Attendance of statutory auditors at physical inventory counting during the pandemic

It should be underlined that the requirements resulting from the applicable regulations have not been changed because of the pandemic. It means that companies are obliged to carry out the inventory count in accordance with Article 26 of the Accounting Act and the statutory auditor – if the inventories are material to the financial statements – is obliged to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by attending the physical count unless impracticable (see National Standard on Auditing 501 Audit evidence – specific considerations for selected items).

As a result, statutory auditors need to take other options to perform the above obligations.

The use of all types of media and devices to ensure the virtual attendance in the count becomes more and more popular. This method involves inevitably an additional risk also pointed out by the Polish Agency for Audit Oversight (PANA) as trusting the entity’s employees servicing the device for virtual transmission is necessary. However, audit firms have designed procedures which, after fulfilling several conditions, allow the use of virtual presence and thus fulfilling the obligation to attend the count. Due to an increased risk, this method will not always be sufficient.

Another solution is to attend the inventory count on another date. In such an event the statutory auditor performs or observes the physical count on a different date and performs audit procedures on intervening transactions. Such solution would apply in particular if the inventory turnover is significantly reduced. However, this method also involves an additional risk and the impact of time lapse between the performance of procedures by the statutory auditor and the balance sheet date should be considered.

Other possibilities occur if the inventory held under the custody of contracting parties on behalf of the entities is subject to the count. Then, both the entity and the statutory auditor may rely on the confirmation received from the third party with respect to the quantities and condition of inventory.

However, if it is impracticable to attend the physical count, alternative audit procedures can be applied in some cases (see also National Standard on Auditing 501 Audit evidence – specific considerations for selected items). Such alternative procedure can take form for example of an inspection of sales documents after the count date with respect to defined inventory acquired or purchased prior to the date of physical count.

It should be underlined that any alternative procedures applied in place of physical attendance of the inventory count require professional skepticism; and every approach to auditing inventory requires that the quality of inventory records and internal control of the entity over inventory are taken into consideration.

In the event that sufficient appropriate audit evidence regarding the existence and condition of inventory by attending the inventory count or by performing alternative procedures cannot be obtained, the statutory auditor modifies the opinion in the auditor’s report following the limitation of the audit scope in accordance with National Standard on Auditing 705 Modifications to the Opinion in the Independent Auditor's Report.

Author: Iwona Polenceusz, Senior Manager in Audit Department

_{Excerpts of the article have been published on prawo.pl portal.}