MCQ 3 — SA 501 Inventory is material—but the partner says attendance is unnecessary.

MCQ 3 — SA 501

Inventory is material—but the partner says attendance is unnecessary. Could the partner actually be right?

Atlas Ltd. has inventory of ₹180 crore at year-end.

The auditor determines that inventory is material.

The company’s inventory system provides continuous perpetual records, and the entity performs monthly physical counts at each warehouse.

At 31 March:

the monthly count was completed on 29 March;
the auditor did not attend that count;
no physical count was performed on 31 March;
between 29 and 31 March, the company maintained complete records of all inventory receipts and dispatches;
the auditor performs procedures over those intervening movements and is able to reconcile the 29 March physical quantities to the 31 March inventory records.

The audit manager says:

“Because inventory is material, the auditor was required to attend a physical inventory count specifically on 31 March. The procedures over movements cannot replace attendance.”

The engagement partner disagrees and says the procedures performed are sufficient.

Which ONE is most appropriate?

A. The manager is correct because SA 501 requires attendance at physical inventory counting when inventory is material, and attendance at an earlier date is permissible only where the entity also performs a physical count on the reporting date.

B. The partner is correct because once the auditor has reconciled the perpetual records with the physical count performed before year-end, attendance at the reporting-date count is unnecessary in every case where inventory movements are properly recorded.

C. The partner may be correct because attendance at an earlier date, combined with procedures on intervening transactions, can enable the auditor to obtain evidence regarding the existence and condition of inventory at the reporting date.

D. Neither position is correct because SA 501 requires the auditor to obtain a written representation from management concerning the quantity and condition of inventory whenever the auditor does not attend the physical count at the reporting date, and such representation is a mandatory substitute for attendance.