Inventory, Auditor and Lockdown.

Due  to  the  outbreak  of  COVID-19,  it  will  be  challenging  for  the  management  to  plan  for inventory  physical  counts  at  upcoming  year  end  of  March  31,  2020.  The  current  situation  is more severe as lockdown being announced till March 31, 2020.

Here are few insights that can be helpful for the auditors and for the company management in the ongoing scenario:

Scenario 1 – Where the company’s personnel is scheduling inventory physical count just immediately after lockdown is lifted and before any inventory movement takes place (say first week of April), but not feasible for auditors to attend.

Above situation is more likely to happen given that  inventory is stored at various locations  and will be a menace for audit staff to visit at those locations.

Auditor can perform the following key procedures:

ª The audit team can be virtually connected and can attend the inventory physical count through video conferencing, to the extent practical, depending upon the IT infrastructure and nature of inventory.

ª Request the company personnel to share images and approved physical count sheets (at the end of same day or next day)

ª Observe some physical counts on an alternative date (before the audit sign off date - say April 30, 2020) considering the situation would normalize by then.

ª Perform the roll-backward procedures i.e., obtain the inventory movement between the intervening period of year end and subsequent date count date and perform audit procedures on those intervening transactions.

ª If the physical count is impracticable at subsequent date as well, perform alternative procedures for example - inspection of documentation of the subsequent sale of specific inventory items acquired or purchased prior to the physical inventory counting.

ª Do enough documentation to support the work and conclusion.

Scenario 2 – Where the company’s personnel is not doing inventory physical count near to year end date.

In such situation, the auditor should perform the possible procedures as enumerated in first scenario. It will be also important to understand the inventory method followed by the company i.e. perpetual inventory system or cyclic count. The auditor should extend the procedures in case of cyclic count.

In all the cases, if it is not possible to perform any of the procedures and unable to test the existence of inventory by any alternate procedures and its impact is pervasive to the financial statements as a whole then the auditor may modify the audit opinion in accordance with the applicable auditing standards.