Auditing Standard ASA 501
Audit Evidence—Specific Considerations for Inventory and Segment Information

This compilation was prepared on 1 March 2023 taking into account amendments made by ASA 2011-1, ASA 2020‑1 and ASA 2022-1.

Compilation Number:  3

Compilation Date:     14 December 2023

Prepared by the Auditing and Assurance Standards Board

Obtaining a Copy of this Auditing Standard

The most recently compiled versions of Auditing Standards, original Standards and amending Standards (see Compilation Details) are available on the AUASB website: www.auasb.gov.au

Contact Details

COPYRIGHT

© 2023 Commonwealth of Australia.  The text, graphics and layout of this Auditing Standard are protected by Australian copyright law and the comparable law of other countries.  Reproduction within Australia in unaltered form (retaining this notice) is permitted for personal and non‑commercial use subject to the inclusion of an acknowledgment of the source as being the Australian Auditing and Assurance Standards Board (AUASB).

Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed to the Technical Director, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne, Victoria 8007 or sent to enquiries@auasb.gov.au.  Otherwise, no part of this Auditing Standard may be reproduced, stored or transmitted in any form or by any means without the prior written permission of the AUASB except as permitted by law.

This Auditing Standard reproduces substantial parts of the corresponding International Standard on Auditing issued by the International Auditing and Assurance Standards Board (IAASB) and published by the International Federation of Accountants (IFAC), in the manner described in the statement on Conformity with International Standards on Auditing.  The AUASB acknowledges that IFAC is the owner of copyright in the International Standard on Auditing incorporated in this Auditing Standard throughout the world.

All existing rights in this material are reserved outside Australia.  Reproduction outside Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use only.

Further information and requests for authorisation to reproduce this Auditing Standard for commercial purposes outside Australia should be addressed to the Technical Director, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne, Victoria 8007 or sent to enquiries@auasb.gov.au.  Any decision to approve a request may also require the agreement of IFAC.

ISSN 1833-4393

CONTENTS

COMPILATION DETAILS

AUTHORITY STATEMENT

CONFORMITY WITH INTERNATIONAL STANDARDS ON AUDITING

Paragraphs

Application......................................................Aus 0.1-Aus 0.2

Operative Date............................................................Aus 0.3

Introduction

Scope of this Auditing Standard..................................................1

Effective Date...............................................................2

Objective..................................................................3

Requirements

Inventory.................................................................4-8

Litigation and Claims........................................................9-12

Segment Information.........................................................13

Application and Other Explanatory Material

Inventory..............................................................A1-A16

Litigation and Claims....................................................A17-A25

Segment Information....................................................A26-A27

COMPILATION DETAILS

Auditing Standard ASA 501 Audit Evidence—Specific Considerations for Inventory and Segment Information (as Amended)

This compilation takes into account amendments made up to and including 27 April 2022 and was prepared on 1 March 2023 by the Auditing and Assurance Standards Board (AUASB).

This compilation is not a separate Auditing Standard made by the AUASB.  Instead, it is a representation of ASA 501 (October 2009) as amended by other Auditing Standards which are listed in the Table below.

Table of Standards

Legislation History

Table of Amendments

Conformity with International Standards on Auditing

This Auditing Standard conforms with the Inventory and Segment Information sections (paragraphs 1-8, 13, A1-A16 and A26-A27) of International Standard on Auditing ISA 501 Audit Evidence—Specific Considerations for Selected Items, issued by the International Auditing and Assurance Standards Board (IAASB), an independent standard-setting board of the International Federation of Accountants (IFAC).

The other paragraphs of ISA 501 relating to Litigation and Claims (paragraphs 9-12 and A17-A25) are incorporated into ASA 502 Audit Evidence—Specific Considerations for Litigation and Claims. 

The AUASB has decided to continue to issue ASA 502 as a separate Auditing Standard, in the same way that the previous standard, ASA 508 Enquiry Regarding Litigation and Claims (April 2006), is a separate standard.  ASA 508 contains requirements and guidance that the AUASB considers important to carry forward in the Australian Auditing Standards, and as a result, the revised standard is better suited to presentation as a separate standard. 

