{"id":"F2006L01381","name":"ASA 501 - Existence and Valuation of Inventory - April 2006","slug":"asa-501-existence-and-valuation-of-inventory-april-2006","collection":"legislative_instrument","jurisdiction":"commonwealth","status":"repealed","isInForce":false,"actNumber":null,"makingDate":null,"administeringDepartment":null,"currentVersion":{"id":58941,"registerId":"commonwealth-F2006L01381-current","compilationNumber":null,"startDate":"2026-04-02","status":"Repealed","reasons":null,"registeredAt":null},"sections":[{"sectionNumber":"Obtaining a Copy of this Auditing Standa","sectionType":"section","heading":"Obtaining a Copy of this Auditing Standard","content":"###### Obtaining a Copy of this Auditing Standard\n\nThis Auditing Standard is available on the AUASB website: www.auasb.gov.au.\n\nAlternatively, printed copies of this Auditing Standard are available by contacting:\n\n| Auditing and Assurance Standards BoardLevel 4530 Collins StreetMelbourne Victoria 3000AUSTRALIA | Phone: (03) 8080 7400Fax: (03) 8080 7450E-mail: enquiries@auasb.gov.auPostal Address:PO Box 204Collins Street WestMelbourne Victoria 8007AUSTRALIA |\n| ----------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- |","sortOrder":0},{"sectionNumber":"COPYRIGHT","sectionType":"section","heading":"COPYRIGHT","content":"##### COPYRIGHT\n\n© Commonwealth of Australia 2006. 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. Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed to the Principal Executive, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne Victoria 8007. Otherwise, no part of the 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.\n\nISSN 1833-4393","sortOrder":1},{"sectionNumber":"CONTENTS","sectionType":"part","heading":"CONTENTS","content":"#   \nCONTENTS\n\nPREFACE\n\nAUTHORITY STATEMENT\n\nParagraphs\n\nApplication.................................. 1-2\n\nOperative Date................................ 3\n\nIntroduction.................................. 4-6\n\nInternal Control Structure......................... 7-9\n\nAttendance at Physical Inventory Counting............. 10-28\n\nInventory Under Control or Custody of a Third Party...... 29\n\nValuation of Inventory........................... 30-32\n\nConformity with International Standards on Auditing...... 33","sortOrder":2},{"sectionNumber":"Preface","sectionType":"part","heading":"Preface","content":"###### Obtaining a Copy of this Auditing Standard\n\nThis Auditing Standard is available on the AUASB website: www.auasb.gov.au.\n\nAlternatively, printed copies of this Auditing Standard are available by contacting:\n\n| Auditing and Assurance Standards BoardLevel 4530 Collins StreetMelbourne Victoria 3000AUSTRALIA | Phone: (03) 8080 7400Fax: (03) 8080 7450E-mail: enquiries@auasb.gov.auPostal Address:PO Box 204Collins Street WestMelbourne Victoria 8007AUSTRALIA |\n| ----------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- |\n\n##### COPYRIGHT\n\n© Commonwealth of Australia 2006. 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. Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed to the Principal Executive, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne Victoria 8007. Otherwise, no part of the 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.\n\nISSN 1833-4393\n\n#   \nCONTENTS\n\nPREFACE\n\nAUTHORITY STATEMENT\n\nParagraphs\n\nApplication.................................. 1-2\n\nOperative Date................................ 3\n\nIntroduction.................................. 4-6\n\nInternal Control Structure......................... 7-9\n\nAttendance at Physical Inventory Counting............. 10-28\n\nInventory Under Control or Custody of a Third Party...... 29\n\nValuation of Inventory........................... 30-32\n\nConformity with International Standards on Auditing...... 33\n\n#   \nPreface\n\n#### Reasons for Issuing Auditing Standard ASA 501 Existence and Valuation of Inventory\n\nThe Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 501 Existence and Valuation of Inventory, due to the requirements of the legislative provisions explained below.\n\nThe Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (the CLERP 9 Act) established the AUASB as an independent statutory body under section 227A of the Australian Securities and Investments Commission Act 2001, as from 1 July 2004. Under section 336 of the Corporations Act 2001, the AUASB may make Auditing Standards for the purposes of the corporations legislation. These Auditing Standards are legislative instruments under the Legislative Instruments Act 2003.\n\n#### Main Features\n\nThis Auditing Standard establishes mandatory requirements and provides explanatory guidance on obtaining sufficient appropriate audit evidence regarding the existence and valuation of inventory material to the financial report.\n\n#### Operative Date\n\nThis Auditing Standard is operative for financial reporting periods commencing on or after 1 July 2006.\n\n####   \nMain changes from AUS 506 (July 2002) Existence and Valuation of Inventory\n\nThe main differences between this Auditing Standard and the Auditing Standard issued by the Auditing & Assurance Standards Board of the Australian Accounting Research Foundation, AUS 506 (July 2002) Existence and Valuation of Inventory, are that in this Auditing Standard:\n\n1.  The word ‘shall’, in the bold-type paragraphs, is the terminology used to describe an auditor’s mandatory requirements, whereas an auditor’s degree of responsibility is described in AUS 506 by the word ‘should’.\n2.  The explanatory guidance paragraphs provide guidance and illustrative examples to assist the auditor in fulfilling the mandatory requirements, whereas in AUS 506 some obligations are implied within certain explanatory paragraphs. Accordingly, such paragraphs have been redrafted to clarify that the matter forms part of the explanatory guidance.\n3.  The following implied obligation in AUS 506 has been elevated and re-stated as a specific mandatory requirement:\n\n(a) if the entity uses procedures to estimate the physical quantity of inventory that is material, the auditor shall design and perform audit procedures to be satisfied with the reasonableness of those procedures (paragraph 19).\n\n4. The following additional mandatory requirement, not contained in AUS 506, is included:\n\n(a) if unable to attend the physical inventory count on the date planned due to unforeseen circumstances, the auditor shall take or observe some physical counts on an alternative date and, when necessary, perform audit procedures on intervening transactions (paragraph 13).