When the auditor could not attend the stock count
What an auditor can do after missing the year-end inventory count, which alternative evidence helps, and when the opinion is qualified or disclaimed.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
The engagement letter is signed in April for a February year end. The previous auditor resigned, the client took weeks to appoint a new one, and the year-end stock count happened without any auditor present. Inventory is the largest asset on the statement of financial position. The new auditor has to decide what can still be done, and what the report will say if it is not enough.
This happens more often than firms like to admit: late appointments, counts brought forward without notice, a staff member who fell ill on count day, a remote branch nobody reached. This article sets out the alternatives, the evidence worth asking for, and how the opinion is affected when the gap cannot be closed.
Why attendance matters for existence and condition
Attending the count lets the auditor see that inventory exists, observe whether it is in saleable condition, test-count items in both directions and watch how the client controls the count. Physical verification is the classic existence test; ACCA lists physical verification of non-current assets among the tests relevant to the existence assertion, and the same logic is why the count matters so much for stock.
Missing the count removes the most direct evidence about existence and condition at the year-end date. Nothing done later is quite as good, which is why the alternatives below need to be planned with care.
Alternative procedures: a later count and working back
Where the count was missed, the usual alternative is to count, or observe a count of, the inventory at a later date, and then reconcile back to the year-end quantities:
- Attend a count as soon as possible after appointment, observing the client's procedures and performing test counts.
- Obtain the movements between the year end and the later count: purchases and goods received, sales and dispatches, production, write-offs and returns.
- Test those movements on a sample basis, including cut-off at both ends.
- Work back from the later count to the year-end quantities and compare them with the client's year-end count.
- Investigate differences and conclude on whether the year-end quantities are supported.
The longer the gap between the year end and the later count, and the weaker the client's records of movements, the less persuasive the roll-back. A count shortly after year end at a business with a perpetual inventory system can give strong evidence. A count months later at a business with poor stock records may give very little.
Evidence from the client's own count records
The client's documentation of the count it did hold is the next source. AccountingTools lists the documents to keep after an inventory count: count instructions, signed count sheets or tags, tag control logs, cut-off records, variance reports, recount documentation, adjustment approvals and final inventory reports. It adds that evidence for damaged, obsolete, consigned or third-party inventory should also be kept. That list doubles as a useful request to send the client.
Ask for all of it. Check that the tags or sheets are complete and in sequence, that the counters signed them, that variances were investigated and recounted, and that adjustments were approved by someone other than the counter. Good count records do not replace observation, but they make the roll-back more credible. Missing or inconsistent records are a strong sign that the alternative procedures will not be enough.
Qualified opinion or disclaimer
ICAEW explains that a modified opinion can arise from an error, a disagreement over a matter or a lack of sufficient audit evidence, and that how material or pervasive the impact is determines the type of modification. Its guide to understanding audit reports gives exactly this situation as an example of a qualified opinion: the auditor could not attend the year-end count or obtain alternative evidence about the inventory's existence and condition, but, except for that matter, the statements give a true and fair view.
The disclaimer arises when the problem is larger. ICAEW explains that a disclaimer of opinion is given when the auditor cannot obtain sufficient appropriate evidence and the effect is material and so pervasive that the auditor cannot form a view. Inventory that dominates the statement of financial position, drives cost of sales and gross profit, and links to the opening position of the following year can push a missed count from material towards pervasive. If the prior-year count was also unaudited, the effect on opening inventory and therefore on the current year's results adds to the problem. Modified audit opinions covers both types.
Inventory observation records and report drafting in Achekam
In Achekam, the Inventory Observation module saves its work on the server for the chosen engagement, so the later count, the test counts and the roll-back can be recorded where the rest of the file is. The ISA numbers on its badge are labels, not evidence of compliance; what supports the conclusion is the work recorded.
If the evidence falls short, the report reflects it. The engagement team drafts the auditor's report on standard ISA 700, 705, 706 and 701 wording, unmodified, qualified, adverse or disclaimer, approval is refused while any bracketed placeholder remains, and only the engagement partner approves. The basis-for-opinion paragraph should say plainly what could not be done and why.
Avoiding it next year
- Agree the count date and the auditor's attendance in the engagement letter or planning memo.
- Ask the client to tell the firm of any change to the count date as soon as it is made.
- For multi-site clients, agree which sites the team will attend and how the others will be covered.
- For late appointments, raise the count at the first meeting, before the engagement letter is signed.
- Where the client counts during the year, consider whether its records are reliable enough to support attendance at an interim count instead.
Attending the inventory count covers planning and observation in detail. A missed count is sometimes unavoidable. A missed count that nobody saw coming usually is not.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
