Partner Designate
Gajma & Company
The Coronavirus pandemic has created challenges in carrying out day-to-day business activities. Among these challenges, the year-end Physical Inventory Counting for businesses with financial year ending 31 March 2020, will be the greatest.
The Sri Lanka Auditing Standards has set strict guidelines/requirements for the auditor to attend the Physical Inventory Counting and to perform audit procedures over the entity’s final inventory record to determine whether they accurately reflect actual count results.
The Coronavirus pandemic has resulted in individuals, including the auditors, to work from home. Working remotely and social distancing have been encouraged as mechanisms to reduce the spread of this virus. The authorities have issued guidelines as to how organisations should organise their workplaces during this pandemic time.
The prevailing circumstances make it challenging for auditors to attend the Physical Inventory Counting, and for the entities to organise the Physical Inventory Counting.
If a Physical Inventory Counting is not carried out by an entity as required to do so, and the auditor did not attend the Physical Inventory Counting, or if the auditor is unable to perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and the condition of the inventory, the auditor shall modify the opinion in the auditor’s report. This may have adverse consequences on the entity.
In the current circumstance, the auditors are compelled to follow alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and the condition of the inventory. The alternate procedures should give comfort to the auditors and the procedures may be summarised as follows:
- Roll forward and roll back.
Postpone the inventory counting and observation to a later date. A date when the stay-at-home restrictions are lifted and is safe to visit the client premises. The process involves the roll-back of the inventory to the year-end, even if the counting of inventory items is taking place subsequent to year-end. Ina addition, depending on the circumstances, the auditor may go back to the previous inventory count and roll forward to the year-end.
- Video observation of the physical inventory.
This process may be worth considering in the circumstance that the country is currently facing. This will minimise the risk of infection and spreading the virus outbreak. The Sri Lanka Auditing Standards states that, “Where attendance is impracticable, due to factors such as the nature and location of the inventory, the auditor should consider whether alternative procedures provide sufficient appropriate audit evidence of existence and condition to conclude that the auditor need not make reference to a scope limitation.”, and this may be considered as another alternative procedure.
- Obtaining additional supporting evidence.
Cut-off testing and price-testing. There are other audit procedures that auditors perform that contribute to evidence about existence. It is difficult to get sufficient, appropriate audit evidence about the existence assertion by only doing price-test and subsequent sales transactions. It will require the auditors to do some roll forward and roll back to obtain a comfort on the closing inventory.
Good governance practices and client’s cooperation with the auditors to provide collaborative and alternative procedures, could provide comfort to the auditors during the current crisis period. This will avoid the auditor issuing a modified audit opening for the financial period ended 31 March 2020.