SA 501- Audit Evidence –

Special Consideration for selected Items

Scope Objectives Specific/ selected

items
Deals with specific To obtain SAAE regarding 1. Inventory
consideration by auditor :
2. Litigations & Claims
to obtain SAAE w.r.t.
a) Existence and 3. Segment information
inventory, litigation &
condition of inventory
claims and segment
information b) Completeness of
litigation and claims
involving the entity
c) Presentation and
disclosure of segment
information as per
AFRF
 Inventory
Auditors Procedure Decision 1 Decision 2 Decision 3
 When inventory is material If auditor could not It is not practical for If verification is held by
 He shall obtain sufficient attend physical auditor at all to attend stockiest (3rd party)
verification on B/s verification
appropriate evidence
Date 1. Perform alternate 1. Confirmation from
 W.r.t. existence and condition of 1. Attend some
other day procedures; eg. 3rd party
inventory by Inspect documents of 2. Perform inspection
(Count Date) subsequent sale of 3. Other audit
2. Check inventory inventory prior to procedure:
Attendance at & Examining as on count date counting a)Attending or
physical 3. Check 2. If unable to obtain arranging for
Entity’s SAAE; then modify another auditor
inventory count
final intermediary
transactions the report (SA-705) b)Another auditors
inventory 3. Matter of general report or a service
•Evaluate management records & (from 1st April inconvenience to auditors report
instructions for to count date) auditor; is not (SA 402)
comparing 4. If unable to sufficient to support c)Inspecting
controlling inventory them with
obtain AE, then that attendance is documentation
•Observe mgt. count actual impracticable d)Confirmation from
procedure modify the
count result 4. Matter of difficulty, other parties
report cost, time not valid when inventory
•Inspect inventory
•Perform test count basis to omit audit has been pledged
procedures as collateral.
 Question

4. (a) While conducting audit of Vee Ltd, CA

Aman, auditor of the company, found that some
goods are lying with third party for a long
period. Advise Aman how will he verify them.
(4 Marks)
• Explain the procedures to be performed by auditor to obtain sufficient and
appropriate audit evidence regarding the existence and condition of inventory.
• Or
• How would an auditor proceed to obtain sufficient appropriate audit evidence
regarding the existence and condition of inventory? Also, state reporting
requirements in this respect.
• Or
• ABC Ltd is engaged in manufacturing of different type of yarns. On-going
through its financial statements for the past years, it is observed that inventory
is material to the financial statements.
• You as an auditor of the company wanted to obtain sufficient appropriate audit
evidence regarding the existence and condition of the inventory as appearing
in the financial statements. Discuss, how would you proceed as an auditor.
• [MTP-March 18, Aug. 18, Oct.18, March 19, May 20]
Question

•Explain clearly the examples of

matters relevant in planning
attendance at physical inventory
counting.
RTP MAY 20
 Answer
Matters relevant in planning attendance at physical inventory counting include,
for example:

CRICKET
i. C  Completion Stage of WIP
ii. R  RMM
iii.I  I.C.S related to it
iv. C  Counting procedure
v. K  Knowledge about nature of inventory
vi. E  Ensure location of inventory
vii.T  Timing of verification
 Completeness of Litigation & claims
Auditors Procedure
 Inquiry of management
 Review minutes of
meetings
 Review legal expenses A/c
Additional Procedure Written Representation
Risk assessment procedure as per SA 315 From Management / TCWG
 
If risk of material misstatement identified All information disclosed to
 auditor and discussed in FS as
1. Direct communication with entity’s per AFRF
legal counsel
2. Send letter of inquiry prepared by
management
3. Obtain evidence regarding valuation
& measurement
4. Accounting estimate as per SA 540
5. Management / Law prohibits
communication with legal
Counsel/external legal council
a) Alternate procedure
b) Unable to obtain SAAE – modify
report - SA 705
 True & False

(vi) If the auditor assesses a risk of

material misstatement regarding
litigation or claims that have been
identified, the auditor need not seek
direct communication with the
entity’s external legal counsel.
 Answer

