Revising the inventory and confirmation standards
What the IAASB's ISA 500 series project aims to change in ISA 501 on inventory and ISA 505 on external confirmations, and what firms should watch.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Two of the most familiar procedures in any audit, attending the stock count and confirming balances with third parties, rest on standards written for a world of paper count sheets and posted letters. Today a client's stock may be tracked by scanners and a cloud warehouse system, and a bank confirmation may arrive through a platform rather than in an envelope. The IAASB has a project under way to bring the standards up to date.
This article sets out what the IAASB says the project covers, what it is trying to achieve, and how a firm should prepare while it is still in progress. It deliberately does not predict the final requirements: the project is not finished, and firms should work from what the IAASB publishes, not from speculation.
The ISA 500 series project
The IAASB states that its ISA 500 Series project aims to revise ISA 501, Audit Evidence—Specific Considerations for Selected Items, only as it relates to inventory, and to revise ISA 505, External Confirmations. It describes the project as seeking to align those standards more closely with the concepts and requirements in foundational ISAs, citing ISA 315 (Revised 2019), proposed ISA 330 (Revised) and proposed ISA 500 (Revised) as examples.
That alignment point is worth noticing. The project page describes ISA 330 (Revised) and ISA 500 (Revised) as proposed, so the inventory and confirmation standards are being revised alongside, and in step with, wider changes to the evidence standards. The IAASB's ISA 500 series project page sets out the objectives and points readers to the IAASB's "Latest on Our Projects" page for current status.
Inventory: ISA 501 only
ISA 501 covers several "selected items". The IAASB states that the project revises it only as it relates to inventory, so its other topics are not part of this work.
For firms, the practical point is to know which of their papers might be affected. Count attendance planning, count observation, test counts, cut-off at the count, and the work linking count results to the final inventory figure are the obvious candidates. Papers on other items covered by ISA 501 are not in the project's scope. Attending the inventory count describes how the count work is done under today's standards.
External confirmations: ISA 505
The IAASB states that the project also aims to revise ISA 505, External Confirmations. Confirmations are where practice has changed most since the standard was written: some banks route confirmations through platforms, customers reply by e-mail, and requests and responses may never exist on paper.
Firms that rely heavily on confirmations, for bank balances, receivables, payables, loans or balances held by third parties, should watch this part of the project most closely. Confirmations and component auditors covers the current approach.
Technology and professional scepticism
The IAASB states that the project seeks to modernise the audit evidence standards on inventory and external confirmations to reflect the business and audit environment more appropriately, including the implications of the use of technology by entities, auditors and the organisations they interact with. It also states that the project seeks to promote consistent practice and behaviour in obtaining and evaluating audit evidence about inventory and from external confirmation procedures, including reinforcing the appropriate exercise of professional scepticism.
Read together, those aims point to questions every firm can ask now, whatever the final text says:
- When a confirmation arrives electronically, how does the team know it came from the party it claims to come from?
- When a client's warehouse system drives the count, what does the team observe, and what does it simply accept?
- Where the firm uses its own technology, does it understand what the tool does well enough to rely on its output?
- Does the file show the team questioning confirmation replies and count results, or only filing them?
Confirmations and inventory observation in Achekam today
Achekam's tools follow today's practice, and their usefulness under a revised standard will depend on what the IAASB finally issues. In the meantime, here is what they do.
For confirmations, staff plan the confirmations for an engagement and prepare requests that a different person approves, and each respondent answers through a single-use link. Achekam does not send the requests itself: staff send them and record how they were sent. That record of the sending route, and the separation between the person who prepares a request and the person who approves it, are exactly the kind of controls over the confirmation process that a firm should be able to show.
For inventory, the Inventory Observation module saves its work on the server for the chosen engagement, alongside the Engagement Control Tower, the Controls & Walkthrough Studio and the TCWG & Governance Pack Centre. The ISA numbers on these modules' badges are labels, not evidence of compliance with any version of the standards.
Following the project's status
Achekam does not pull a live feed of standards and regulatory changes; its Standards & Regulatory Updates page shows what its knowledge base records. Tracking the project is therefore up to the firm. A simple routine works:
- Name one person in the firm to follow the IAASB's project pages and report changes to the partners.
- When the IAASB publishes an exposure draft or a final standard, read the text itself rather than relying on summaries.
- Check, through IRBA in South Africa, the FRC and ICAN in Nigeria, or ICPAK in Kenya, how and when any revised standard will apply locally.
- Map the affected count and confirmation papers in the firm's methodology, so updating them is a planned task rather than a scramble.
- Brief staff before the first engagement to which revised requirements apply.
The count and the confirmation are procedures every junior learns in their first year. When the standards behind them change, the firms that adapt smoothly will be the ones that started watching early.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
