SA 501 - Audit Evidence - Specific Considerations for Selected Items

Question 1

ISA 501: Audit Evidence - Specific Considerations for Selected Items

Answer 1

We must check for:
> Existence, and
> Condition of the Inventory.

NB: According to ISA 501, Auditor must attend the Physical Inventory Count conducted by the management at the year end.

Other rare circumstances:
> Inventory counted by management on some other date.
> Inventory counted on balance sheet date but Auditor could not attend.
> Impractical for Auditor to attend physical Inventory Count.
> Inventory held with third party.

If you encounter the above, do an alternative Audit Procedure, and if that fails, modify the opinion According to ISA 705 Modification of opinion.

Additional Audit Procedures:
> Sending another Auditor.
> Obtaining Service Audit Report
> Inspection of Documents from client.
> Confirmations from warehouse keepers.
> Confirmation from banks for pledged goods.

Question 2

ISA 501: Sufficient and Appropriate Audit Evidence:

Answer 2

Financial Items:
>Inventory (Physical verificationof) , check for:
- Existence (is it present), and
- Condition (is it good or obsolete)
To meet the above,
Attend the Physical Inventory Count at year end:
- Understand the Internal Control
- Observation, as you are there.
- Inspection of the Inventory.
- Test Count some items.
Circumstances:
- Inventory not counted at year end Date.
- Inventory counted at year end Date but Auditor could not attend.
- Impractical for Auditor to attend Physical Inventory Count, maybe because of the location.

Circumstances explained:
1. Inventory not counted at year end.
- Let’s assume the Count was eventually done 7 days after the year end.
- Do a reverse calculation and come to the position as at say 31 December 2022 from 7 January 2023 by adding back all sales done during this 7 day period, deduct all the purchases for the same period.
2. Inventory counted on 31 December 2022 but the Auditor could not attend:
- first inform management and request for postponement of the Inventory Count.
If they agree, you will then do on the agreed date and again do a reverse calculation as per scenario one to get the year end Inventory Closing balance.
- If management disagrees to postpone the Inventory Count and do it in your absence, you can then perform alternative Audit Procedures like checking the sales and purchases.
- If you are not able to do alternative Audit Procedures, then you are lacking sufficient and Appropriate Audit Evidence and this will impact the FS and opinion.

3. Circumstances: Impractical for Auditor to attend Physical Inventory Count.
   - This can be because of war where there is the branch, because of floods, etc.
   This will mean that there will be no Sufficient and Appropriate Audit Evidence and this impacts FS as well as the Opinion.
4. Circumstances, Inventory held with third party:
   - Third party can be:
   - An Agent,
   - Banker,
   - Consignee,
   - Warehouse,
   - ISA 505 - External Confirmations - any doubt on reliability, is used for Obtaining Audit Evidence.
   Alternative Audit Procedures for the above:
   - Sending another Auditor,
   - Obtaining Service Audit Report,
   - Inspection of documents from clients,
   - Confirmations from Warehouse Kerper,
   - Confirmations from banks for pledged goods.
   -

> Claims and Litigations, check for:
- Completeness

> Segment Information, check for:
- Presentation, and
- Disclosure.

Question 3

ISA 501: Inventory Evidence: Claims and Litigations:

Answer 3

Legal cases on the Entity:

Client

Auditor

Financial Statements:
> Provisions
> Contingent Liabilities
> Legal Expenses.

Inquire with:
> Management,
> TCWG,
> In-house Legal counsel.
> Review meeting minutes done between Management and Legal counsel.
> Review Legal expenses, are they too high or low? Match the expense to the number and value of cases.
> Review the number of court cases.

> If you feel that, There could be risk for material Misstatement:
Conduct,
Additional Audit Procedures.
- Seek for, External confirmation from External Legal counsel.
- If we fail to get the External confirmation, try other Audit Procedures.
In some cases Management or the External Legal counsel may refuse to supply the needed information, and the other Audit Procedures may not yield the needed results, in such a case, we have to use:
ISA 705 - Modification of opinion because we have failed to support our Coompleteness hence there is no Sufficient and Appropriate Audit Evidence.
Whenever something becomes a Management responsibility, make sure that you get a written representation.

Question 4

ISA 501: Segment Information:

Answer 4

Entities which need to report segment wise because of:
> IAS 17 - Segment Reporting
> IAS108 - Operating Segments

As the Auditor make sure that you check:
> Disclosure, and
> Presentation of Segment Information.

Also check:
*Methods used for Segment Information.
Examples:
> Sales, Transfers
> Charges between Segments
> Allocation of Assets and costs.
> Comparison of the Budgets.
> Consistency with prior periods.

• Alternate Audit Procedures
  > Comparison between similar entities.