This Auditing Standard, ASA 501, contains all the requirements and guidance contained in ISA 501 relating to Inventory and Segment Information.  Paragraphs that have been added to this Auditing Standard (and do not appear in the text of the equivalent ISA) are identified with the prefix “Aus”.

Compliance with this Auditing Standard, in conjunction with ASA 502, enables compliance with ISA 501.

Auditing Standard ASA 501

Audit Evidence—Specific Considerations for Inventory and Segment Information

Application

Aus 0.1 This Auditing Standard applies to:

(a) an audit of a financial report for a financial year, or an audit of a financial report for a half-year, in accordance with the Corporations Act 2001; and

(b) an audit of a financial report, or a complete set of financial statements, for any other purpose.

Aus 0.2 This Auditing Standard also applies, as appropriate, to an audit of other historical financial information.

Operative Date

Aus 0.3 This Auditing Standard is operative for financial reporting periods commencing on or after 1 January 2010.  [Note: For operative dates of paragraphs changed or added by an Amending Standard, see Compilation Details.]

Introduction

Scope of this Auditing Standard

1. This Auditing Standard deals with specific considerations by the auditor in obtaining sufficient appropriate audit evidence in accordance with ASA 330,1F[1] ASA 5002F[2] and other relevant Australian Auditing Standards, with respect to certain aspects of inventory and segment information in an audit of a financial report.

Effective Date

2.                   [Deleted by the AUASB.  Refer Aus 0.3]

Objective

3.                   The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the:

(a)                Existence and condition of inventory; and

(b)                [Deleted by the AUASB.  Refer ASA 502 Audit Evidence—Specific Considerations for Litigation and Claims]

(c)                Presentation and disclosure of segment information in accordance with the applicable financial reporting framework.

Requirements

Inventory

4.                   If inventory is material to the financial report, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by:

(a)                Attendance at physical inventory counting, unless impracticable, to: (Ref: Para. A1-A3)

(i)                 Evaluate management’s instructions and procedures for recording and controlling the results of the entity’s physical inventory counting;
(Ref: Para. A4)

(ii)               Observe the performance of management’s count procedures; (Ref: Para. A5)

(iii)             Inspect the inventory; and (Ref: Para. A6)

(iv)             Perform test counts; and (Ref: Para. A7-A8)

(b)                Performing audit procedures over the entity’s final inventory records to determine whether they accurately reflect actual inventory count results.

5.                   If physical inventory counting is conducted at a date other than the date of the financial report, the auditor shall, in addition to the procedures required by paragraph 4 of this Auditing Standard, perform audit procedures to obtain audit evidence about whether changes in inventory between the count date and the date of the financial report are properly recorded. (Ref: Para. A9-A11)

6.                   If the auditor is unable to attend physical inventory counting due to unforeseen circumstances, the auditor shall make or observe some physical counts on an alternative date, and perform audit procedures on intervening transactions.

7.                   If attendance at physical inventory counting is impracticable, the auditor shall perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory.  If it is not possible to do so, the auditor shall modify the opinion in the auditor’s report in accordance with ASA 705.[3]
(Ref: Para. A12-A14)

8.                   If inventory under the custody and control of a third party is material to the financial report, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of that inventory by performing one or both of the following:

(a)                Request confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity. (Ref: Para. A15)

(b)                Perform inspection or other audit procedures appropriate in the circumstances. (Ref: Para. A16)

Litigation and Claims

9.-12. [Deleted by the AUASB.  Refer ASA 502  Audit Evidence—Specific Considerations for Litigation and Claims]

Segment Information

13. The auditor shall obtain sufficient appropriate audit evidence regarding the presentation and disclosure of segment information in accordance with the applicable financial reporting framework by: (Ref: Para. A26)

(a)                Obtaining an understanding of the methods used by management in determining segment information, and:
(Ref: Para. A27)

(i)                 Evaluating whether such methods are likely to result in disclosure in accordance with the applicable financial reporting framework; and

(ii)               Where appropriate, testing the application of such methods; and

(b)                Performing analytical procedures or other audit procedures appropriate in the circumstances.

