Wire Limited, a company engaged in manufacturing of electric equipment, gets some part of its production processes outsourced from third parties.…
CA Intermediate · Auditing and Ethics · MTP · May 2025
Wire Limited, a company engaged in manufacturing of electric equipment, gets some part of its production processes outsourced from third parties. During the audit, the company had sent raw material to third parties for carrying out certain processes on these raw materials and such inventories worth - 1.50 crores (material to financial statements) were lying with different third parties as at year end. How can auditor obtain sufficient appropriate audit evidence in respect of existence and condition of inventories lying with third parties?
Suggested Answer and Working Notes:
When inventory under the custody and control of a third party is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of that inventory by performing one or both of the following: - (i) Request confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity. (ii) Perform inspection or other audit procedures appropriate in the circumstances. Other audit procedure may include – For example, Inspecting documentation regarding inventory held by third parties, example, warehouse receipts.Requesting confirmation from other parties when inventory has been pledged as collateral.Attending, or arranging for another auditor to attend, the third party's physical counting of inventory, if practicable.Obtaining another auditor's report, or a service auditor's report, on the adequacy of the third party's internal control for ensuring that inventory is properly counted and adequately safeguarded.
Topics: Audit Evidence
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