\n\n5. The auditor is required to attend physical inventory counting unless impracticable (paragraph 11), whereas in AUS 506 in exceptional circumstances, the auditor may judge it necessary to depart from the requirement to attend physical inventory counting in order to more effectively achieve the same objectives.\n\n##   \nAUTHORITY STATEMENT\n\nThe Auditing and Assurance Standards Board (AUASB) makes Auditing Standard ASA 501 Existence and Valuation of Inventory, as set out in paragraphs 1 to 33, pursuant to section 227B of the Australian Securities and Investments Commission Act 2001 and section 336 of the Corporations Act 2001.\n\nThis Auditing Standard is to be read in conjunction with the Preamble to AUASB Standards which sets out the intentions of the AUASB on how the Auditing Standards are to be understood, interpreted and applied.\n\nThe mandatory requirements of this Auditing Standard are set out in bold-type paragraphs.\n\nDated 28 April 2006 M H Kelsall  \nChairman - AUASB","sortOrder":3},{"sectionNumber":"Reasons for Issuing Auditing Standard AS","sectionType":"subdivision","heading":"Reasons for Issuing Auditing Standard ASA 501 Existence and Valuation of Inventory","content":"#### Reasons for Issuing Auditing Standard ASA 501 Existence and Valuation of Inventory\n\nThe Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 501 Existence and Valuation of Inventory, due to the requirements of the legislative provisions explained below.\n\nThe Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (the CLERP 9 Act) established the AUASB as an independent statutory body under section 227A of the Australian Securities and Investments Commission Act 2001, as from 1 July 2004. Under section 336 of the Corporations Act 2001, the AUASB may make Auditing Standards for the purposes of the corporations legislation. These Auditing Standards are legislative instruments under the Legislative Instruments Act 2003.","sortOrder":4},{"sectionNumber":"Main Features","sectionType":"subdivision","heading":"Main Features","content":"#### Main Features\n\nThis Auditing Standard establishes mandatory requirements and provides explanatory guidance on obtaining sufficient appropriate audit evidence regarding the existence and valuation of inventory material to the financial report.","sortOrder":5},{"sectionNumber":"Operative Date","sectionType":"subdivision","heading":"Operative Date","content":"#### Operative Date\n\nThis Auditing Standard is operative for financial reporting periods commencing on or after 1 July 2006.","sortOrder":6},{"sectionNumber":"Main changes from AUS 506 (July 2002) Ex","sectionType":"subdivision","heading":"Main changes from AUS 506 (July 2002) Existence and Valuation of Inventory","content":"####   \nMain changes from AUS 506 (July 2002) Existence and Valuation of Inventory\n\nThe main differences between this Auditing Standard and the Auditing Standard issued by the Auditing & Assurance Standards Board of the Australian Accounting Research Foundation, AUS 506 (July 2002) Existence and Valuation of Inventory, are that in this Auditing Standard:\n\n1.  The word ‘shall’, in the bold-type paragraphs, is the terminology used to describe an auditor’s mandatory requirements, whereas an auditor’s degree of responsibility is described in AUS 506 by the word ‘should’.\n2.  The explanatory guidance paragraphs provide guidance and illustrative examples to assist the auditor in fulfilling the mandatory requirements, whereas in AUS 506 some obligations are implied within certain explanatory paragraphs. Accordingly, such paragraphs have been redrafted to clarify that the matter forms part of the explanatory guidance.\n3.  The following implied obligation in AUS 506 has been elevated and re-stated as a specific mandatory requirement:\n\n(a) if the entity uses procedures to estimate the physical quantity of inventory that is material, the auditor shall design and perform audit procedures to be satisfied with the reasonableness of those procedures (paragraph 19).\n\n4. The following additional mandatory requirement, not contained in AUS 506, is included:\n\n(a) if unable to attend the physical inventory count on the date planned due to unforeseen circumstances, the auditor shall take or observe some physical counts on an alternative date and, when necessary, perform audit procedures on intervening transactions (paragraph 13).\n\n5. The auditor is required to attend physical inventory counting unless impracticable (paragraph 11), whereas in AUS 506 in exceptional circumstances, the auditor may judge it necessary to depart from the requirement to attend physical inventory counting in order to more effectively achieve the same objectives.\n\n##   \nAUTHORITY STATEMENT\n\nThe Auditing and Assurance Standards Board (AUASB) makes Auditing Standard ASA 501 Existence and Valuation of Inventory, as set out in paragraphs 1 to 33, pursuant to section 227B of the Australian Securities and Investments Commission Act 2001 and section 336 of the Corporations Act 2001.\n\nThis Auditing Standard is to be read in conjunction with the Preamble to AUASB Standards which sets out the intentions of the AUASB on how the Auditing Standards are to be understood, interpreted and applied.\n\nThe mandatory requirements of this Auditing Standard are set out in bold-type paragraphs.\n\nDated 28 April 2006 M H Kelsall  \nChairman - AUASB","sortOrder":7},{"sectionNumber":"AUTHORITY STATEMENT","sectionType":"part","heading":"AUTHORITY STATEMENT","content":"##   \nAUTHORITY STATEMENT\n\nThe Auditing and Assurance Standards Board (AUASB) makes Auditing Standard ASA 501 Existence and Valuation of Inventory, as set out in paragraphs 1 to 33, pursuant to section 227B of the Australian Securities and Investments Commission Act 2001 and section 336 of the Corporations Act 2001.\n\nThis Auditing Standard is to be read in conjunction with the Preamble to AUASB Standards which sets out the intentions of the AUASB on how the Auditing Standards are to be understood, interpreted and applied.\n\nThe mandatory requirements of this Auditing Standard are set out in bold-type paragraphs.","sortOrder":8},{"sectionNumber":"AUDITING STANDARD ASA 501","sectionType":"part","heading":"AUDITING STANDARD ASA 501","content":"## AUDITING STANDARD ASA 501\n\n### Existence and Valuation of Inventory\n\n##### Application\n\n1 This Auditing Standard applies to:\n\n(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 Part 2M.3 of the Corporations Act 2001; and\n\n(b) an audit of a financial report for any other purpose.