(vi) Incorrect: If the auditor assesses a risk of material

misstatement regarding litigation or claims that have
been identified, or when audit procedures performed
indicate that other material litigation or claims may exist,
the auditor shall, in addition to the procedures required
by other SAs, seek direct communication with the
entity’s external legal counsel.
 SA 505 External Confirmation
Meaning Process to obtain Examples Types of Confirmation letter
Audit Shortcut – DS DS Shortcut –
Evidence 1.Decide - Matters on which ABCD of SIP
obtained by confirmation required (Systematic Positive Negative
auditor Factor to be considered while Investment plan)
 deciding items: A– Account  
From 3rd a. Materiality of a/c balance Balance &
b. Assessment of inherent & Control
Situation Situation where
party transaction where auditor

risk
details
auditor require
c. Particular FS assertion require answer
As a DIRECT B- Bank Balances & in all
ans. Only in
2.Select - Party from which
WRITTEN confirmation required transaction agreements & case of
RESPONSE 3.Design – Confirmation Letter Details disagreements disagreement
 Factor to be considered while C– Creditor
In paper designing confirmation letter Balance  
form / Assertions being addressed confirmation More Less persuasive
electronic / Layout & presentation of D – Debtor Balance persuasive
other confirmation request Confirmation 
Management’s Authorization to 
medium confirming parties to respond
S- Stock held by ICS is - Weak Strong
Ability of confirming party to provide 3rd party
request information I – Investments RMM is- High Low
Method of Communication details
Identified RMM, including Fraud risk P- Related Party Materiality is – more Less
Prior experience on audit or similar transaction
engagement Expected error – more Less
confirmation
4.Send – To the appropriate party
 SA 505 External Confirmation
Decisions
1.In case of Non-response
 perform alternate procedure
 still AE not obtained  modify AR
2.Unreliable Response
 perform additional procedures
 if not satisfied, alternate procedure
 AE not obtained  Modify AR
3.Managements Refusal
Check whether it is justified

Yes No
 
Perform alternate procedure Communicate with TCWG (SA 260)
 
Still AE not obtained – modify modify AR (SA 705)
 Question

(iii) Audit evidence obtained from

external confirmation is always reliable.
 Answer

(iii) Incorrect: The reliability of information to be used as

audit evidence, and therefore of the audit evidence itself,
is influenced by its source and its nature, and the
circumstances under which it is obtained, including the
controls over its preparation and maintenance where
relevant. Even when information to be used as audit
evidence is obtained from sources external to the entity,
circumstances may exist that could affect its reliability.
 SA 510 ‘Initial Audit Engagement – Opening Balance’
Meaning Consistency of Predecessor’s Audit
Engagement Procedure for Opening Balances Accounting Policy Report
in which a) Read prior year’s Financial Obtain SAAE If modification in
Statements & Audit Reports. whether: predecessor’s AR,
either FS for b) Whether correctly brought a) Accounting
the prior forward. Policies applied then evaluate the
period c) Any adjustment disclosed as Prior appropriately effect of
a)Not Period Adjustment. and consistently modification in
audited OR d) Co-relate opening balance with b) If any change; assessing RMM in
procedures performed in current properly Current period F.S.
b)Audited by year. disclosed by
Predecesso e) Obtain additional evidence for management in 
r auditor opening balances. If doubt as to notes to account Decision
misstatement in opening balance, as per AFRF If balance of current FY
then communicate with  still contain effect of that
management and TCWG. misstatement
 Decision modify AR (SA 705 &
Whether disclosed: 710)
Decision
Yes – Clean Report
a) Unable to obtain AE: modify AR (SA 705) Note:
(EOM para) Use OM para to mention
b) If misstatement in Opening Balance ask
mgt to rectify  Yes – EOM para No – modify the AR that last year we have not
 No – Modify AR (SA 705) audited the FS
 Live Classes Personal Guidance
Weekly Tests
Study Planner
Structured Courses
Test Analysis
Unlimited Access Plus
Experts' Guidelines

Study Material

Iconic

CODE CODE
KUNAL
KUNAL
Join KUNAL Sir’s Telegram Channel
on UNACADEMY

Telegram Channel
Thank
You
Use Code: KUNAL
to get 10% Discount