On reviewing internal control over inventories as part of statutory audit of a company, auditor finds that physical verification is not being…

As per SA 265, “Communicating Deficiencies in Internal Control to Those Charged with Governance and Management", while pointing out significant deficiencies in internal control, auditor has not only to communicate significant deficiencies giving their description but also explain the potential effects and sufficient information to those charged with governance and management to understand context of communication. In the given situation, auditor noticed significant deficiency in internal control over inventories and he pointed out the same to management i.e. "Physical verification of inventories is not being conducted at regular intervals as stipulated by management." Therefore, the above communication is not proper. Not only significant deficiency has to be communicated, it should also be explained to management the potential effects of not carrying out physical verification of inventories at regular intervals as stipulated by management. It should explain that such a significant deficiency can lead to misstatement of inventories impacting profits of the company. Highlighting the importance of such a control, it should be stated that responsibility be fixed for concerned person(s) for adhering to such an important control.