\n\n2 This Auditing Standard also applies, as appropriate, to an audit of other financial information.\n\n##### Operative Date\n\n3 This Auditing Standard is operative for financial reporting periods commencing on or after 1 July 2006.\n\n##### Introduction\n\n4 The purpose of this Auditing Standard is to establish mandatory requirements and to provide explanatory guidance on obtaining sufficient appropriate audit evidence regarding the existence and valuation of inventory in the financial report.\n\n5 The auditor shall obtain sufficient appropriate audit evidence regarding the existence and valuation of inventory material to the financial report.\n\n6 Definitions, and the method of measurement regarding inventory, are given in Accounting Standard AASB 102: Inventories and are adopted for the purpose of this Auditing Standard. Although the method of measurement given in AASB 102 does not apply to certain types of inventories, the guidance provided by this Auditing Standard may be suitable for the purpose of obtaining sufficient appropriate audit evidence regarding their existence and valuation.\n\n#####   \nInternal Control Structure\n\n7 When obtaining an understanding of the internal control structure and making a preliminary assessment of control risk, ordinarily, the auditor considers the adequacy of authorisation, custodianship and recording functions relating to inventory (as well as internal controls relating to the determination of quantity and value of inventory for financial reporting purposes) to determine the nature, timing and extent of audit procedures.\n\n8 In obtaining an understanding of the internal control structure, ordinarily, the auditor considers the records and internal controls existing over the receiving, storing, returning, utilisation and dispatch of inventory.\n\n9 Records and internal controls ordinarily considered by the auditor regarding a manufacturer may include those relating to the movement of inventory through work in progress to finished goods, and the aggregation of costs through appropriate centres.\n\n##### Attendance at Physical Inventory Counting\n\n10 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 or to ascertain the reliability of the perpetual inventory system.\n\n11 The auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by attendance at physical inventory counting unless impracticable.\n\n12 The auditor’s attendance serves as a test of controls or substantive procedures over inventory depending on the auditor’s risk assessment and planned approach. Such attendance enables the auditor, for example, to inspect the inventory, to observe compliance with the operation of management’s procedures for recording and controlling the results of the count and to provide audit evidence as to the reliability of management’s procedures.\n\n13 If unable to attend the physical inventory count on the date planned due to unforeseen circumstances, the auditor shall take or observe some physical counts on an alternative date and, when necessary, perform audit procedures on intervening transactions.\n\n14 Where attendance is impracticable, due to factors such as the nature and location of the inventory, the auditor shall consider whether alternative procedures provide sufficient appropriate audit evidence of existence and condition to conclude that the auditor need not make reference to a scope limitation.\n\n15 For example, documentation of the subsequent sale of specific inventory items acquired or purchased prior to the physical inventory count may provide sufficient appropriate audit evidence.\n\n16 The auditor may audit a financial report that contains one or more reporting periods for which the auditor has not observed or made some physical count of inventory. The auditor may however be able to obtain sufficient appropriate audit evidence regarding prior period inventory by performing such procedures as:\n\n-   tests of prior period transactions;\n-   review of the records of prior counts; and\n-   the application of gross profit tests.\n\n17 In planning attendance at the physical inventory count or the alternative procedures, the auditor ordinarily considers the following:\n\n-   the risks of material misstatement related to inventory;\n-   the nature of the internal control related to inventory;\n-   whether adequate procedures are expected to be established and proper instructions issued for physical inventory counting;\n-   the timing of the count;\n-   the locations at which inventory is held; and\n-   whether an expert’s assistance is needed.\n\n18 When the quantities are to be determined by a physical inventory count and the auditor attends such a count, or when the entity operates a perpetual system and the auditor attends a count one or more times during the year, the auditor would ordinarily observe count procedures and perform test counts.\n\n19 If the entity uses procedures to estimate the physical quantity of inventory that is material, the auditor shall design and perform audit procedures to be satisfied with the reasonableness of those procedures.\n\n20 ASA 540 Audit of Accounting Estimates, provides mandatory requirements and explanatory guidance on the audit of accounting estimates.\n\n21 When inventory is situated in several locations, under paragraph 5 of this Auditing Standard, the auditor needs to consider at which locations attendance is appropriate, taking into account the materiality of the inventory and the risk of material misstatement at different locations.\n\n22 In certain circumstances, it may be necessary for the auditor to rely on the work performed by an expert regarding, for example, the quantity of inventory. For mandatory requirements and explanatory guidance on using the work of an expert refer to ASA 620 Using the Work of an Expert.\n\n23 The auditor would ordinarily review management’s instructions regarding:\n\n-   the application of control activities, for example, collection of used stocksheets, accounting for unused stocksheets and count and re-count procedures;\n-   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; and\n-   whether appropriate arrangements are made regarding the movement of inventory between areas and the shipping and receipt of inventory before and after the cut-off date.