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SAS
No. 09 Physical Inventory Observation |
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 Status |
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Issued by Auditing Standards Committee in Taiwan on
15 April, 1986. |
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Summary |
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When inventory quantities are determined solely by means of a
physical count, and all counts are made as of the balance-sheet date
or as of a single date within a reasonable time before or after the
balance-sheet date, it is ordinarily necessary for the independent
auditor to be present at the time of count and, by suitable
observation, tests, and inquiries, satisfy himself respecting the
effectiveness of the methods of inventory-taking and the measure of
reliance which may be placed upon the client's representations about
the quantities and physical condition of the inventories. |
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In planning attendance at the physical inventory count or the
alternative procedures, the auditor considers the following:
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The nature of the internal control related to inventory.
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Whether adequate procedures are expected to be established
and proper instructions issued for physical inventory counting.
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The timing of the count.
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The locations at which inventory is held. |
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The auditor would review management’s instructions regarding:
a.
The application of control activities, for example, collection of
used countsheets, accounting for unused countsheets and count and
re-count procedures;
b.
Accurate identification of the stage of completion of work in
progress, of slow moving, obsolete or damaged items and of inventory
owned by a third party, for example, on consignment; and
c.
Whether appropriate arrangements are made regarding the movement of
inventory between areas and the shipping and receipt of inventory
before and after the cutoff date. |
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To obtain audit evidence that management’s control activities are
adequately implemented, the auditor would observe employees’
procedures and perform test counts. When performing test counts, the
auditor performs procedures over both the completeness and the
accuracy of the count records by tracing items selected from those
records to the physical inventory and items selected from the
physical inventory to the count records. The auditor considers the
extent to
which copies of such count records need to be retained for
subsequent audit procedures and
comparison. |
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AUDITING |
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The auditor also considers cutoff procedures including details of
the movement of inventory just prior to, during and after the count
so that the accounting for such movements can be checked at a later
date. |
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If inventories are in the hands of public warehouses or other
outside custodians, the auditor ordinarily would obtain direct
confirmation in writing from the custodian. If such inventories
represent a significant proportion of current or total assets, to
obtain reasonable assurance with respect to their existence, the
auditor should apply one or more of the following procedures as he
considers necessary in the circumstances.
a.
Test the owner's procedures for investigating the warehouseman and
evaluating the warehouseman's performance.
b.
Obtain an independent accountant's report on the warehouseman's
control procedures relevant to custody of goods and, if applicable,
pledging of receipts, or apply alternative procedures at the
warehouse to gain reasonable assurance that information received
from the warehouseman is reliable.
c.
Observe physical counts of the goods, if practicable and reasonable.
d.
If warehouse receipts have been pledged as collateral, confirm with
lenders pertinent details of the pledged receipts (on a test basis,
if appropriate). |
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The independent auditor may be asked to audit financial statements
covering the current period and one or more periods for which he had
not observed or made some physical counts of prior inventories. He
may, nevertheless, be able to become satisfied as to such prior
inventories through appropriate procedures, such as tests of prior
transactions, reviews of the records of prior counts, and the
application of gross profit tests, provided that he has been able to
become satisfied as to the current inventory. |
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 Effective
date
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This Statement is effective for audit of financial statements with
fiscal years ending on or after
30 September, 1986. |
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