# SA 501 — Audit Evidence: Specific Considerations for Selected Items
SA 501 builds on SA 500 with specific guidance for three high-risk areas: (1) Inventory, (2) Litigation & Claims, (3) Segment Information.
## PART 1 — INVENTORY
When inventory is material to the FS, the auditor shall obtain SAAE regarding existence and condition of inventory by:
1. Attendance at physical inventory counting (unless impracticable), to:
- Evaluate management's instructions/procedures for the count.
- Observe mgt's count procedures.
- Perform test counts.
- Inspect the inventory.
2. Performing procedures over final inventory records to determine if they accurately reflect the actual count results.
### Matters Relevant in Planning Attendance
- Nature of inventory.
- Stages of completion of WIP.
- Whether the entity maintains a perpetual inventory system.
- ROMM related to inventory.
- Nature of IC related to inventory.
- Whether adequate procedures and proper instructions have been issued.
- Timing of the count.
- Locations where inventory is held (materiality & ROMM at each).
- Whether an auditor's expert is required.
### Counting Conducted on a Date Other than FS Date
- If unable to attend due to unforeseen circumstances, the auditor observes the count on an alternative date.
- Auditor performs procedures to obtain evidence whether changes in inventory between count date and FS date are properly recorded. Relevant matters:
- Whether perpetual records are properly adjusted.
- Reliability of perpetual records.
- Reasons for significant differences between physical count and perpetual records.
### When Attendance is Impractical
- Due to factors like nature/location of inventory.
- Auditor performs alternative procedures to obtain SAAE.
- If even alternative procedures cannot give SAAE, modify opinion (SA 705).
- NOT valid reasons to skip attendance: general inconvenience, difficulty, time, or cost.
### Inventory under Custody & Control of a Third Party
If material, the auditor shall:
1. Request confirmation from the 3rd party as to quantities and condition.
2. Perform inspection or other procedures as appropriate.
If doubt about integrity/objectivity of 3rd party — additional procedures:
- Request confirmation from other parties (e.g., when inventory is pledged as collateral).
- Inspect documentation regarding inventory held by 3rd parties.
- Attend or arrange another auditor to attend the 3rd party's physical count.
- Obtain another auditor's report on adequacy of the 3rd party's IC over inventory.
## PART 2 — LITIGATION & CLAIMS
The auditor designs and performs procedures to identify litigation and claims involving the entity by:
- Inquiry of mgt and in-house legal counsel.
- Reviewing minutes of TCWG meetings and correspondence between entity and external legal counsel.
- Reviewing the legal expense account.
### Communication with Entity's External Legal Counsel
If the auditor:
- Assesses ROMM regarding litigation/claims, OR
- The CA has not disclosed all material litigation,
then the auditor communicates through a letter of inquiry prepared by mgt and sent by the auditor, requesting the external legal counsel to communicate directly with the auditor.
- If law/professional body prohibits direct communication → perform alternative procedures.
- If a general inquiry is unlikely to yield a useful response → use a letter of specific inquiry, which includes:
1. A list of litigation & claims.
2. Mgt's assessment of outcome and estimate of financial implications.
3. A request that external legal counsel confirm reasonableness of mgt's assessments and supply info if list is incomplete/incorrect.
### Meeting with External Legal Counsel
May be necessary where:
- The matter is complex.
- The matter is significant.
- There is disagreement between mgt and external legal counsel.
Such meetings:
- Require mgt's permission.
- Are held with representative of mgt in attendance.
### If Mgt or External Counsel does NOT cooperate
If all of the following occur:
- Mgt refuses permission to communicate/meet with external legal counsel, OR
- External legal counsel refuses or is prohibited from responding, AND
- Auditor cannot obtain SAAE via alternative procedures,
→ Auditor shall modify the opinion as per SA 705.
## PART 3 — SEGMENT INFORMATION
Auditor obtains SAAE regarding presentation and disclosure of segment information per AFRF by:
1. Obtaining understanding of methods used by mgt to determine segment information, and:
- Evaluating whether such methods are likely to result in disclosure per the AFRF.
- Where appropriate, testing the application of these methods.
- Matters relevant include:
- Sales, transfers, and charges between segments, and elimination of inter-segment amounts.
- Comparisons with budgets and expected results.
- Consistency with prior periods, and adequacy of disclosure for inconsistencies.
- Allocation of assets and costs among segments.
2. Performing Analytical Procedures or other procedures appropriate in the circumstances.