\n\n24 To obtain audit evidence that management’s control activities are adequately implemented, the auditor would ordinarily observe employees’ procedures and perform test counts. When performing test counts, the auditor ordinarily performs procedures over both the completeness and the accuracy of the count records by tracing items selected from those records to the physical inventory and items selected from the physical inventory to the count records. The auditor ordinarily considers the extent to which copies of such count records need to be retained for subsequent audit procedures and comparison.\n\n25 The auditor ordinarily considers cut-off procedures including details of the movement of inventory just prior to, during and after the count so that the accounting for such movements can be checked at a later date.\n\n26 For practical reasons, the physical inventory count may be conducted at a date other than period end. This will ordinarily be adequate for audit purposes only when the entity has designed and implemented controls over changes in inventory. The auditor ordinarily determines whether, through the performance of appropriate audit procedures, changes in inventory between the count date and period end are free of material error and reasonably stated.\n\n27 When the entity operates a perpetual inventory system which is used to determine the period end balance, the auditor would ordinarily evaluate whether, through the performance of additional procedures, the reasons for any significant differences between the physical count and the perpetual inventory records are understood and the records are properly adjusted.\n\n28 Ordinarily, the auditor performs audit procedures over the final inventory listing to determine whether it accurately reflects actual inventory counts.\n\nInventory Under Control or Custody of a Third Party\n\n29 When inventory is under the custody and control of a third party, the auditor ordinarily obtains direct confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity. Depending on materiality of this inventory the auditor ordinarily considers the following:\n\n-   the integrity and independence of the third party;\n-   observing, or arranging for another auditor to observe, the physical inventory count;\n-   obtaining another auditor’s report on the adequacy of the third party’s internal control for ensuring that inventory is correctly counted and adequately safeguarded; and\n-   inspecting documentation regarding inventory held by third parties, for example, warehouse receipts, or obtaining confirmation from other parties when such inventory has been pledged as collateral.\n\n#####   \nValuation of Inventory\n\n30 The auditor shall evaluate the methods used by management in the valuation of inventory.\n\n31 The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence regarding the valuation of inventory.\n\n32 Such procedures may include the following:\n\n-   testing the inventory sheets or continuous inventory records with relevant documents such as invoices, cost records and other sources, to ascertain cost;\n-   testing standard costing records, where applicable, and testing the treatment of overhead expenses;\n-   testing for the lower of cost and net realisable value;\n-   testing the arithmetical accuracy of calculations;\n-   testing the consistency, in principle and in detail, with which the amounts have been computed;\n-   evaluating audit evidence supporting the assessment of net realisable value, with particular reference to slow moving, obsolete or damaged inventory;\n-   consideration of the gross profit ratio disclosed in the financial report and its comparison with the ratio shown in previous reporting periods;\n-   consideration of the rate of turnover of inventory and its comparison with previous reporting periods; and\n-   where applicable, consideration of the variances shown by the standard costing records and their treatment in the financial report.\n\n##### Conformity with International Standards on Auditing\n\n33 Except as noted below, this Auditing Standard conforms with International Standard on Auditing ISA 501 Audit Evidence – Additional Considerations for Specific Items (Part A), Attendance at Physical Inventory Counting, issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants. The main differences between this Auditing Standard and ISA 501 (Part A) are:\n\n-   This Auditing Standard contains mandatory requirements for the auditor to obtain audit evidence regarding both the existence and valuation of inventory material to the financial report (paragraph 5). ISA 501 (Part A) only establishes standards and provides guidance in relation to the attendance at a physical inventory counting when inventory is material to the financial statements.\n-   This Auditing Standard contains mandatory requirements for the auditor to be satisfied with the reasonableness of an entity’s estimation procedures when used by the entity to estimate the physical quantity of inventory that is material (paragraph 19). ISA 501 (Part A) only provides explanatory guidance relating to estimation procedures.\n\n-   This Auditing Standard provides explanatory guidance relating to the internal control structure affecting inventory (paragraphs 7-9), whereas ISA 501 (Part A) does not.\n-   This Auditing Standard provide explanatory guidance relating to prior period inventory (paragraph 16), whereas ISA 501 (Part A) does not.\n\nCompliance with this Auditing Standard enables compliance with ISA 501 (Part A).","sortOrder":9},{"sectionNumber":"Existence and Valuation of Inventory","sectionType":"division","heading":"Existence and Valuation of Inventory","content":"## AUDITING STANDARD ASA 501\n\n### Existence and Valuation of Inventory\n\n##### Application\n\n1 This Auditing Standard applies to:\n\n(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 Part 2M.3 of the Corporations Act 2001; and\n\n(b) an audit of a financial report for any other purpose.\n\n2 This Auditing Standard also applies, as appropriate, to an audit of other financial information.\n\n##### Operative Date\n\n3 This Auditing Standard is operative for financial reporting periods commencing on or after 1 July 2006.\n\n##### Introduction\n\n4 The purpose of this Auditing Standard is to establish mandatory requirements and to provide explanatory guidance on obtaining sufficient appropriate audit evidence regarding the existence and valuation of inventory in the financial report.\n\n5 The auditor shall obtain sufficient appropriate audit evidence regarding the existence and valuation of inventory material to the financial report.