Leveraging technology to help with inventory counting
The COVID-19 outbreak could create several potential challenges for management of an entity to conduct physical inventory counting and for the auditors to attend these counts. With scenarios like lockdown, travel restrictions etc. as imposed by Government of India, physical inventory counting would be challenging and in some cases it would be impracticable. Possibility of leveraging technology to help with inventory counting and challenges and in this regard are discussed below.
Background:
When inventory is material to the financial statements, SA 501, “Audit Evidence - Specific Considerations for Selected Items” requires that the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by:
(a) Attendance at physical inventory counting, unless impracticable to:
- Evaluate management’s instructions and procedures for recording and controlling the results of the entity’s physical inventory counting;
- Observe the performance of management’s count procedures;
- Inspect the inventory; and
- Perform test counts; and
(b) Performing audit procedures over the entity’s final inventory records to determine whether they accurately reflect actual inventory count results.
Is it impracticable?
“A12 of SA 501 : In some cases, attendance at physical inventory counting may be impracticable. This may be due to factors such as the nature and location of the inventory, for example, where inventory is held in a location that may pose threats to the safety of the auditor. The matter of general inconvenience to the auditor, however, is not sufficient to support a decision by the auditor that attendance is impracticable. Further, as explained in SA 200, the matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive.
Question of practicability should be assessed case to case. However, it’s a very reasonable interpretation of that paragraph in the standard to say that COVID-19 is putting auditors’ safety in jeopardy. And therefore, alternative procedures would be appropriate.
Virtual Inventory Attendance of Inventory Count
Standards on Auditing do not prohibit use of technology when performing inventory observations. If auditors are satisfied with the inventory counting process, they may be able to utilize technologies to observe these counts.
Use of technology in inventory counting
In certain situations where physical attendance by auditors at inventory counting is not possible, they may be able to observe the inventory counting remotely via video call with the help of technology. Auditors would need to ensure the security on these applications. Auditors would need to understand the technological and practical constraints to observing an inventory counting remotely. If auditors are observing an inventory counting remotely, they would need to perform the same procedures as required in case of physically attending the inventory counting.
This method of gathering audit evidence should be approached with caution as there are inherent weaknesses with this. For example, obsolete or damaged stock may be hidden from view and records-based alternative audit procedures may not detect this. This should be used only in circumstances wherein the inventory items can be identified with a unique reference number etc. so that there are no chances of replacement of inventory during/ after inventory counting. Further, auditors may carry out additional procedures to mitigate the increased risk which might include increasing sample sizes and following up on items tested at a later date. Also, auditors should consider the previous experience while conducting inventory counting at an earlier date (e.g. inventory counting conducted at an interim date before the year end).
Practical Considerations
- Who will be controlling the device(s), and how and where are the cameras directed? If you are not in control, there is a risk that the video footage may be manipulated.
- How will you obtain evidence regarding completeness? Do cameras allow you to see all of the inventory at any point in time? There is a risk that things are hidden out of frame or that items are moved in and out of frame.
- Can the condition of the inventory be assessed? If videos lack resolution, you may not be able to see indications of damage. Video footage may not be appropriate for assessing the condition of all inventory.
- How will you select samples for testing, and will you increase their size to reflect the increased risk? If communicated prior to the count, this could allow for manipulation. Unpredictability, and only selecting on the call items to be counted, from both floor to sheet, and sheet to floor, will help to reduce this risk.
- Do you need to adjust your sample sizes, given these issues?
- How experienced are your staff who are involved with the count? Given the technology limitations, you will likely want to use staff with prior experience of inventory counts. You may also find it helpful to have more than one member of staff involved.
