We want our people and our clients to stay safe. There is no doubt that Covid-19 has caused disruption to all businesses and people around the world. Despite the disruption, businesses are still expected to deliver their reporting and audited financial statements with or without an extended deadline to third parties such as regulators or lenders.
Our clients often ask us how can we be safe and work remotely, and able to complete the audit process? Can auditors still perform their testing, including inventory count and observation without a site visit?
Our answer is Yes. Although the COVID-19 pandemic has made it difficult or impossible to physically inspect inventory, sufficient, appropriate evidence can still be obtained, observed, and documented, indifferent mean and remain in compliance with the audit standards such as ISAs. We are still able to obtain appropriate sufficient evidence as required by the Auditing Standards through our “Remote Auditing alternatives and techniques”. It is possible for the auditor to still observe inventory without being on-site, in accordance with the International Standard on Auditing (ISAs), and the US Generally Accepted Auditing Standards (GAAS).
Whilst the first option and alternative comes to mind is the use of Technology, that is not the only means to use on gathering the required appropriate and sufficient evidence on the existence of the inventory, but there are basic known procedures that can be performed as well. These are as the following;
Carry back and forward:
This is similar to the alternative procedures that the auditor can perform with the coordinate of the company when for different reasons they have not observed or performed the count. In the case where the inventory count can be postponed to a later date, so in effect to postponing the inventory count and observation to a later date, when the stay-at-home orders might be relaxed and people feel safe visiting the company site. The auditor could count inventory and observe it at an agreed subsequent date and then perform additional testing on the sales subsequent to year-end as well as on subsequent purchases, which might not be expected to be extensive in this environment. We could effectively carry/rollback the inventory to the year-end, even if it was counted subsequent to year-end.
The other more traditional alternative procedure can be performed if the company is using a cycle count
Procedure and a perpetual inventory system. A cycle count procedure is where the company essentially has controls in place where periodically — regularly on different timing, i.e., Quarterly — they will conduct their own test counts of just a portion of their inventory. And then they go back to their perpetual system and prepare the counts, make corrections, and so on. With cycle counting, the company is not performing one huge year-end, wall-to-wall count in most cases. If the auditor had been testing those controls and relying on those controls to establish the existence of inventory, the auditor may be able to go back to the last prior cycle count that was taken and then be able to roll forward to year-end, again using sales transactions and purchase transactions and testing those during that interim period.
So carry/roll forward and carry/rollback are two available alternatives.
Careful use of Technology – Video observation:
Many, if not most, of the warehouses nowadays have security cameras that record and can be remotely controlled to focus in on different areas of the warehouse. The other alternative is a situation where company personnel go out and make a video recording of the counting of inventory. If it’s a live situation where perhaps someone independent from the client is on-site and can send live video feedback to the auditor for them to watch, that makes it easier to determine authenticity. If you are using, for example, Skype or Zoom and somebody is walking around to the inventory and counting it in response to verbal commands of the auditor with interactive dialogue, the auditor can be pretty comfortable which is an authentic video feed. However, this option must be used with care and control as to when performing remotely, auditors have the same obligations to comply with standards and deliver high quality as they would when working on-site. Documentation requirements, for example, are
Just as important in remote audit procedures as they are on the company’s business site.
Communication also remains vital to a high-quality audit when remote procedures are being performed.
The remote auditing may not be a complete solution for all the challenges the coronavirus has created for auditors. But when it is possible to perform remote audit procedures thoroughly, they may be a valuable tool for auditors at this difficult time.
The goal is trying to work to help companies and auditors think creatively about unnecessary qualified opinions for scope limitations, but we also bear in mind that there may be some of those situations in this environment that might still require such opinion or disclosure due to imposed circumstances.
Another reason auditors observe inventory is to evaluate physical condition, and that’s more difficult with remote video. We can check it for whether there is a lot of dust on the boxes that would indicate there are obsolescence and that sort of indications. But I think you can still evaluate that in a live feed by getting the person who is operating the camera to do essentially what you would do, and you would be able to look at that through the video feed. Many options are available to us.
Additional supporting evidence:
Other audit procedures are normally performed and can provide some audit evidence about the existence of inventory. For example, inventory price-testing is performed on almost every audit, and the primary objective of inventory price-testing is, of course, to address the valuation pricing assertion. However, we are always looking at the quantity in the inventory, the price at which it was purchased, and what the cost was. When we are price-testing inventory, while it is not the primary purpose, we are getting some evidence around the quantity of inventory in stock from the supplier invoice and other third independent parties.
When we look at testing sales prices, subsequent sales for obsolescence, and write-downs in value, we are looking at subsequent sales transactions, or sales transactions subsequent to year-end.
Obviously, if the Company is selling product after year-end, they likely would have had to have that in inventory at year-end, depending, of course, on inventory turns, especially the closer it is to year-end.
With cutoff testing and price-testing, even in our traditional audits taking place before the pandemic, there have been other audit procedures that auditors perform that contribute to evidence about existence. The caveat here would be that we certainly could not get sufficient, appropriate audit evidence about the existence assertion by only doing price-test and subsequent sales transactions. We would have to do some carry/roll forward, carry/rollback, and that type of procedure. But it is not as if the inventory observation is the only evidence that is obtained with respect to existence.
The bottom line is that while these are challenging times with respect to observing inventory on-site, there are ways for auditors to get sufficient, appropriate evidence about inventory that will allow them to perform a successful, high-quality audit.