\n\n6 Definitions, and the method of measurement regarding inventory, are given in Accounting Standard AASB 102: Inventories and are adopted for the purpose of this Auditing Standard. Although the method of measurement given in AASB 102 does not apply to certain types of inventories, the guidance provided by this Auditing Standard may be suitable for the purpose of obtaining sufficient appropriate audit evidence regarding their existence and valuation.\n\n#####   \nInternal Control Structure\n\n7 When obtaining an understanding of the internal control structure and making a preliminary assessment of control risk, ordinarily, the auditor considers the adequacy of authorisation, custodianship and recording functions relating to inventory (as well as internal controls relating to the determination of quantity and value of inventory for financial reporting purposes) to determine the nature, timing and extent of audit procedures.\n\n8 In obtaining an understanding of the internal control structure, ordinarily, the auditor considers the records and internal controls existing over the receiving, storing, returning, utilisation and dispatch of inventory.\n\n9 Records and internal controls ordinarily considered by the auditor regarding a manufacturer may include those relating to the movement of inventory through work in progress to finished goods, and the aggregation of costs through appropriate centres.\n\n##### Attendance at Physical Inventory Counting\n\n10 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 or to ascertain the reliability of the perpetual inventory system.\n\n11 The auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by attendance at physical inventory counting unless impracticable.\n\n12 The auditor’s attendance serves as a test of controls or substantive procedures over inventory depending on the auditor’s risk assessment and planned approach. Such attendance enables the auditor, for example, to inspect the inventory, to observe compliance with the operation of management’s procedures for recording and controlling the results of the count and to provide audit evidence as to the reliability of management’s procedures.\n\n13 If unable to attend the physical inventory count on the date planned due to unforeseen circumstances, the auditor shall take or observe some physical counts on an alternative date and, when necessary, perform audit procedures on intervening transactions.\n\n14 Where attendance is impracticable, due to factors such as the nature and location of the inventory, the auditor shall consider whether alternative procedures provide sufficient appropriate audit evidence of existence and condition to conclude that the auditor need not make reference to a scope limitation.\n\n15 For example, documentation of the subsequent sale of specific inventory items acquired or purchased prior to the physical inventory count may provide sufficient appropriate audit evidence.\n\n16 The auditor may audit a financial report that contains one or more reporting periods for which the auditor has not observed or made some physical count of inventory. The auditor may however be able to obtain sufficient appropriate audit evidence regarding prior period inventory by performing such procedures as:\n\n-   tests of prior period transactions;\n-   review of the records of prior counts; and\n-   the application of gross profit tests.\n\n17 In planning attendance at the physical inventory count or the alternative procedures, the auditor ordinarily considers the following:\n\n-   the risks of material misstatement related to inventory;\n-   the nature of the internal control related to inventory;\n-   whether adequate procedures are expected to be established and proper instructions issued for physical inventory counting;\n-   the timing of the count;\n-   the locations at which inventory is held; and\n-   whether an expert’s assistance is needed.\n\n18 When the quantities are to be determined by a physical inventory count and the auditor attends such a count, or when the entity operates a perpetual system and the auditor attends a count one or more times during the year, the auditor would ordinarily observe count procedures and perform test counts.\n\n19 If the entity uses procedures to estimate the physical quantity of inventory that is material, the auditor shall design and perform audit procedures to be satisfied with the reasonableness of those procedures.\n\n20 ASA 540 Audit of Accounting Estimates, provides mandatory requirements and explanatory guidance on the audit of accounting estimates.\n\n21 When inventory is situated in several locations, under paragraph 5 of this Auditing Standard, the auditor needs to consider at which locations attendance is appropriate, taking into account the materiality of the inventory and the risk of material misstatement at different locations.\n\n22 In certain circumstances, it may be necessary for the auditor to rely on the work performed by an expert regarding, for example, the quantity of inventory. For mandatory requirements and explanatory guidance on using the work of an expert refer to ASA 620 Using the Work of an Expert.\n\n23 The auditor would ordinarily review management’s instructions regarding:\n\n-   the application of control activities, for example, collection of used stocksheets, accounting for unused stocksheets and count and re-count procedures;\n-   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; and\n-   whether appropriate arrangements are made regarding the movement of inventory between areas and the shipping and receipt of inventory before and after the cut-off date.\n\n24 To obtain audit evidence that management’s control activities are adequately implemented, the auditor would ordinarily observe employees’ procedures and perform test counts. When performing test counts, the auditor ordinarily performs procedures over both the completeness and the accuracy of the count records by tracing items selected from those records to the physical inventory and items selected from the physical inventory to the count records. The auditor ordinarily considers the extent to which copies of such count records need to be retained for subsequent audit procedures and comparison.\n\n25 The auditor ordinarily considers cut-off procedures including details of the movement of inventory just prior to, during and after the count so that the accounting for such movements can be checked at a later date.