## Audit Evidence – Specific Considerations (SA 501)

### A. Inventory

#### Situation 1: Physical count date ≠ Financial year-end date

Perform audit procedures to verify that changes in inventory between the count date and the FY date are properly recorded.

#### Situation 2: Inventory held by a third party

Two options (not mutually exclusive):

Request written confirmation from the third party (quantities and condition)
Perform inspection or review documentation (e.g., job work records, excise register, dispatch documents)

#### Situation 3: Attending inventory count is impracticable

Perform alternative audit procedures to obtain SAAE regarding existence and condition
If alternative procedures are also not possible → Modify opinion per SA 705

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### B. Litigation & Claims

#### Step 1 – Internal information gathering:

1. Inquiry of management and others within the entity

2. Review minutes of TCWG meetings + communications with external legal counsel

3. Review legal expenses account (often reveals undisclosed claims)

#### Step 2 – Direct communication with external legal counsel

The auditor sends a letter of inquiry:

Prepared by management
Sent by the auditor (not management)
Requesting the entity's external legal counsel to communicate directly with the auditor

If a general inquiry is unlikely to get an appropriate response → use a specific inquiry letter covering:

1. A list of all litigation and claims

2. Management's assessment of outcome and financial implications for each

3. A request that legal counsel confirm the reasonableness of those assessments and provide additional information

Worked example

### Example 1

Inventory at third party: ABC Ltd holds raw materials worth ₹20 lakhs at a third-party warehouse. The auditor requests a written confirmation from the warehouse keeper confirming quantities and condition. The warehouse keeper's confirmation is external evidence (highly reliable). If confirmation is not possible, the auditor visits the site or reviews dispatch documentation and job work orders.

### Example 2

Inventory count timing: A company performs a physical inventory count on 15th March 2025, but the year-end is 31st March 2025. The auditor must verify that goods received between 15-31 March are added, and goods dispatched during this period are removed, so the year-end balance is correctly stated.

### Example 3

Litigation – specific inquiry: A company is involved in a ₹1 crore lawsuit. The auditor sends a specific inquiry letter to the company's advocate listing the claim, asking for confirmation of management's assessment that the case is unlikely to result in a payout, and requesting the advocate's independent view on the likely outcome.

⚠️ Common exam mistakes

Thinking observation of inventory count alone is sufficient when the count date differs from year-end – the auditor must also verify roll-forward/roll-back transactions
Confusing who prepares vs. who sends the letter to legal counsel – management PREPARES the letter but the AUDITOR sends it (maintains auditor control)
Forgetting SA 705 is triggered when attendance is impracticable AND alternative procedures are also unavailable – it does not trigger just because attendance is difficult
Overlooking the legal expenses account review as an audit procedure for identifying undisclosed litigation

Reference: — SA 501 – Audit Evidence: Specific Considerations for Selected Items (ICAI)

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Inventory Count Procedures and Litigation & Claims

Worked example

⚠️ Common exam mistakes