Audit Evidence — Specific Considerations for Selected Items

CAS 501

Audit Evidence — Specific Considerations for Selected Items

CAS 501

Requirements
Inventory
  • If inventory is material to the F/S, the auditor should obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by:
    • Attendance at physical inventory counting, unless impracticable, to:
      • 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
      • Perform test counts
    • Performing audit procedures over the entity’s final inventory records to determine whether they accurately reflect actual inventory count results.
  • If physical inventory counting is conducted at a date other than the date of the F/S, the auditor should perform audit procedures to obtain audit evidence about whether changes in inventory between the count date and the date of the F/S are properly recorded
  • If the auditor is unable to attend physical inventory counting due to unforeseen circumstances, the auditor should make or observe some physical counts on an alternative date, and perform audit procedures on intervening transactions
  • If attendance at physical inventory counting is impracticable, the auditor shall perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory; If it is not possible to do so, the auditor shall modify the opinion in the auditor’s report as a result of the scope limitation
    • i.e. inventory may be held in a location that may pose threats to the safety of the auditor
    • General inconvenience to the auditor, is not sufficient to support a decision by the auditor that attendance is impracticable
    • Alternative audit procedures can include inspection of documentation of the subsequent sale of specific inventory to support evidence of existence
  • If inventory under the custody and control of a third party is material to the F/S, the auditor shall obtain audit evidence regarding the existence and condition of that inventory by performing one or both of the following:
    1. Requesting confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity
    2. Performing inspection or other audit procedures
      • Examples of other audit procedures include
        • Attending the third party’s physical counting of inventory (or arranging for another auditor to do so)
        • Obtaining another auditor’s report or a service auditor’s report on the adequacy of the third party’s internal control for ensuring that inventory is properly counted and safeguarded
Litigation and Claims
  • Design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including:
    • Inquiry of management and others within the entity, including in-house legal counsel
    • Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel
    • Reviewing legal expense accounts
  • If the auditor assesses a risk of material misstatement regarding litigation or claims or if audit procedures performed indicate that material litigation or claims may exist seek direct communication with the entity’s external legal counsel through a letter of inquiry, prepared by management and sent by the auditor, requesting the entity’s external legal counsel to communicate directly with the auditor
    • If management refuses permission to communicate with the entity’s external legal counsel or if the entity’s external legal counsel refuses to respond and the auditor is unable to obtain sufficient appropriate audit evidence by performing alternative audit procedures, issue a modified opinion
  • Request management and those charged with governance to provide written representations that all known actual or possible litigation and claims whose effects should be considered when preparing the F/S have been disclosed to the auditor and accounted for appropriately
Segment Information
  • Obtain sufficient appropriate audit evidence regarding the presentation and disclosure of segment information by:
    1. Obtaining an understanding of the methods used by management in determining segment information; and
      • Evaluating whether such methods are likely to result in disclosure in accordance with GAAP; and
      • Where appropriate, testing the application of such methods; and
    2. Performing analytical procedures or other audit procedures

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