* * *

Application and Other Explanatory Material

Inventory

Attendance at Physical Inventory Counting (Ref: Para. 4(a))

A1.             Management ordinarily establishes procedures under which inventory is physically counted at least once a year to serve as a basis for the preparation of the financial report and, if applicable, to ascertain the reliability of the entity’s perpetual inventory system.

A2.             Attendance at physical inventory counting involves:

• Inspecting the inventory to ascertain its existence and evaluate its condition, and performing test counts;
• Observing compliance with management’s instructions and the performance of procedures for recording and controlling the results of the physical inventory count; and
• Obtaining audit evidence as to the reliability of management’s count procedures.

These procedures may serve as test of controls or substantive procedures depending on the auditor’s risk assessment, planned approach and the specific procedures carried out.

A3.             Matters relevant in planning attendance at physical inventory counting (or in designing and performing audit procedures pursuant to paragraphs 4-8 of this Auditing Standard) include, for example:

• The risks of material misstatement related to inventory.
• The nature of the internal control related to inventory.
• Whether adequate procedures are expected to be established and proper instructions issued for physical inventory counting.
• The timing of physical inventory counting.
• Whether the entity maintains a perpetual inventory system.
• The locations at which inventory is held, including the materiality of the inventory and the risks of material misstatement at different locations, in deciding at which locations attendance is appropriate.  
• Whether the assistance of an auditor’s expert is needed. ASA 620[4] deals with the use of an auditor’s expert to assist the auditor to obtain sufficient appropriate audit evidence.

Evaluate Management’s Instructions and Procedures (Ref: Para. 4(a)(i))

A4.             Matters relevant in evaluating management’s instructions and procedures for recording and controlling the physical inventory counting include whether they address, for example:

• The application of appropriate controls, for example, collection of used physical inventory count records, accounting for unused physical inventory count records, and count and re-count procedures.
• The accurate identification of the stage of completion of work in progress, of slow moving, obsolete or damaged items and of inventory owned by a third party, for example, on consignment.
• The procedures used to estimate physical quantities, where applicable, such as may be needed in estimating the physical quantity of a coal pile.
• Control over the movement of inventory between areas and the shipping and receipt of inventory before and after the cut-off date.

Observe the Performance of Management’s Count Procedures
(Ref: Para. 4(a)(ii))

A5.             Observing the performance of management’s count procedures, for example those relating to control over the movement of inventory before, during and after the count, assists the auditor in obtaining audit evidence that management’s instructions and count procedures are adequately designed and implemented.  In addition, the auditor may obtain copies of cut-off information, such as details of the movement of inventory, to assist the auditor in performing audit procedures over the accounting for such movements at a later date.

Inspect the Inventory (Ref: Para. 4(a)(iii))

A6.             Inspecting inventory when attending physical inventory counting assists the auditor in ascertaining the existence of the inventory (though not necessarily its ownership), and in identifying, for example, obsolete, damaged or ageing inventory.

Perform Test Counts (Ref: Para. 4(a)(iv))

A7.             Performing test counts, for example by tracing items selected from management’s count records to the physical inventory and tracing items selected from the physical inventory to management’s count records, provides audit evidence about the completeness and the accuracy of those records.

A8.             In addition to recording the auditor’s test counts, obtaining copies of management’s completed physical inventory count records assists the auditor in performing subsequent audit procedures to determine whether the entity’s final inventory records accurately reflect actual inventory count results.

Physical Inventory Counting Conducted Other than At the Date of the Financial Report (Ref: Para. 5)

A9.             For practical reasons, the physical inventory counting may be conducted at a date, or dates, other than the date of the financial report.  This may be done irrespective of whether management determines inventory quantities by an annual physical inventory counting or maintains a perpetual inventory system.  In either case, the effectiveness of the design, implementation and maintenance of controls over changes in inventory determines whether the conduct of physical inventory counting at a date, or dates, other than the date of the financial report is appropriate for audit purposes.  ASA 330 establishes requirements and provides guidance on substantive procedures performed at an interim date.[5]

A10.         Where a perpetual inventory system is maintained, management may perform physical counts or other tests to ascertain the reliability of inventory quantity information included in the entity’s perpetual inventory records.  In some cases, management or the auditor may identify differences between the perpetual inventory records and actual physical inventory quantities on hand; this may indicate that the controls over changes in inventory are not operating effectively.

