ISA 501 Audit Evidence and Attendance at Stocktakes During Coronavirus
The spread of COVID-19 has escalated across the world and has led to the introduction of mobility restrictions in a number of countries. Travelling to and from work is only permitted when absolutely necessary and when the work cannot be done from home. This is having major implications for many businesses—and for auditors.
Regulators in several jurisdictions have issued guidance covering areas of balance sheet risk and collection of audit evidence. Given the fluidity of the current situation, it is likely that further guidance will be issued in due course.
One issue weighing on the minds of accounting and audit professionals at the moment is physical attendance at stocktakes. The implications of not being able to obtain sufficient and appropriate audit evidence on inventory can impact the audit opinion—not just on the current year’s financial statements, but also those of future years.
New guidance from accounting regulators
Several audit and accounting bodies have issued guidance on attendance at stocktakes to assist auditors if they are not able to be present. Auditors can use this guidance to assess whether the use of alternative procedures would enable them to have sufficient and appropriate evidence, in relation to the assertions of existence, condition and completeness of inventory.
The guidance highlights that the most relevant International Standards on Auditing (ISAs (UK) in terms of stocktake attendance are ISA (UK) 501 (June 2016) Audit Evidence—Specific Considerations for Selected Items and ISA (UK) 705 Modifications to the Opinion in the Independent Auditor’s Report. It also recognises the likelihood that there will be far fewer stocktakes taking place in the coming months.
It should be noted that the requirements of ISA (UK) 501 are not suspended, but rather, the guidance being issued is additional information to help auditors and controllers to comply.
Alternative procedures for obtaining audit evidence
The guidance from the audit and accounting bodies suggests potential alternative procedures that might assist auditors in obtaining sufficient and appropriate audit evidence.
Amongst the alternative procedures discussed are:
- Stocktakes at a future date with appropriate rollback (including cut-off) procedures undertaken
- Analytical review
- Increased cloud-based audit, documentation and reviews
These, of course, are specific to circumstances, and the auditor will need to exercise professional judgement as to their practicability. The auditor also has to ensure that all matters considered and implemented are appropriately documented to allow understanding of the thought process that was followed in their determination.
If the auditor concludes that they have obtained sufficient and appropriate audit evidence, then there is no need to qualify the audit opinion on the basis of a limitation of scope with regards to inventory.
Extension of accounting period
Entities could consider taking advantage of the ability to extend their accounting period. This is covered in section 392 of the Companies Act 2006 that allows this period to be extended, provided it has not been extended in the previous five years. Certain conditions apply, so directors of the audited entity should check these before pursuing this approach.
Limitation of scope
In circumstances in which the auditor is not able to obtain sufficient and appropriate audit evidence in relation to the existence and completeness of inventory, there would be a limitation of scope.
If the inventory is material, then there would be a need to qualify the audit opinion on the basis of a limitation of scope. In certain circumstances, the auditor may need to issue a disclaimer of opinion if they conclude that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
Where the auditor is to issue a limitation of scope opinion, reference should be made to illustration 3 in ISA (UK) 705. This provides an example of a limitation of scope audit qualification, but this does not relate to non-attendance at a stocktake. This would need to be reworded, but it does illustrate how the concept should be applied.
How you can reduce the risk of physical stocktakes
In circumstances where attendance at physical inventory counting is not possible, a connected reporting and compliance platform can perform the alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory.
Stocktake attendance provides auditors with the opportunity to converse with other key people at the audited entity. Therefore, the auditor could arrange a conference call with the store’s manager or stockroom staff (without management present, of course) to understand their stock control policy, along with other internal controls. All of these discussions should be documented and stored within a connected and centralized platform accessible remotely via the cloud.
A connected reporting and compliance platform can also connect a range of ERPs and accounting data sources to perform cut-off tests using goods inwards/despatch notes and quantities checked to after date sales invoices. This could be combined with the analytical procedures work described below.
Spreadsheets in a connected reporting and compliance platform allow the use of analytical review to assess the reasonableness of the stock figure included in the accounts—including computation and assessment of relevant ratios, such as gross profit, inventory days, stock/turnover and more (this test alone would not be sufficient and should be used in conjunction with other testing).
How can Workiva help?
Controllers and auditors understand that sufficient time and support are vital to carry out audit work to an appropriate standard, including reassessing work done to reflect changed circumstances.
While auditors may be accustomed to working remotely, being required to operate from home to slow the spread of COVID-19 brings new challenges. This guidance, supported by a connected reporting and compliance platform, can help keep you on track. Looking for more information on how auditors can complete their work amid unprecedented restrictions? Check out these Practical Steps for Auditors in Light of COVID-19.
About the Author
Conor has over 20 years of experience as a senior finance executive for multinational corporations. He is a fellow of the Institute of Chartered Accountants in Ireland (FCA). He was also a Member of Council at the Institute of Chartered Accountants in Ireland from 2002–2005.