According to the standard of independent auditing, how does an auditor collect audit evidence for the existence of inventory?

Audit evidence is all the documentation and information related to the audit, and based on this documentation and information, the auditor will draw conclusions and form an audit opinion. The collection of audit evidence for the existence of inventory is regulated by Vietnamese Standard on Auditing No. 501: Additional Audit Evidence for Specific Items and Events.

In cases where inventory is considered significant to the financial statements, the auditor must gather sufficient appropriate audit evidence regarding the existence and condition of inventory by:

1.  Witnessing the physical inventory counting:

• The auditor selects inventory samples for physical inventory count, such as choosing some items from the unit's inventory count sheet to compare with the actual inventory in the warehouse. This provides audit evidence of the completeness and accuracy of the inventory count sheets;
• The auditor evaluates and observes compliance with the management's instructions and the execution of recording and control procedures for the results of physical inventory counting;
• The auditor obtains audit evidence on the reliability of the inventory counting procedures as specified by the audited entity's management. 

2. Perform audit procedures on the final accounting records of the audited unit's inventory to determine whether these records accurately reflect the actual results of the physical inventory counting.

Some cases to note:

• In cases where the physical inventory count is conducted on a date different from the end of the accounting period: In addition to the prescribed procedures mentioned above, the auditor must also perform audit procedures to collect audit evidence on whether the inventory fluctuations between the date of the physical inventory count and the end of the accounting period are accurately recorded.
• In cases where the auditor is unable to participate in the physical inventory count:
  • The auditor must conduct a separate inventory count or observe the inventory count on a different date, and perform audit procedures on transactions occurring between the subsequent inventory count date and the date of the actual inventory count.
  • Alternatively, the auditor must perform alternative audit procedures to gather sufficient appropriate audit evidence regarding the existence and condition of inventory. If it is not possible to perform the alternative audit procedures as mentioned above, the auditor must issue a qualified audit opinion in accordance with the regulations and guidelines of Vietnamese Standard on Auditing No. 705.

• In cases where inventory is under the control or custody of a third party and is determined to be significant to the financial statements, the auditor must gather sufficient and appropriate audit evidence regarding the existence and condition of that inventory by performing one or both of the following procedures:
  • Request confirmation from the third party regarding the quantity and condition of the inventory held by them.
  • Conduct an inspection or perform other appropriate audit procedures depending on the circumstances. For example, witnessing the physical count of the third party's inventory, obtaining reports on the adequacy and appropriateness of the third party's internal controls to ensure accurate counting and adequate protection of the inventory, examining relevant documentation, etc.