A11.         Relevant matters for consideration when designing audit procedures to obtain audit evidence about whether changes in inventory amounts between the count date, or dates, and the final inventory records are properly recorded include:

• Whether the perpetual inventory records are properly adjusted.
• Reliability of the entity’s perpetual inventory records.
• Reasons for significant differences between the information obtained during the physical count and the perpetual inventory records.

Attendance at Physical Inventory Counting Is Impracticable (Ref: Para. 7)

A12.         In some cases, attendance at physical inventory counting may be impracticable.  This may be due to factors such as the nature and location of the inventory, for example, where inventory is held in a location that may pose threats to the safety of the auditor.  The matter of general inconvenience to the auditor, however, is not sufficient to support a decision by the auditor that attendance is impracticable.  Further, as explained in ASA 200,[6] the matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive. 

A13.         In some cases where attendance is impracticable, alternative audit procedures, for example inspection of documentation of the subsequent sale of specific inventory items acquired or purchased prior to the physical inventory counting, may provide sufficient appropriate audit evidence about the existence and condition of inventory.

A14.         In other cases, however, it may not be possible to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by performing alternative audit procedures.  In such cases, ASA 705 requires the auditor to modify the opinion in the auditor’s report as a result of the scope limitation.[7]

Inventory under the Custody and Control of a Third Party

Confirmation (Ref: Para. 8(a))

A15.         ASA 505[8] establishes requirements and provides guidance for performing external confirmation procedures.

Other Audit Procedures (Ref: Para. 8(b))

A16.         Depending on the circumstances, for example where information is obtained that raises doubt about the integrity and objectivity of the third party, the auditor may consider it appropriate to perform other audit procedures instead of, or in addition to, confirmation with the third party.  Examples of other audit procedures include:

• 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.
• Inspecting documentation regarding inventory held by third parties, for example, warehouse receipts.
• Requesting confirmation from other parties when inventory has been pledged as collateral.

Litigation and Claims

A17.-A25.  [Deleted by the AUASB.  Refer ASA 502 Audit Evidence—Specific Considerations for Litigation and Claims]

Segment Information (Ref: Para. 13)

A26. Depending on the applicable financial reporting framework, the entity may be required or permitted to disclose segment information in the financial report.  The auditor’s responsibility regarding the presentation and disclosure of segment information is in relation to the financial report taken as a whole.  Accordingly, the auditor is not required to perform audit procedures that would be necessary to express an opinion on the segment information presented on a
stand-alone basis.

Understanding of the Methods Used by Management (Ref: Para. 13(a))

A27. Depending on the circumstances, example of matters that may be relevant when obtaining an understanding of the methods used by management in determining segment information and whether such methods are likely to result in disclosure in accordance with the applicable financial reporting framework include:

• Sales, transfers and charges between segments, and elimination of inter-segment amounts.
• Comparisons with budgets and other expected results, for example, operating profits as a percentage of sales.
• The allocation of assets and costs among segments.
• Consistency with prior periods, and the adequacy of the disclosures with respect to inconsistencies.

[*]  Early adoption, in conjunction with ASA 315 Identifying and Assessing Risks of Material Misstatement, permitted.

[1]  See ASA 330 The Auditor’s Responses to Assessed Risks.

[2]  See ASA 500 Audit Evidence.

[3]  See ASA 705 Modifications to the Opinion in the Independent Auditor’s Report.

[4]  See ASA 620 Using the Work of an Auditor’s Expert.

[5]  See ASA 330, paragraphs 22-23.

[6]  See ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards, paragraph A48.

[7]  See ASA 705, paragraph 13.

[8]  See ASA 505 External Confirmations.