During the audit of Alpha Components Ltd., the management informs the auditor that the company has implemented a sophisticated ERP system that…

Reporting requirement under CARO 2020: As per Clause 3 (ii) (a) of CARO, 2020, the auditor is required to report whether physical verification of inventory has been conducted at reasonable intervals by the management and whether, in the opinion of the auditor, the coverage and procedures of such verification by the management is appropriate. The auditor is also required to report whether any discrepancies of 10% or more in the aggregate for each class of inventory were noticed and, if so, whether the same have been properly dealt with in the books of account. Auditor must Report on the non-conduct of physical verification In the present case, the management of Alpha Components Ltd. has stated that it has discontinued physical verification of inventories on the ground that a sophisticated ERP system tracks inventory movement in real time. However, the existence of an ERP system does not replace the requirement of physical verification, as CARO, 2020 specifically requires reporting on physical verification conducted by management. Therefore, in compliance with Clause 3 (ii) (a) of CARO, 2020, the auditor must report the non-conduct of physical verification of inventory, notwithstanding the use of an ERP system, and suitably reflect this matter in the CARO report.