SAS No. 09 Physical Inventory Observation


Issued by Auditing Standards Committee in Taiwan on 15 April, 1986.


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.

In planning attendance at the physical inventory count or the alternative procedures, the auditor considers the following:

  • The nature of the internal control related to inventory.
  • Whether adequate procedures are expected to be established and proper instructions issued for    physical inventory counting.
  • The timing of the count.
  • The locations at which inventory is held.

The auditor would review management’s instructions regarding:

  • The application of control activities, for example, collection of used countsheets, accounting for unused countsheets and count and re-count procedures;
  • 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
  • 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.

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.


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.

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.

  • Test the owner's procedures for investigating the warehouseman and evaluating the warehouseman's performance.
  • 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.
  • Observe physical counts of the goods, if practicable and reasonable.
  • If warehouse receipts have been pledged as collateral, confirm with lenders pertinent details of the pledged receipts (on a test basis, if appropriate).

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.

Effective date

This Statement is effective for audit of financial statements with fiscal years ending on or after 30 September, 1986.

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