\n\n26 For practical reasons, the physical inventory count may be conducted at a date other than period end. This will ordinarily be adequate for audit purposes only when the entity has designed and implemented controls over changes in inventory. The auditor ordinarily determines whether, through the performance of appropriate audit procedures, changes in inventory between the count date and period end are free of material error and reasonably stated.\n\n27 When the entity operates a perpetual inventory system which is used to determine the period end balance, the auditor would ordinarily evaluate whether, through the performance of additional procedures, the reasons for any significant differences between the physical count and the perpetual inventory records are understood and the records are properly adjusted.\n\n28 Ordinarily, the auditor performs audit procedures over the final inventory listing to determine whether it accurately reflects actual inventory counts.\n\nInventory Under Control or Custody of a Third Party\n\n29 When inventory is under the custody and control of a third party, the auditor ordinarily obtains direct confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity. Depending on materiality of this inventory the auditor ordinarily considers the following:\n\n-   the integrity and independence of the third party;\n-   observing, or arranging for another auditor to observe, the physical inventory count;\n-   obtaining another auditor’s report on the adequacy of the third party’s internal control for ensuring that inventory is correctly counted and adequately safeguarded; and\n-   inspecting documentation regarding inventory held by third parties, for example, warehouse receipts, or obtaining confirmation from other parties when such inventory has been pledged as collateral.\n\n#####   \nValuation of Inventory\n\n30 The auditor shall evaluate the methods used by management in the valuation of inventory.\n\n31 The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence regarding the valuation of inventory.\n\n32 Such procedures may include the following:\n\n-   testing the inventory sheets or continuous inventory records with relevant documents such as invoices, cost records and other sources, to ascertain cost;\n-   testing standard costing records, where applicable, and testing the treatment of overhead expenses;\n-   testing for the lower of cost and net realisable value;\n-   testing the arithmetical accuracy of calculations;\n-   testing the consistency, in principle and in detail, with which the amounts have been computed;\n-   evaluating audit evidence supporting the assessment of net realisable value, with particular reference to slow moving, obsolete or damaged inventory;\n-   consideration of the gross profit ratio disclosed in the financial report and its comparison with the ratio shown in previous reporting periods;\n-   consideration of the rate of turnover of inventory and its comparison with previous reporting periods; and\n-   where applicable, consideration of the variances shown by the standard costing records and their treatment in the financial report.\n\n##### Conformity with International Standards on Auditing\n\n33 Except as noted below, this Auditing Standard conforms with International Standard on Auditing ISA 501 Audit Evidence – Additional Considerations for Specific Items (Part A), Attendance at Physical Inventory Counting, issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants. The main differences between this Auditing Standard and ISA 501 (Part A) are:\n\n-   This Auditing Standard contains mandatory requirements for the auditor to obtain audit evidence regarding both the existence and valuation of inventory material to the financial report (paragraph 5). ISA 501 (Part A) only establishes standards and provides guidance in relation to the attendance at a physical inventory counting when inventory is material to the financial statements.\n-   This Auditing Standard contains mandatory requirements for the auditor to be satisfied with the reasonableness of an entity’s estimation procedures when used by the entity to estimate the physical quantity of inventory that is material (paragraph 19). ISA 501 (Part A) only provides explanatory guidance relating to estimation procedures.\n\n-   This Auditing Standard provides explanatory guidance relating to the internal control structure affecting inventory (paragraphs 7-9), whereas ISA 501 (Part A) does not.\n-   This Auditing Standard provide explanatory guidance relating to prior period inventory (paragraph 16), whereas ISA 501 (Part A) does not.\n\nCompliance with this Auditing Standard enables compliance with ISA 501 (Part A).","sortOrder":10},{"sectionNumber":"Application","sectionType":"section","heading":"Application","content":"##### Application\n\n1 This Auditing Standard applies to:\n\n(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 Part 2M.3 of the Corporations Act 2001; and\n\n(b) an audit of a financial report for any other purpose.\n\n2 This Auditing Standard also applies, as appropriate, to an audit of other financial information.","sortOrder":11},{"sectionNumber":"Introduction","sectionType":"section","heading":"Introduction","content":"##### Introduction\n\n4 The purpose of this Auditing Standard is to establish mandatory requirements and to provide explanatory guidance on obtaining sufficient appropriate audit evidence regarding the existence and valuation of inventory in the financial report.\n\n5 The auditor shall obtain sufficient appropriate audit evidence regarding the existence and valuation of inventory material to the financial report.\n\n6 Definitions, and the method of measurement regarding inventory, are given in Accounting Standard AASB 102: Inventories and are adopted for the purpose of this Auditing Standard. Although the method of measurement given in AASB 102 does not apply to certain types of inventories, the guidance provided by this Auditing Standard may be suitable for the purpose of obtaining sufficient appropriate audit evidence regarding their existence and valuation.","sortOrder":13},{"sectionNumber":"Internal Control Structure","sectionType":"section","heading":"Internal Control Structure","content":"#####   \nInternal Control Structure\n\n7 When obtaining an understanding of the internal control structure and making a preliminary assessment of control risk, ordinarily, the auditor considers the adequacy of authorisation, custodianship and recording functions relating to inventory (as well as internal controls relating to the determination of quantity and value of inventory for financial reporting purposes) to determine the nature, timing and extent of audit procedures.