity’s external legal counsel refuses to respond appropriately to the letter of inquiry & The auditor is unable to obtain sufficient & appropriate audit evidences by performing alternative procedures |
The auditor shall modify the opinion in the auditor’s report. | |
Auditor’s Duty in regards to Segment Information
| A Business Segment is a part of the company that has operations that can function on its own independently from the company. | |
| Auditor’s Duty | Audit procedures |
| Obtain an understanding of the methods used by the management in determining segment information | v Evaluate such methods;v Check whether such methods are likely to result in disclosure in accordance with the applicable FRF.
v Perform analytical procedures. |
| Perform analytical procedures or other appropriate procedures. | |