Confirmation of inventory held by third parties
(i) It is often not possible for auditors to confirm inventory held by third parties by attendance at an inventory count and therefore the only evidence available is confirmation from the third party.
(ii) It is particularly important to ensure that the confirmation is genuine because of the possibility of fraudulent collusion between the third party and the client to inflate inventory and profit figures.
(iii) The reliability of service from the third party and the quality of documentation and correspondence are all taken account of as part of the auditor‘s risk assessment in this area.
(iv) Both the quality and quantity of inventory held should be confirmed. It is common for third parties to use different descriptions or units of measurement in their records to those used by the client and it is necessary to reconcile these items.
(v) It may be possible for the auditor of the third party to provide some evidence in relation to the amounts held.
(vi) If the inventory held by the third party is likely to be material, the auditor must consider the possibility of visiting the third party and attending the inventory count.
(vii) The auditor may review and test the controls over the movement of inventory to and from the third party and the related records, in order to reduce the level of substantive evidence needed at the period-end.
(viii) Records that show ‗negative‘ inventory (more ‗outs‘ than ‗ins‘) at either the client or the third party may be indicative of misclassifications, for example.