COVID-19 – Attendance at stocktakes by auditors of Small and Medium sized Entities

Mar 27, 2020

Practice Consulting writes

With the impact of the COVID-19 pandemic, an urgent issue facing auditors of entities with March year-ends, and thereafter, is attendance at stocktakes. Non-attendance may result in the inability to obtain sufficient appropriate audit evidence, which may impact upon the audit opinion in the current and subsequent years. The purpose of this article is to provide guidance regarding stocktake attendance for audits of small and medium-sized entities with financial years ending on or after 31 March 2020 in the circumstances of the COVID-19 pandemic. 

The measures announced by the UK government and devolved administrations on 23 March 2020 and the recommendations of the Irish government to combat COVID-19 mean that travelling to and from work is only permitted or recommended where this is absolutely necessary and where the work cannot be done from home. Obviously, this has major implications for many businesses and their auditors.

Reference to an International Standards on Auditing (ISA) below should be read as referring to the equivalent ISA (UK) or ISA (Ireland) as appropriate.

Requirements of ISAs for attendance at stocktake

The requirements for attendance at stocktakes are set out in ISA 501 Audit Evidence - Specific Considerations for Selected Items. If inventory is material to the financial statements, ISA 501 requires the auditor to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory, including “attendance at physical inventory counting, unless impracticable”.

If stock is counted at a date other than the date of the financial statements, in addition to attendance at the stocktake, the auditor is required to perform audit procedures to obtain audit evidence about whether changes in inventory between the count date and the date of the financial statements are properly recorded.

If the auditor is unable to attend physical inventory counting due to unforeseen circumstances, the auditor shall make or observe some physical counts on an alternative date, and perform audit procedures on intervening transactions.

If attendance at physical inventory counting is impracticable, the auditor shall perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory. If it is not possible to do so, the auditor shall modify the opinion in the auditor's report in accordance with ISA 705.

Circumstances where attendance at the stocktake may not be practicable

There are two main scenarios where it may be impracticable to attend the stocktake –

  1. The entity does not conduct a stock take at the year-end; or
  2. The entity conducts a stock take and the auditor considers whether it is practicable to attend.

You should firstly contact the business to see whether management intends to conduct a stocktake and establish what plans are in place. 

The entity does not conduct a stock take at the year-end

Since the start of the measures to combat COVID-19, a year-end stocktake may not be carried out by many businesses -

  • The business may be required to be closed, and thus a stocktake may be unfeasible. In this case, you should gain an understanding of the reasons, consider whether you agree, and document why the stocktake is not being held, together with details of any alternative plans that are to be put in place.
  • Alternatively, the business may not be required to close, but decides not to conduct a stocktake for reasons of employee welfare. You should carefully evaluate the reasonableness of management’s rationale for not performing the count and whether you agree, and document why the stocktake is not being held, together with details of any alternative plans that are to be put in place.  

However, if you conclude that management’s explanations do not appear to be reasonable in the circumstances, then you should consider whether you need to request management to perform a stocktake. If they refuse, you should consider how this will impact upon your audit, including the risk assessment, including the risk of fraud, and your ability to obtain sufficient appropriate audit evidence.You should also consider whether there may be a requirement to report to any regulator or third party.

Note that it may be possible for the entity to conduct (and the auditor to attend) a stocktake if restrictions are lifted and the entity re-opens before completion of the audit.  Stock movement may have been largely frozen during the closure or it may be possible to perform procedures which roll back the stock to the year-end. You should discuss this possibility with the entity, to ensure that you receive sufficient notice of the stocktake to allow you to attend. If this happens, please note the requirements of paragraph 5 of ISA 501 to perform audit procedures to obtain audit evidence about whether changes in inventory between the count date and the date of the financial statements are properly recorded. This would include appropriate cut-off tests.

The entity conducts a stock take and the auditor considers whether it is practicable to attend

Generally, when stock is material and a stocktake is held, the auditor attends the stocktake, unless it is impracticable to do so. 

In some circumstances, the auditor may conclude that it is practicable to attend, even in the current climate, but making sure to take into account that health and safety considerations are paramount. You may also consider taking the opportunity to carry out other audit procedures that need to be carried out at the premises, such as physical verification of fixed assets, bearing in mind that it may be difficult to subsequently gain physical access before the end of the audit.

In other circumstances, you may conclude that attendance is not practicable, especially of this consideration is due to health and safety issues.

The application material to ISA 501 states that “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.” It further states that “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”.

It may be the case that you consider that restrictions on travel or staff safety make it impractical to attend, or indeed you may be prohibited from attending. In particular, it may be that certain members of your staff are in vulnerable categories and should not be asked to attend. You should carefully consider the facts and circumstances when assessing whether it is impracticable to attend the stocktake. If this is the case, you should document your reasons in your audit working papers. 

In some circumstances, it may be possible to observe the stocktake using remote technology, such live video-streaming and/or the use of drones or similar technology.  This, along with other aspects of the issue around attendance at stocktakes in the current COVID-19 climate, is discussed in an Institute for Chartered Accountants of Scotland (ICAS) paper available at https://www.icas.com/professional-resources/coronavirus/icas-updates/icas-issues-guidance-for-auditors-on-attendance-at-stocktakes-during-the-coronavirus-outbreak. The limitations and risks attendant on using technology in place of actual attendance should be carefully considered.

Alternative procedures

If a stocktake was not attended, then ISA 501 requires you to perform alternative procedures to obtain sufficient appropriate audit evidence. 

The application material to ISA 501 suggests as an example that “inspection of documentation of the subsequent sale of specific inventory items acquired or purchased prior to the physical inventory counting, may provide sufficient appropriate audit evidence about the existence and condition of inventory”. Other alternative procedures may be available. 

In other cases, however, it may not be possible to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by performing alternative audit procedures. In such cases, ISA 705 (Revised June 2016) Modifications to the Opinion in the Independent Auditor's Report requires the auditor to modify the opinion in the auditor's report as a result of the scope limitation.

Implications for the audit opinion

At the end of the audit, you will need to consider the impact of non-attendance at the stocktake on your auditor’s report, in particular whether you have obtained sufficient appropriate audit evidence. 

If you conclude that you have not, a qualified opinion or disclaimer of opinion may be appropriate. Please refer to ISA (UK) 705 (Revised June 2016) Modifications to the Opinion in the Independent Auditor's Report. This standard addresses the implications of limitations on the scope of the audit. 

In the circumstances described above, a limitation on the scope of the audit may arise from circumstances beyond the control of the entity (such as when you conclude that a stocktake is not feasible, or that it is not practicable for you to attend) and limitations imposed by management (such as when a stocktake does not take place and you disagree with management’s decision not to conduct a count, or to prevent you from attending).

This matter may also interact with other audit issues, such as other scope limitations and uncertainties, such as going concern, which may further impact the auditor’s report.