## Audit Evidence for Inventory Held by Third Parties

Governing Standard: SA 501 – Audit Evidence – Specific Considerations for Selected Items

When is this triggered? When inventory under the custody and control of a third party is material to the financial statements.

### Primary Procedures (one or both)

Procedure	Detail
(a) Confirmation	Request confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity
(b) Inspection or other procedures	Perform inspection or other audit procedures appropriate in the circumstances

### 'Other Audit Procedures' May Include:

Inspect documentation regarding inventory held by third parties
Request confirmation from other parties when inventory has been pledged as collateral (e.g., lender confirmation)
Attend the third party's physical count (or arrange for another auditor to attend), if practicable
Obtain a service auditor's report on the adequacy of the third party's internal controls for ensuring inventory is properly counted and safeguarded

### Practical Context

This scenario arises commonly in job-work / sub-contracting arrangements — e.g., a manufacturer sends raw material to a processing unit and receives finished components back. Stock lying at the processor's premises at year-end must be verified.

Worked example

### Example 1

Scenario: Quality Products Limited (bicycle manufacturer) sends raw material to third-party processors and holds material finished-component inventory at those locations as at 31 March 2024. As statutory auditor, to verify existence and condition: (a) Send confirmation requests to each third-party processor asking them to confirm quantities and condition of inventory held on Quality Products' behalf; and/or (b) Attend the third party's year-end stock count, inspect their records, and if the inventory is pledged as collateral for a bank loan, also obtain the bank's confirmation of the pledged stock.

⚠️ Common exam mistakes

Applying only one procedure (e.g., only confirmation) without considering whether it is sufficient — SA 501 requires the auditor to use judgment about whether confirmation alone is adequate.
Ignoring the condition of inventory — confirmation of quantities is not enough; the condition (damage, obsolescence) must also be addressed.
Not attending or arranging attendance at physical counts when practicable — simply receiving written confirmation without any physical verification may not be sufficient for high-value third-party stocks.
Treating service auditor reports as automatically sufficient — the auditor must assess the relevance and adequacy of the service auditor's report to the specific assertion being tested.

Bare-Act text Inventory · SA 501 – Audit Evidence – Specific Considerations for Selected Items · click to expand

When inventory under the custody and control of a third party is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of that inventory by performing one or both of the following: (a) Request confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity. (b) Perform inspection or other audit procedures appropriate in the circumstances.

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Inventory Held by Third Parties — Audit Evidence (SA 501)

Worked example

⚠️ Common exam mistakes