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Coronavirus, stocktake attendance and the auditor’s report

27 March 2020: ICAEW’s Technical Advisory Service considers the potential impact of coronavirus on attendance at audited entities’ stocktakes and the auditor’s report.

The requirements of the ISAs (UK) in relation to the audit of inventory have not changed as a result of the coronavirus pandemic. ISA (UK) 501 Audit Evidence – Specific Considerations for Selected Items states that if inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by attendance at physical inventory counting, unless impracticable. 
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 (UK) 705 Modifications to the opinion in the independent auditor’s report (Revised June 2016).
Given the current situation and the latest government Guidance for employers and businesses on coronavirus, it is likely that in many cases, physical attendance at a stocktake will be impracticable at the balance sheet date. Auditors must, therefore, consider whether alternative procedures can be performed. Realistic and appropriate alternative audit procedures will depend on the specific circumstances of the audited entity and each entity will need to be considered on a case-by-case basis. The starting point will be to discuss the position with the management of each audited entity.

Virtual attendance

If the audited entity intends to perform a full stocktake, auditors may be able to attend virtually, for example using video call facilities. This method of gathering audit evidence should be approached with caution as there are inherent weaknesses with this. For example, obsolete or damaged stock may be hidden from view and records-based alternative audit procedures may not detect this. Additional procedures to mitigate the increased risk might include increasing sample sizes and following up on items tested at a later date.

Attending a stocktake at an alternative date

ISA (UK) 501 states 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. This may involve attending a stocktake at a future date with a roll-back to the balance sheet date, or, if an interim stocktake was attended, it may be possible to use those results and roll-forward to the balance sheet date.
If the audited entity's trading is significantly reduced and/or its premises have closed, a roll-forward or roll-back might be appropriate, because of reduced movements of inventory. This may also be a viable option where the audited entity has a continuous stock counting system. Auditors should also consider whether the time between the balance sheet date and the date of the stocktake being performed results in the assessment of the condition of inventory at the balance sheet date being compromised. 
Auditors should not take a blanket approach to all their audit clients as there are some industries in which business has not been adversely affected, and this type of approach may not be appropriate in such cases. 
Any approach to the audit of inventory involves the consideration of the quality of the entity’s stock records and internal controls over stock movements and records. Auditors should exercise professional scepticism and consider whether records and controls may have deteriorated as a result of current events, including assessing any additional actions taken by the audited entity regarding its security. 

Stock held by a third party

Where the audited entity has inventory under the custody and control of a third party, it may be possible, in accordance with ISA 501 (UK) to place some reliance on confirmation received from that third party regarding the quantities and condition of the inventory. Professional scepticism may require a careful evaluation of confirmations provided by third parties who have not attended stock counts, and any changes to the wording usually provided in such confirmations. 

Extending the accounting period

It may be worth discussing with the audited entity the possibility of changing its accounting reference date to a later date (for example, in accordance with Companies Act 2006 section 392). By moving the accounting reference date to a later point, the challenges associated with obtaining sufficient appropriate audit evidence arising from an inability to attend the year end stock count take may be deferred, and potentially removed. However, altering the accounting period may have other business implications to consider, for example, tax year end alignment.   

Implications for the auditor’s report

The implications for the auditor’s report of an inability to attend a stock count will depend on the audit evidence obtained. 
Where alternative audit procedures are performed and the procedures provide sufficient appropriate audit evidence to conclude that inventory is free from material error, the auditor’s report will not need to be qualified in respect of stock.
However, if it is not possible to perform alternative audit procedures to obtain sufficient appropriate audit evidence in relation to a material inventory balance, the auditor must modify the opinion in the auditor’s report. In many cases, this will result in a qualified audit opinion due to a limitation of scope, where the stock balance is material but not pervasive.
Where a qualified auditor’s opinion is necessary, we suggest referring to coronavirus in the basis for the qualified opinion paragraph. 
Guidance on modifying audit reports is available in the helpsheet Audit reports – modified opinions, emphasis of matter and other matter paragraphs and in the Audit and Assurance Faculty guide to modifying an audit report for a Limitation on the scope of the audit. 
Further information
Further guidance and resources in connection with coronavirus are available on ICAEW’s Coronavirus hub. 
ICAEW members, affiliates or members of staff in an eligible firm with member firm access may discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250.