\n\n8 In obtaining an understanding of the internal control structure, ordinarily, the auditor considers the records and internal controls existing over the receiving, storing, returning, utilisation and dispatch of inventory.\n\n9 Records and internal controls ordinarily considered by the auditor regarding a manufacturer may include those relating to the movement of inventory through work in progress to finished goods, and the aggregation of costs through appropriate centres.","sortOrder":14},{"sectionNumber":"Attendance at Physical Inventory Countin","sectionType":"section","heading":"Attendance at Physical Inventory Counting","content":"##### Attendance at Physical Inventory Counting\n\n10 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 or to ascertain the reliability of the perpetual inventory system.\n\n11 The auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by attendance at physical inventory counting unless impracticable.\n\n12 The auditor’s attendance serves as a test of controls or substantive procedures over inventory depending on the auditor’s risk assessment and planned approach. Such attendance enables the auditor, for example, to inspect the inventory, to observe compliance with the operation of management’s procedures for recording and controlling the results of the count and to provide audit evidence as to the reliability of management’s procedures.\n\n13 If unable to attend the physical inventory count on the date planned due to unforeseen circumstances, the auditor shall take or observe some physical counts on an alternative date and, when necessary, perform audit procedures on intervening transactions.\n\n14 Where attendance is impracticable, due to factors such as the nature and location of the inventory, the auditor shall consider whether alternative procedures provide sufficient appropriate audit evidence of existence and condition to conclude that the auditor need not make reference to a scope limitation.\n\n15 For example, documentation of the subsequent sale of specific inventory items acquired or purchased prior to the physical inventory count may provide sufficient appropriate audit evidence.\n\n16 The auditor may audit a financial report that contains one or more reporting periods for which the auditor has not observed or made some physical count of inventory. The auditor may however be able to obtain sufficient appropriate audit evidence regarding prior period inventory by performing such procedures as:\n\n-   tests of prior period transactions;\n-   review of the records of prior counts; and\n-   the application of gross profit tests.\n\n17 In planning attendance at the physical inventory count or the alternative procedures, the auditor ordinarily considers the following:\n\n-   the risks of material misstatement related to inventory;\n-   the nature of the internal control related to inventory;\n-   whether adequate procedures are expected to be established and proper instructions issued for physical inventory counting;\n-   the timing of the count;\n-   the locations at which inventory is held; and\n-   whether an expert’s assistance is needed.\n\n18 When the quantities are to be determined by a physical inventory count and the auditor attends such a count, or when the entity operates a perpetual system and the auditor attends a count one or more times during the year, the auditor would ordinarily observe count procedures and perform test counts.\n\n19 If the entity uses procedures to estimate the physical quantity of inventory that is material, the auditor shall design and perform audit procedures to be satisfied with the reasonableness of those procedures.\n\n20 ASA 540 Audit of Accounting Estimates, provides mandatory requirements and explanatory guidance on the audit of accounting estimates.\n\n21 When inventory is situated in several locations, under paragraph 5 of this Auditing Standard, the auditor needs to consider at which locations attendance is appropriate, taking into account the materiality of the inventory and the risk of material misstatement at different locations.\n\n22 In certain circumstances, it may be necessary for the auditor to rely on the work performed by an expert regarding, for example, the quantity of inventory. For mandatory requirements and explanatory guidance on using the work of an expert refer to ASA 620 Using the Work of an Expert.\n\n23 The auditor would ordinarily review management’s instructions regarding:\n\n-   the application of control activities, for example, collection of used stocksheets, accounting for unused stocksheets and count and re-count procedures;\n-   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; and\n-   whether appropriate arrangements are made regarding the movement of inventory between areas and the shipping and receipt of inventory before and after the cut-off date.\n\n24 To obtain audit evidence that management’s control activities are adequately implemented, the auditor would ordinarily observe employees’ procedures and perform test counts. When performing test counts, the auditor ordinarily performs procedures over both the completeness and the accuracy of the count records by tracing items selected from those records to the physical inventory and items selected from the physical inventory to the count records. The auditor ordinarily considers the extent to which copies of such count records need to be retained for subsequent audit procedures and comparison.\n\n25 The auditor ordinarily considers cut-off procedures including details of the movement of inventory just prior to, during and after the count so that the accounting for such movements can be checked at a later date.\n\n26 For practical reasons, the physical inventory count may be conducted at a date other than period end. This will ordinarily be adequate for audit purposes only when the entity has designed and implemented controls over changes in inventory. The auditor ordinarily determines whether, through the performance of appropriate audit procedures, changes in inventory between the count date and period end are free of material error and reasonably stated.\n\n27 When the entity operates a perpetual inventory system which is used to determine the period end balance, the auditor would ordinarily evaluate whether, through the performance of additional procedures, the reasons for any significant differences between the physical count and the perpetual inventory records are understood and the records are properly adjusted.