## SA 501: Audit Evidence — Existence & Condition of Inventory

When inventory is material to the financial statements, the auditor must obtain Sufficient Appropriate Audit Evidence (SAAE) about its existence and condition.

### Standard Audit Procedures

#### (a) Attending Physical Inventory Count (Conducted by Management)

Evaluate management's instructions for performing the count
Observe performance of the physical inventory count
Inspect inventory items
Perform test counts — independently count select items and compare with management's count records (mnemonic: CaPE — Count, attend, Perform, Evaluate)

#### (b) Audit Procedures on Final Inventory Records

Check whether the final inventory records properly reflect the results of the physical count in the books.

---

### Special Cases

#### Case I — Count Conducted on a Date Other Than the Balance Sheet Date

Management may count inventory before or after the year-end.

Auditor applies audit procedures on "changes" in inventory between the count date and the balance sheet date to verify whether movements are properly recorded.

#### Case II — Auditor Was Unable to Attend the Count

Attend at an alternative date and apply audit procedures
Also apply procedures on intervening transactions (purchases/sales between the count date and the alternative date)

#### Case III — Impracticable to Attend (Due to Location or Nature of Inventory)

Examples: inventory on a ship mid-ocean, hazardous materials, remote warehouse.

Perform Alternative Audit Procedures (AAP) to obtain SAAE:
Examine subsequent sales up to the date of financial statements
Examine prior purchases up to the date of financial statements
If SAAE cannot be obtained → Modify opinion as per SA 705

#### Case IV — Inventory Lying with a Third Party

Primary procedures:

Obtain external confirmation from the third party regarding existence and condition of the inventory held by them

Other audit procedures (if external confirmation is insufficient):

Inspect warehouse receipts issued by the third party
Attend the third party's warehouse physically, or send a local auditor to attend on your behalf
Obtain a report on the third party's internal controls (Service Auditor's Report) relating to inventory management

Worked example

### Example 1

Case I — Year-End Count on Different Date: ABC Ltd. counts inventory on 25th March, but the balance sheet date is 31st March. The auditor attends the count on 25th March and then audits all inventory movements (purchases, sales, adjustments) between 25th–31st March to ensure the closing balance on 31st March is correctly stated.

### Example 2

Case III — Remote Location: A mining company stores ore at a remote site. The auditor finds it impracticable to visit. Instead, the auditor examines subsequent sales invoices (goods sold after year-end) to confirm that the inventory existed at year-end, and also checks pre-year-end purchase documentation. If these procedures don't yield SAAE, the opinion must be modified.

### Example 3

Case IV — Goods in Bonded Warehouse: A pharma company stores ₹8 crore of raw materials in a third-party bonded warehouse. The auditor sends a direct confirmation letter to the warehouse operator asking them to confirm the quantity and condition of goods held. The auditor also inspects the warehouse receipts issued and obtains the warehouse's SOC 1 report on internal controls.

⚠️ Common exam mistakes

Assuming the auditor can skip the physical inventory count simply because management is conducting it — the auditor must OBSERVE, not just accept management's count.
Not performing procedures on intervening transactions when the count date differs from the balance sheet date (Case I and Case II).
Treating external confirmation from a third-party warehouse as sufficient without considering other corroborative procedures (receipts, SOC reports).
Forgetting that inability to obtain SAAE on inventory (especially in Case III) requires a modified opinion under SA 705 — the auditor cannot just accept the limitation silently.

Bare-Act text Paragraphs 4–8 (Inventory) · SA 501 — Audit Evidence: Specific Considerations for Selected Items · click to expand

The auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by attendance at physical inventory counting, unless impracticable. If attendance at physical inventory counting is impracticable, the auditor shall perform alternative audit procedures to obtain sufficient appropriate audit evidence about the existence and condition of inventory.

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

SA 501 — Existence and Condition of Inventory

Worked example

⚠️ Common exam mistakes