In the midst of the current unprecedented crisis, we’ve had a number of queries in recent days about stocktake attendance for 31 March 2020 year ends and the audit approach to adopt in the event that it is not possible to physically access a client’s premises to undertake testing.

As we’ve mentioned many times on courses over the last 10 years, International Auditing Standards (ISAs) are tough in this area, with ISA 501 requiring the auditor to almost always attend the count where stock is material. Here are some thoughts:

1.      Attendance may be impracticable

Paragraph 4 of ISA 501 states that stocktake attendance is not required where impracticable. We’ve had lots of amusing discussions over the years as to what ‘impracticable’ might mean. The current crisis surely counts – but that doesn’t remove the need for audit evidence over the existence and completeness of stock quantities. Guidance issued by the Financial Reporting Council (FRC) on 16 March states that ‘the coronavirus outbreak should not undermine the delivery of high-quality audits.’

2.      Could the financial year be lengthened?

Although the FRC guidance referred to above states that ‘additional time may be required to complete audits, even at the risk of delaying company reporting’, this isn’t especially helpful where stock quantities are concerned because evidence needs to be sought in the moment.

A lengthening of the financial year might be one way to go here. A company’s financial year can be lengthened to a maximum of 18 months – though only once every five years. In view of the current extraordinary circumstances some would argue that an exception should be made to this rule. However, this has not been forthcoming yet.

3.      Consider counting later and roll back

Where a stocktake cannot be attended, another option for entities and their auditors would be for the count to take place at a later date (maybe 30 June) and for the figures to be rolled back to take account of movements since that date.

Such a rollback would need to be carefully audited with movements since 31 March (e.g. good received, goods despatched, returns etc.) tested for over and understatement. For clients with good stock records and good evidenced controls over completeness of stock movements, the challenge for auditors here may not insurmountable. A good tip would be to make them aware now of the audit work that will need to be done later. Also, with many businesses in virtual shut down, there may not be that many stock movements in the ‘gap period.’

4.      Be careful with internal control reliance

Some audit firms already avoid attending a year end count by relying on continuous stock checking controls. This can be a useful approach – but it only works where the controls are tested during the accounting period under review. So, if they’ve not already been tested by an audit firm, then they’re too late!

5.      Third party stock might not be a problem

Some firms have mentioned to us these last few days that the stock that they are struggling to get access to is under the custody of a third party. This might be less of a problem. Paragraph 8 of ISA 501 allows the auditor to rely on third party confirmation for this stock – though it’s important that the confirmation is sought direct from the third party.

6.      Some audit reports will be modified

Notwithstanding all the points above, I fear that numerous audit reports will be modified at the current time where sufficient, relevant evidence simply can’t be obtained. The relevant modification is likely to be a qualified opinion for limitation of scope. ICAEW members can download a useful guide on relevant wording from:

https://www.icaew.com/-/media/corporate/files/helpsheets/technical/aaf-guides/limitation-on-the-scope-of-the-audit.ashx

For many audit clients the thought of a modified audit opinion would traditionally be unthinkable. To some extent, in these awful times, it may simply be part of the ‘new normal.’

Peter Herbert

March 2020