\n\n28 Ordinarily, the auditor performs audit procedures over the final inventory listing to determine whether it accurately reflects actual inventory counts.\n\nInventory Under Control or Custody of a Third Party\n\n29 When inventory is under the custody and control of a third party, the auditor ordinarily obtains direct confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity. Depending on materiality of this inventory the auditor ordinarily considers the following:\n\n-   the integrity and independence of the third party;\n-   observing, or arranging for another auditor to observe, the physical inventory count;\n-   obtaining another auditor’s report on the adequacy of the third party’s internal control for ensuring that inventory is correctly counted and adequately safeguarded; and\n-   inspecting documentation regarding inventory held by third parties, for example, warehouse receipts, or obtaining confirmation from other parties when such inventory has been pledged as collateral.","sortOrder":15},{"sectionNumber":"Valuation of Inventory","sectionType":"section","heading":"Valuation of Inventory","content":"#####   \nValuation of Inventory\n\n30 The auditor shall evaluate the methods used by management in the valuation of inventory.\n\n31 The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence regarding the valuation of inventory.\n\n32 Such procedures may include the following:\n\n-   testing the inventory sheets or continuous inventory records with relevant documents such as invoices, cost records and other sources, to ascertain cost;\n-   testing standard costing records, where applicable, and testing the treatment of overhead expenses;\n-   testing for the lower of cost and net realisable value;\n-   testing the arithmetical accuracy of calculations;\n-   testing the consistency, in principle and in detail, with which the amounts have been computed;\n-   evaluating audit evidence supporting the assessment of net realisable value, with particular reference to slow moving, obsolete or damaged inventory;\n-   consideration of the gross profit ratio disclosed in the financial report and its comparison with the ratio shown in previous reporting periods;\n-   consideration of the rate of turnover of inventory and its comparison with previous reporting periods; and\n-   where applicable, consideration of the variances shown by the standard costing records and their treatment in the financial report.","sortOrder":16},{"sectionNumber":"Conformity with International Standards ","sectionType":"section","heading":"Conformity with International Standards on Auditing","content":"##### Conformity with International Standards on Auditing\n\n33 Except as noted below, this Auditing Standard conforms with International Standard on Auditing ISA 501 Audit Evidence – Additional Considerations for Specific Items (Part A), Attendance at Physical Inventory Counting, issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants. The main differences between this Auditing Standard and ISA 501 (Part A) are:\n\n-   This Auditing Standard contains mandatory requirements for the auditor to obtain audit evidence regarding both the existence and valuation of inventory material to the financial report (paragraph 5). ISA 501 (Part A) only establishes standards and provides guidance in relation to the attendance at a physical inventory counting when inventory is material to the financial statements.\n-   This Auditing Standard contains mandatory requirements for the auditor to be satisfied with the reasonableness of an entity’s estimation procedures when used by the entity to estimate the physical quantity of inventory that is material (paragraph 19). ISA 501 (Part A) only provides explanatory guidance relating to estimation procedures.\n\n-   This Auditing Standard provides explanatory guidance relating to the internal control structure affecting inventory (paragraphs 7-9), whereas ISA 501 (Part A) does not.\n-   This Auditing Standard provide explanatory guidance relating to prior period inventory (paragraph 16), whereas ISA 501 (Part A) does not.\n\nCompliance with this Auditing Standard enables compliance with ISA 501 (Part A).","sortOrder":17}],"analysis":{"kimi_summary":{"_metrics":{"model":"kimi-k2.5","source":"moonshot-realtime","completionTokens":1781},"content_quality":"ok","complexity_score":6,"scope_assessment":{"changed":true,"description":"The standard significantly strengthened requirements from its predecessor AUS 506 (2002) by changing 'should' to 'shall' for mandatory obligations, explicitly expanding scope to mandate valuation evidence (not just existence), and adding new specific requirements for estimation procedures and alternative attendance dates. It also exceeds the equivalent International Standard on Auditing (ISA 501) by making valuation a mandatory requirement rather than optional guidance."},"complexity_factors":["Cross-references to four other standards (ASA 540, ASA 620, AASB 102, and ISA 501)","19 mandatory requirements using 'shall' distinguished from non-mandatory explanatory guidance","Multiple conditional exceptions (e.g., 'unless impracticable', 'when necessary', 'as appropriate')","Technical auditing terminology requiring specialised expertise (substantive procedures, control risk, cut-off procedures, perpetual inventory systems)","Dual focus on both existence (physical presence) and valuation (monetary accuracy) with different evidentiary requirements for each"],"plain_english_summary":"This standard requires auditors to obtain direct, persuasive evidence that a company's inventory exists, is owned, in the claimed condition, and is not overstated in value. Auditors are expected to attend stocktakes where practicable, confirm goods held by third parties, test valuation methods and cost records, and assess inventory controls and estimation techniques. It applies to financial report audits under the Corporations Act 2001 and similar engagements."}},"importantCases":[],"_links":{"self":"/api/acts/asa-501-existence-and-valuation-of-inventory-april-2006","history":"/api/acts/asa-501-existence-and-valuation-of-inventory-april-2006/history","analysis":"/api/acts/asa-501-existence-and-valuation-of-inventory-april-2006/analysis","conflicts":"/api/acts/asa-501-existence-and-valuation-of-inventory-april-2006/conflicts","importantCases":"/api/acts/asa-501-existence-and-valuation-of-inventory-april-2006/important-cases","documents":"/api/acts/asa-501-existence-and-valuation-of-inventory-april-2006/documents"}}